Huntington Bancshares Inc (HBAN) — Q4 2023 Earnings Call Transcript

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we'll 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.

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 five 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 remained 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 number-one ranking by JD Power for both categories. We remained 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, 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 three 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're 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.

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 swaptions hedging program impacted pre-tax 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%. 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 remained 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 Floorplan increased by $359 million, and CRE balances, which declined by $361 million, included the impact of payoffs and normal amortization. All other commercial categories net decreased as we continued to drive optimization toward the highest returns. In Consumer, growth was led by residential mortgage, which increased by $295 million, and 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. Non-interest bearing mix-shift continues to track closely to our forecast with deceleration of sequential changes. The non-interest 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 two 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 refunds, 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 two-year average life, and 10% in ARMs with a four-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 have retained 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 are bounded on the lower end by a scenario that includes five 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 three cuts in 2024. We continue to be focused on managing net interest margin in a tighter 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 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, bringing a number of benefits. 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. Third, 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, a peer-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 the overall hedge duration of the portfolio from 4.1 years to 3.7 years over the past 18 months. Turning to Slide 17, 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 30th. Using market rates at year-end, we would recapture an estimated incremental 44% of AOCI over the next three 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 protecting NIM in down rate scenarios and actively reduced instruments that intended to protect capital in up rate scenarios. As we announced in late December, we terminated the pay-fixed swaptions program as our assessment of the probability for substantial up-rate 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 down rate hedging activities remains unchanged, to support the management of net interest margin in as tight a range as possible. Moving on to Slide 19, our fee growth strategies remain centered on three key areas: capital markets, payments, and wealth management. Note, this quarter in our earnings materials, we've updated the presentation of our non-interest income categories in order to more clearly highlight our strategic areas of focus and align it more closely to the way we manage the business. Slide 35 in the appendix provides further detail on the components of each line item. These three key focus areas for fee growth collectively represent 63% of total non-interest income. We're seeing positive underlying growth in each of these areas. In capital markets, we're pleased that revenues expanded sequentially, and both advisory and core banking 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 non-interest income decreased by $104 million to $405 million for the fourth quarter. Excluding the mark-to-market on the pay-fixed swaptions and the CRT premium, fees increased by $5 million quarter-over-quarter. Moving on to Slide 21 on expenses. GAAP non-interest 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 expenses included higher personnel and professional services driven by seasonally higher benefits expense, incentives, as well as consulting 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, along with 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 five quarters. Our adjusted CET1 ratio, inclusive of AOCI, was 8.6%. This metric increased by 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, credit quality continues to perform very well 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 basis points to 45 basis points. Gross charge-offs in the fourth quarter were relatively flat, with the overall change in net charge-offs largely resulting from lower recoveries. Given ongoing normalization, non-performing 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. 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 playing 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 by 2 percentage points. In both scenarios, I expect net interest income to trough in the first quarter before expanding throughout 2024 from that level. Non-interest 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-fixed 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 basis points and 35 basis points. With that, we'll conclude our prepared remarks and move to questions-and-answers. Tim, over to you.

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

Hi, good morning.

Good morning, Manan.

I wanted to begin by discussing the change in the expense guidance. I understand it’s a slight increase from 4% to 4.5%, but it’s higher than the guidance some of your competitors have provided for 2024. Could you provide more details about the reasons for this adjustment? Additionally, is there potential for flexibility on the expense side similar to what you have with revenues? For example, if you end up with a 2% decline in net interest income due to further rate cuts, does that allow for some flexibility in expenses as well?

Great question, Manan. This is Zach. I'll take that. The guidance that we've given back in October and in December was really primarily designed to be an early view for you so you can get insights into some of the key decisions we're making. For us to really be able to discuss that in detail, that was approximately 4% as we discussed before. The finalization of our budget reflects the additional loan growth added to the plan and associated fee revenues as well. It represents the differences up to 4.5%, which is about $5 million a quarter, so relatively small. I think you are understanding that the underlying drivers of that are unchanged. We'll continue to drive significant efficiencies and core 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 in automation and data, getting ahead of the coming regulations, and we'll execute on the really attractive commercial growth opportunities we discussed before. All of this is included in that number, and there is no change to our expectation as well about reducing that growth rate as we go into 2024 and 2025, excuse me, back to more normalized levels. As it relates to your question in terms of marginal sensitivity of it, certainly there will be just some degree of that. I think the expense that we guide is generally calibrated towards the middle of the ranges we've guided in terms of revenues and we saw potential upside of expenses. All of the revenues hit the high-end, likewise some potential opportunity if the revenues went lower.

