Huntington Bancshares Inc (HBAN) — Q4 2024 Earnings Call Transcript

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.

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. Building on a good third quarter, we delivered very strong fourth quarter results, which Zach will detail later. 2024 was an exceptional year for Huntington with our teams delivering accelerated growth over the course of the year. We're very grateful to our 20,000 colleagues who drove these results while living 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 drove record fee revenues and accelerated growth of loans and deposits. This reflected contributions from both existing and new businesses. Our investments into new geographies and capabilities are delivering attractive returns and we're seeing accelerated contributions from these new areas. We delivered sequential growth in both spread and fee revenues in the quarter. We move into 2025 with strong momentum. We are poised to deliver record net interest income and fee revenues for the full year. Third, we are executing our down beta action plans and lowering deposit pricing. This supports management of net interest margin through a dynamic interest rate environment. Fourth, we are achieving strong credit performance. This is a direct result of our disciplined client selection and rigorous portfolio management aligned with our aggregate moderate-to-low-risk appetite. Fifth, through execution of our growth strategies, we are driving profit momentum into 2025 and beyond. I'll move us on to Slide 5 to recap our performance last year. 2024 was a breakout year for Huntington. Our many years of consistent and disciplined management benefited us as we came into the year with robust liquidity and capital as well as stable credit. This position of strength enabled us to accelerate growth in our core, add new capabilities and teams, and expand into new geographies in North and South Carolina as well as Texas. We're just getting started here. We believe our investments and focused execution will deliver robust organic growth in future years. The results in 2024 included growing average deposits by over $7.5 billion and growing average loans by over $3.5 billion. Our growth accelerated over the course of the year with our new initiatives increasing contributions to our overall results. Additionally, our fee revenue businesses are performing exceptionally well. Within payments, we brought in-house our merchant acquiring capabilities and increased treasury management products and services. Within wealth management, we're expanding advisory household relationships 9% year-over-year and gathering increased wealth assets from our customers. Capital markets set a new quarterly record for revenue in the fourth quarter at $120 million, an increase of 74% from a year ago. Turning to Slide 6. Let me take a moment to share the top-level revenue trends we've delivered. The organic growth we are driving continues to significantly outpace our peer group. We are well positioned to drive attractive and sustained revenue. These revenue growth trends support expanding PPNR into 2025 and beyond. Now let's turn to Slide 7. The growth opportunities today are the most attractive they've been since I joined Huntington. We have three primary areas of focus. These include executing the organic growth strategy I shared earlier, driving revenues higher and maintaining our consistent approach to risk management. We have numerous growth levers, both in our existing markets and businesses as well as the collective set of expanded geographies and new capabilities. We see substantive opportunities to expand loans, deposits, and value-added fee revenues. These efforts will result in sustained revenue expansion in both fee and spread revenue. Huntington benefits from a consistent approach to risk management that has served us well for many years. We expect this bedrock principle to remain unchanged as we 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 8 provides highlights of our fourth quarter results. We reported earnings per common share of $0.34. Return on tangible common equity or ROTCE came in at 16.4% for the quarter. Average loan balances increased by $7 billion or 5.7% versus last year. Average deposits increased by $9.7 billion or 6.5% versus last year. CET1 ended the quarter at 10.5% and increased roughly 30 basis points from last year. Adjusted common equity Tier 1, including AOCI was 8.7%. Tangible book value per share has increased by 6.9% year-over-year. We maintained strong credit performance and are positioned to continue to outperform. Net charge-offs were 30 basis points, stable from the prior quarter. Allowance for credit losses ended the quarter at 1.88%. Turning to Slide 9. Consistent with our plan and prior guidance, year-over-year average loan growth continued to accelerate. Loan growth in the fourth quarter increased 5.7% year-over-year, rising from 3.1% year-over-year in Q3. Average loan balances increased sequentially by $3.7 billion or 2.9%. This exceptional loan growth reflects strong production and contributions from our existing and new businesses. During the quarter, new initiatives represented $1.1 billion in growth or 30% of the total net loan growth. Growth from new initiatives continued to accelerate as we have guided previously, increasing from approximately $700 million and $500 million in the prior two quarters. Of the $3.1 billion of loan growth from existing businesses, we saw $766 million from auto, $421 million from regional banking, commercial and industrial, $511 million from asset finance, $327 million from higher auto floorplan balances, $85 million from seasonally higher balances within distribution finance, $165 million from all other consumer categories net, including increases from residential mortgage and home equity, offset by lower RV and marine balances and approximately $800 million collectively across the commercial bank. Of the $1.1 billion of loan growth from new initiatives, the largest contributions in the quarter came from Funds Finance, North and South Carolina and Texas. Offsetting a portion of this growth was lower commercial real estate balances, which declined by $465 million. Turning to Slide 10. The result of our accelerated loan growth continues to be a differentiated position compared to our peers. Over the last year through the third quarter, the peer group reported lower loan balances, down nearly 3% at the median. During this time, Huntington outperformed the median by approximately 6%. Importantly, we have sustained deposit growth to self-fund our expanded loan balances with deposit growth also substantially outperforming peers on a cumulative basis. Turning to Slide 11. We delivered deposit growth through the fourth quarter. Average deposits increased by $2.9 