Great. Thank you. And my next question was on the deposit franchise. You have a pretty strong core consumer deposit franchise and some of your peers have highlighted that there is 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?

Yes. This is Zach. I'll take that one again. What we've been seeing in the marketplace broadly with respect to deposit costs and deposit beta across both consumer and commercial is a deceleration of the sequential changes and very much for us trending highly aligned to our expectations. I'll 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 downgrade environment with a shortening, for example, time deposit terms, changes of promotional terms on money market, and select testing of different price points for these segments in each geography, all of which is what you'd expect to pre-stage what will ultimately be a series of downgrade moves. With respect to your specific question on consumer deposits, I think the answer is yes. What we have been saying all along is that deposit costs and beta will continue to trend at a decelerating rate through the pause period until such time if there is a rate reduction. That's our expectation as well. I won’t say the go-to-market pricing is generally here, pretty consistent if not testing somewhat lower price points, but there is, of course, a sort of embedded momentum of somewhat upward bias in terms of pricing for at least another quarter here, and then we'll see. We've got rates cuts in March, some aggressive in our view is possible, which could create additional downgrade pressure in rates on deposits until September, which may be a longer period.

Great. Thank you.

You're welcome.

Hi, good morning. And by the way, whoever wrote that script, the guidance could not be any clearer, so that was great. That being said, a few follow-up questions. The loan growth guidance from your peers would imply that the macro outlook, which seems pretty consensus, is indicative of softer 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 performed differently to outperform. Maybe go back through those opportunities that they 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 opportunities for this year?

Erika, this is Steve. I'll start with that because you've asked a broader question. We believe that our cautious approach to moderate-to-low risk, which has been in place for 14 years, has been beneficial and has guided our decision-making. Keeping this in mind, we have been intentional and strategic in expanding our businesses. During Investor Day, we highlighted a mid-teens growth rate in specialty banking. Our middle-market core banking capabilities are strong, and we have significant capacity in small business operations. We are achieving market presence in Ohio for small businesses, and we are now replicating that success in other states. Our core regional banking franchise is performing well. Additionally, we have introduced three new specialties last year, all of which have started off strong. We have had a presence in Dallas and Charlotte for over a decade. When we identify opportunities, we act on them. For instance, in the Carolinas, we are welcoming a fantastic group of new colleagues along with outstanding teams we've been monitoring for years, and everything came together perfectly. While we were investing, others were not, creating a moment for us to be proactive. Moreover, we still see growth prospects in the TCF markets. We are performing exceptionally well in Michigan, although we are still in the early stages in Chicago, the Twin Cities, and Denver. We are optimistic about these markets. With our investments in specialty banking and the strong performance of our core regional banks, we have significant growth potential in the coming years. I also want to highlight our asset finance business. Our distribution finance sector had an outstanding year last year, and our auto business is performing exceptionally well, supported by a great team. The Floorplan segment has also seen impressive growth. Overall, there are numerous avenues for growth, particularly in the equipment finance sector, and we are confident in our ability to outperform and anticipate our colleagues will excel in the years ahead. Thank you for that question.

For sure, and you had the capital, so it all makes sense. Just a follow-up question, again, so many moving pieces in terms of the rate outlook, but Zach, if you could maybe update us on your rate sensitivity as of 12/31. How does some of the technical difficulties in terms of your balance sheet management? 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 in a similar discipline? I wonder if you could give us maybe your expectations on deposit beta for the first 100 basis points of rate cut.

Sure. Great questions. There's a lot in there to unpack. So let me address those both. As it relates to asset sensitivity for December, I expect it to be roughly consistent with the asset sensitivity we saw that was reported in October. You'll see that come out in the Q, in the K. As we've discussed over time, the business is naturally asset-sensitive. On the way up with the industry cycle, we've benefited very significantly in terms of margin expansion and revenue growth. I'll note as well that something just as important to assess as you're thinking about asset sensitivity is that in our securities portfolio, we have 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 downside 100 basis point 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 of sensitivity will begin to ramp off starting in the second half of 2024 and continuing on for that 12-month period thereafter. The other thing I'll just say is, as an important point is that those sensitivity metrics are pretty academic and not standardized across the industry with lots of assumptions, the beta being the most significant, but also whether those analyses are ramps 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, advising is important to assess those assumptions carefully in comparing those metrics across firms. Back to the second question: our management posture incrementally from here sees the opportunity to add downside rate reduction hedges. Our hedging strategy is shifting from a focus on capital protection 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 incrementally add into those down rate 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 to give you a sense: in the scenario that I'm looking at where rates begin to fall in March and then have five cuts in total, even though it’s little more than your scenario, we would expect to see about a 20% roughly downward adjustment over a three-quarter period by the end of 2024. We would, of course, be less than that if there was an extended pause through the late summertime period, but just to give you a sense of the sensitivity to your question.

So clear. Thanks so much.

Thanks, Erika.

Good morning.

Good morning, John.

On the capital front, I know your CET1 increased nicely, about 15 basis points to 10.25 basis points in the fourth quarter. Just as you look at that 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? Thank you.

Great question, John. Thanks. This is Zach. I'll take that one. We're very pleased with the outcomes around the overall action plan we've had regarding managing capital and capital priorities throughout the course of 2023. As we've talked about, we're actively modulating the pace of loan growth to balance additional loan growth and revenue, but also to accrete capital and balance sheet equally in the fourth quarter, benefiting significantly from a recapture of AOCI, which allows us now to accelerate the pace of loan growth, as we discussed earlier. For the foreseeable future, I see us continuing on with that posture, driving the most important capital priority we have, which is to fund higher-term loan growth. There is a significant opportunity for us to do that, and that is the most value-creating decision in front of us. Importantly, at 8.6%, our adjusted CET1 has been rising significantly. We want to drive that into the 9% to 10% operating rate 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 will reassess our posture regarding share repurchases. Over time, share repurchases are a critically important part of the value creation model for the company; I absolutely expect us to get back to them. We will drive to those outcomes as soon as we possibly can.

And John, as Zach shared with you in 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.

Great. All right. Thank you. 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 bank, both the last year's failures and 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 you think from an industry perspective, not necessarily for Huntington, that you think we can see a pickup in whole bank M&A given the backdrop and regulators?

That's a series of questions, John, and I'll do my best to address them, but I might overlook an aspect. Let's take a moment to reflect. Three unique banks have failed, and we've observed the rest of the industry adjusting, adapting, and responding swiftly. The fundamental strength of the industry is not in question at this time. We believe in maintaining a focused, disciplined, and broadly diversified set of businesses, and we've successfully built that framework, which has benefited us as we saw in the second half of last year and into this year. We are optimistic about our ability to grow organically and that is our primary focus. We will continue on this path, and you may see further announcements from us this year regarding organic growth initiatives. I expect we will remain somewhat contrarian yet agile as we move forward. We believe there are significant opportunities within our existing business lines. Regarding scale, the regulatory response to those three bank failures raises questions about how much smaller banks will benefit in the industry over time. Expectations have risen, as they should. We are investing in our risk management platform, and I mentioned in the third-quarter call that we will achieve better intraday visibility soon as a result. We are addressing several aspects like this. I can't say how we stack up against other banks. We've always considered the stress test results, where we've ranked in the top quartile or even led in portfolio stresses set by regulators, as a benchmark, and it appears that was a good measure, at least for now. We are not anticipating any changes to our approach at this time and do not feel pressured to take action. However, if future opportunities arise, we will evaluate them, but they must make sense in a risk-adjusted framework. I don’t foresee that happening in 2024. We have a significant amount of core growth to pursue, and we are enthusiastic about that.

Great. Thanks, Steve.

Thanks, John.