billion or 1.9%. This growth was led by our commercial customers. Non-interest-bearing deposits expanded, growing by approximately $800 million on average, totaling 18.6% of total deposits. We lowered our overall cost of deposits in the quarter by 24 basis points to 2.16%. This is consistent with the trajectory we shared in our mid-quarter update and reflects our disciplined deposit pricing. On to Slide 12. During the quarter, we drove a $45 million or 3.3% growth in net interest income. This reflects over 6% growth year-over-year and net interest income has increased for the third consecutive quarter. Net interest margin was 3.03% for the fourth quarter, up 5 basis points from the prior quarter. The change in net interest margin included 3 basis points lower spread net of free funds, more than offset by a 3 basis point benefit from lower cash balances and a 5 basis point benefit from lower drag from the hedging program. Turning to Slide 13. Our level of cash and securities at year end decreased to 28% of total assets, as we saw modestly lower cash balances in the quarter. We expect to operate at or around this level going forward. We have continued to reinvest securities cash flows into treasuries and, as previously stated, expect to manage the duration of the portfolio at approximately the current range. As previously disclosed, we sold approximately $1 billion of corporate securities during the fourth quarter. This repositioning was beneficial to risk-weighted assets and capital ratios and resulted in a pre-tax loss of $21 million with an earn back of less than two years. Turning to Slide 14. We continue to manage our hedging program with two objectives in mind, to protect net interest margin from a lower rate environment as well as to protect capital from a potential higher rate environment. We have remained relatively stable in our hedging position since November. We continue to monitor the likelihood of potential rate scenarios and will remain dynamic as we adjust to the rate environment. Moving to Slide 15. On a GAAP basis, non-interest income increased by $154 million from the prior year. On a core underlying basis, adjusting for the impacts of the loss on securities, CRT transactions and the pay-fixed swaptions mark-to-market from the prior year, fee revenues increased by $96 million or 20%. Moving to Slide 16. We have continued to see powerful acceleration from our focus on three strategic fee businesses. For the full year, fee revenues as a percentage of total revenue increased to 28% from 26% the prior year. Within payments, we saw 8% growth year-over-year in the fourth quarter, driven by a 16% increase in commercial payment revenues, benefiting from higher treasury management fees and the launch of our new merchant acquiring model. Wealth management fees increased by 8% from the prior year. AUM continued to grow, increasing 16% from the prior year, with wealth advisory households having increased by 9%. Finally, Capital Markets completed a record quarter with $120 million in revenue. That's up 74% from the prior year. Our Capstone Group had a phenomenal quarter, helping to lead our strong capital markets results. Turning to Slide 17. GAAP non-interest expense increased sequentially by $48 million and underlying core expenses increased by $57 million from Q3. The primary driver of the increase in expenses was in personnel costs, largely comprised of higher revenue-driven compensation expense, which was $42 million higher in the quarter. Slide 18 recaps our capital position. Common equity Tier 1 ended the quarter at 10.5%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.7%, up approximately 10 basis points from a year ago. Our capital management strategy remains focused on driving our top priority to fund high-return loan growth while also driving capital ratios higher. We intend to drive adjusted CET1 inclusive of AOCI into our operating range of 9% to 10%. On Slide 19, credit quality continues to perform very well. Net charge-offs were 30 basis points for the quarter, stable from Q3 and within 1 basis point of that level over the past four quarters. For the full year, net charge-offs also totaled 30 basis points, well within our through-the-cycle range. Allowance for credit losses was at 1.88%, lower by 5 basis points from the prior quarter. This reflects the continued strong credit performance and loan portfolio growth. Turning to Slide 20. The criticized asset ratio improved for the third consecutive quarter to 3.76%. The non-performing asset ratio ended the quarter at 63 basis points, relatively stable over the prior three quarters. Let's turn to Slide 21 for our outlook for 2025. We expect to continue to drive robust loan growth with balances expected to increase between 5% and 7% for the full year. Deposits are also expected to sustain growth with balances increasing between 3% and 5%. We see net interest income on a dollar basis growing between 4% and 6% this year. As noted, this level would reflect record net interest income on a full year basis. We will maintain our focus on key fee revenue areas, including payments, wealth management, and capital markets, which we expect to lead to noninterest income growth between 4% and 6% for 2025. Expense growth will be driven by sustained investments in revenue-producing initiatives, albeit at a moderately lower pace of growth than we saw in full year 2024. We expect expense growth between 3.5% and 4.5%. The pace of expense growth will in part be driven by revenue levels and the associated variable compensation expense. Importantly, we see positive operating leverage for the full year 2025. Related to credit, we expect net charge-offs for the year to be between 25 and 35 basis points. The effective tax rate for the year is expected to be approximately 19%. Let me also share a couple of thoughts on where we see trends for the first quarter compared to the fourth quarter. We expect average loan balances to grow approximately 2%, average deposits to be relatively stable sequentially, net interest income on a dollar basis to be lower by approximately 2% to 3%, reflecting normal day count headwinds as well as a modestly lower net interest margin. Fee revenues normalizing in the first quarter given seasonality and recognizing the record level we delivered in the fourth quarter. Fee revenues are expected to be approximately $500 million in the first quarter and then expand from that level over the course of the year. Expenses are likewise expected to be lower in the first quarter, given the strong year-end production levels we delivered in the fourth quarter. We forecast expenses to be down approximately 2% from the fourth quarter, the exact level of which will fluctuate dependent on revenue-driven compensation. With that, we'll conclude our prepared remarks and move to Q&A.