Hey, good morning, everybody.

Good morning, Steve.

I want to start with a big picture question for you, Zach. Historically, a steep yield curve has been beneficial for bank margins and earnings. Considering how you've positioned the balance sheet with the use of hedges, have you effectively created a way to harness much of that potential benefit to maintain a more stable net interest margin today?

Great question, Steve. I think the short answer to your question is no. A steeper yield curve continues to benefit us. Obviously, that environment would be indicative of lower funding costs, which would represent solid margins against asset yields. I think we're in this really strange environment with inverted yield curves and with the dramatic reduction forecasted pretty quickly here. So we'll see how it all plays out. For us, the puts and takes with respect to NIM outlook in 2024, we will continue to benefit significantly from fixed asset repricing. I tried to provide some incremental clarity about that in the prepared remarks and the presentation. But we expect to see 50 basis point to 100 basis point moves in overall portfolio yields in key categories that will continue to benefit us, not only in 2024, but also in 2025 and beyond. Another thing for us is that as the curve becomes less inverted, we'll see our negative carry from our down rate hedge protection program reduce. The negative carry, in fact, in Q4, was around 17 basis points of drag. We've talked about likely we will see about 10 basis points of that come back to us. We believe the scenario will align closely with the forward curve over the next four quarters. Funding costs, again, in a steeper yield curve environment where rates have fallen, will start to benefit us as we begin to pivot toward down beta and actually executing on down beta, since Erika asked that question earlier. Those things in total essentially offset for us in our NIM, the variable yield reduction that we will see if and when the short end comes down. I still believe that that scenario of a nice upward slope in the yield curve is accretive to margin and is supportive of it. Our goal remains to collar the NIM here, put a floor under it, and maximize the upside. Lastly, the modeling we've done about 2025 highlights NIM expansion opportunities, which is again an indication that the upward slope in the yield curve is positive.

Okay, that's helpful. Zach, I asked the 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. As we move beyond 2025, 2026, there's a clear benefit to the NIM. Are you able to quantify for us, like on a longer-term basis, assuming the forward curve plays out, given what's on and what's rolling off? Where the NIM could be long term for Huntington?

Sure. Yes. But the point on the higher NIM and the scenario, if we stay higher for longer is not only a scenario where short end stays higher for longer but also longer stays higher for longer. I will note historically much of our balance sheet yields key off the belly of the curve, the two to five year range. So I think that's an important point to consider. Looking over the longer term, I see north of three into the low threes in terms of NIM as a sustainable level. Of course, the business mix continues to shift, so I think it's hard to be precise about that, and several years out we will have to continue to do our modeling. But over the foreseeable future, we see that range of 3% to 3.10%. In a quicker rate reduction scenario, maybe as much as 10 basis points higher than that, if rates stay higher for longer through 2024. Then I would see another step up into 2025, assuming the yield curve holds generally.

Okay, thanks for taking my question.

Thanks so much.

Hey, thanks. Good morning.

Good morning, Jon.

A couple of guidance clarifications for you, Zach. When you say Q1 net interest income is a trough, how deep is that trough, how much lower? Where do you want us to start, I guess, for Q1?

Good question. Q1, by the way, is typically seasonally lower, just with day count and other mixed items. 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. The trajectory from there is the major difference in the guidance range, given that, if you just pull back loan growth, I would expect in Q1 we will be about the same year-on-year as we saw in Q4 year-round at 2%. Then steadily accelerating from there and ending the year growing at or even potentially above the high end of the loan growth range, the average should be 3% to 5% that I discussed. There's a trajectory for sure during the year. Likewise, in terms of NIM, I think it's likely that the NIM will reach its lowest point in the year in the first quarter and then rise pretty significantly depending on the scenario you consider. That's a general trajectory I'm expecting.

Okay, good. 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. When you say consistent, are you basically saying flat-line expenses quarterly for 2024? Meaning that all the expense investments and hiring and things that you’ve done are essentially in the run rate today and you don't see a lot of these pressures as 2024 progresses. Is that fair?