Thank you, 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, they can add themselves back into the queue. Thank you.

Hi, good morning.

Good morning.

Zach, can you talk about the confidence around the NII guidance range? It's a tighter range than last year. And I ask because I know there's a lot of uncertainty from trade and immigration and tax policy. So I just wanted to get a sense of what's embedded in that guide from a macro perspective.

Yes, that's a great question, Manan. I appreciate your focus on it. The short answer is that we are very confident in our ability to drive revenue growth within that range. As we observe the year unfolding, it’s still quite dynamic regarding the short-term rate outlook and the longer-term yield curve. However, we believe we can manage the net interest margin within a reasonable range, from no cuts to possibly two or three cuts, remaining roughly flat throughout 2025. We expect it to rise as we move into 2026 and beyond, following the normal upward slope of the yield curve, along with ongoing growth in high return areas, though generally flat for 2025. Ultimately, it will be loan growth and overall earnings asset growth that drive our revenue performance this year. We believe we have set a range that is very achievable based on the current run rates.

Got it. And you're growing loans faster than deposits this year. It sounds like you're reversing some of the trend that we've seen in 2024. Can you talk about what's driving that? And does that give you more room to flex on deposit costs as you go through the year?

Sure. We're currently experiencing loan growth of 5.7% in the fourth quarter, which exceeds our projected exit growth rate of 5%. I'm pleased with this outcome. As mentioned earlier, about 60% of this growth is from our core business, while 40% stems from new initiatives, showcasing a strong balance in our growth sources. Looking ahead to 2025, we anticipate loan growth to remain between 5% and 7%, with an estimated equal contribution from both core and new initiatives. Our loan-to-deposit ratio has been a focus for us over the last few years, emphasizing strong deposit growth to support our expected loan expansion. We've intentionally prefunded this to prepare for the acceleration in loan growth, and I'm happy to see our strategy coming to fruition. For 2025, we expect deposits to continue growing between 3% and 5%. While our core funding will drive much of the loan growth, we've also reduced our loan-to-deposit ratio, allowing us to implement our beta plan effectively. This plan has performed well so far in the first quarter, and we expect to see further reductions in deposit pricing even as we ramp up loan growth.

Great. Thank you.

Good morning.

Hi, John.

On the topic of loan growth, could you provide insight into the new money loan production yield for the new loans, comparing it to your existing yield? Additionally, what is the new money yield on the $1.1 billion generated this quarter from the new initiatives?

I appreciate the question, John. And I'm not going to dive into the depths of that, but I'll sort of talk a bit about this at a high level. The yields we're seeing ultimately are very consistent with kind of spread levels we've got in the business overall. That's why you're seeing that pretty consistent level of NIM. Obviously, the business being roughly 50% fixed asset production; those are keyed off of the belly of the curve, the other 50% being variable keyed off of the shorter end. One of the things I didn't say, just a minute ago, when Manan was asking was that, if you sort of unpack what's going on in yields and NIM, we continue to benefit from quite a bit of fixed asset repricing given where the belly is, and so all those things will help us together to get to that stable NIM we talked about before.