That's an excellent point, and I appreciate the chance to clarify that. Broadly speaking, the answer is yes. The dollar amount of expenses we saw in Q4, the forecast we've got in our budget represents pretty similar dollar amounts for each quarter during 2024. There are a variety of factors driving within that. I would say there’s still a little bit of additional ramp-up on some of the incremental capability investments that we're doing. Likewise, there's a little additional ramp-up on some of the new initiatives, like in the commercial business. We're also actively tuning our overall strategic investments to modestly offset that. Then lastly, you've got these efficiency programs, which are cumulating their impact over time. The business process re-engineering initiative we've been driving for quite some time. We internally call it Operation Accelerate. The business process offshoring initiative, which by the way is also growing, accumulating. So there's a series of factors netting together, but the result is dollars that are pretty consistent with what we observed in Q4.

Okay, good. Very helpful. Thank you very much.

Thank you.

Hey, good morning. 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? On the C&I side, these also continue to normalize. Can you talk about what you're seeing in this book? Thank you.

Sure, Nate. This is Brendan. I'll take that. For the quarter, yes, we did see an increase in the commercial real estate side. But I want to point you to the dollars there. It was $20 million of charge-offs in the quarter. It really represented three 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 there is potential for loss content, which is why we've increased our reserves to approximately 10% there. What you're seeing in the current quarter is sort of the manifestation of that message that we've been delivering for some time. When I take a step back and look more broadly, the portfolio on commercial in general is actually performing pretty well. The C&I side of the house has had its individual idiosyncratic issues, but in general, the strength of the portfolio reflects 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.

So, Nate, it's Steve. The gross charge-offs in Q3 and Q4 were $2 million apart, which was very similar. The difference was in their coverings. The pre-portfolio is performing very well. The office portfolio has had minimal losses, with 23 basis points for the year. Q1 charge-offs are outstanding. We're very pleased with the performance and are confident moving forward. Thanks for the question.

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

This is Brendan again, Nate. As Zach 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 expect the criticized assets 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 would classify that as just more credit normalization across the portfolio.

Thank you for the question.

Hey, good morning.

Good morning, Ebrahim.

I wanted to follow up on the loan growth guidance, Steve. It seems to be at the upper end of what we've observed from your peers over the past week. Could you clarify how much of this is expected to come from gaining market share versus the actual growth in these markets and your expectations regarding GDP growth?

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. We are in an advanced position. We'll capture a share from that but also have these specialty banking initiatives in the Carolinas; they begin with no portfolio, so there's no prepayment or repayment risk, but those groups are off to terrific starts. We're very pleased with the quality of the colleagues we've been able to attract to Huntington, and I'm confident in our teams in both the core teams and our specialty banking teams. Our consumer lending teams are outstanding as well. As we enter the year, we've got momentum and will continue to invest in these businesses, which should help us achieve or even exceed our goals.

Got it. I guess what I didn't hear, Steve, was any mention of fiscal stimulus, the Chips Act, etc., flowing through your market. Is that not as meaningful going forward around moving the needle on growth?

The markets are relevant primarily in 11 to 12 states where we operate our network. In Columbus, which you mentioned in relation to the Intel plant, that facility is currently under construction, and we expect supply chain commitments to be finalized this year as they prepare for opening next year. There are unique factors boosting the outlook in greater Columbus. We hold a significant market share here and lead in most categories. This will also positively impact the surrounding region, and it’s just one of many sectors that have opted for the Midwest. Consider the battery industry from East Michigan, Ann Arbor, through Columbus, along with announcements from last year, including the Honda joint venture in greater Columbus related to batteries. There has been considerable investment in the core area, which brings economic benefits to the industry and certainly to us, given our leading position in many of these sectors. Thank you 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 dynamically manage through this environment. We believe we're well-positioned. The investments we made in 2023 will further drive revenue growth in 2024 and beyond. Our focus is on driving core revenue growth, carefully managing expenses to support investments in the business, and growing loans 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 executives, our colleagues, we're not just shareholders. That creates strong long-term alignment with our shareholders generally. Finally, we're grateful to our nearly 20,000 exceptional colleagues who delivered these outstanding results and our perennial award winners for customer service. Thank you all very much. Appreciate your interest, and have a great day.