Okay. All right, Zach. Thank you. And then just hopping to capital. The CET1 at 10.5% that's down to adjusted for AOCI 8.7% and I know, you're targeting 9% to 10% including of that. So fair to assume, I know buybacks are still kind of on hold. How long do you see that? Do you see a potential change in that outlook as you look at the capital generation that you're forecasting for the year? Just trying to think of how we should think about capital return.

Yes, that's a great question. Our focus remains on the same goals, with the primary one being funding high-return loan growth. We're pleased that we've been able to effectively utilize our internally generated capital. Our adjusted CET1 ratio stands at 8.7%, and our aim is to increase that to the 9% to 10% range. I anticipate we will achieve this in the first half of 2025 and maintain it within that range. My current expectation is that if we continue to see growth in risk-weighted assets and loans, we'll likely hover around the low 9% level throughout 2025. This also depends on the state of the longer end of the yield curve and how the AOCI marks trend. Under these circumstances, there would be limited capacity for share repurchases in the near term. However, as we work to elevate our CET1 into that range, I expect to return to a more typical distribution, including share repurchases. Therefore, the dynamics in 2025 will largely depend on the pace of loan growth and the movement of the longer end of the yield curve.

Okay, great. All right. Thanks, Zach.

Thank you.

Hi, good morning.

Morning, Ebrahim.

Zach, following up on the loan-to-deposit ratio comments, as we consider the scenario where loan growth matches deposit growth in 2025, could you share your expectations regarding the incremental margin and the additional cost of deposits compared to how you anticipate the rest of the book will reprice?

Yes, those are great questions. Our loan-to-deposit ratio at the end of Q4 was 79%, which provides us a strong opportunity to drive loan growth at a faster pace than deposit growth for some time, even as we focus on core funding. The marginal spreads we are currently observing align consistently with what I mentioned earlier in response to John's question and our previous experiences. In the near term, we expect acquisition deposit rates to decline, benefitting from the lower yield curve and the reductions in Fed funds. However, looking ahead, we anticipate that our net interest margin will start to improve as we move into 2025, especially towards the end of 2025 and into 2026 and beyond.

Got it. And I guess just one quick one on the fee outlook around payments, wealth management cap market. How much of the fee growth is tied to lending or I'm just trying to think through if lending or loan growth are slower, could you still have a fee revenue backdrop which could be in line or better than, what you've guided this morning?

No. Fundamentally, the fee strategies are designed to support the overall core business, so the faster the core business grows, the more opportunities there are for fee revenues. This can be seen in some of our new growth initiatives in the Carolinas, Texas, and various specialty commercial businesses. As these grow, we are observing a positive increase in fees, especially in treasury management. Another important aspect of our fee strategy is fully tapping into the available opportunities. For instance, I wouldn't say that wealth management is closely linked to loan growth, but rather to our penetration efforts. While there is a general correlation, the strategies we're implementing are also quite independent. I anticipate that over the long term, payments, wealth management, and capital markets will see revenue growth in the high single digits to low double digits in a sustainable manner.

Got it. Thank you.

Thank you.

Hi, all.

Hi, Brian.

Hi, I see that your 2025 loan and deposit growth guidance is strong. Most of your peers are showing flat growth or a 2% increase, while you are leading the market with continued growth. However, growth rates seem to be leveling off or slowing down. I'm curious about the reasons behind this potential deceleration. Is it due to macroeconomic factors, the maturation of your investments, or other influences? What could lead to a change in these growth rates?

Yes. Great question, Brian, and appreciate you recognizing this peer leading performance, because we certainly feel pretty good about that. The way I think about it is sustaining the current run rate of loan growth. Again, we talked earlier 5.7% year-over-year in Q4, it's pretty much spot in the middle of the loan growth range and certainly, there's potential that will be at the high end of that range, which would represent acceleration actually of loan growth. Deposit growth of 3% to 5% is somewhat of a deceleration from the growth rate we saw in 2024, but really reflective of us not needing to grow deposits as much and purposely driving down the cost of deposits and benefiting from frankly that, that really advantageous position we have in loan-to-deposit ratio. So a great way to manage the NIM overall in the face of a sort of dynamic interest rate environment we've got at this point. Over the longer term, I would expect to fairly well match up fund with core deposits kind of in the business model as you go out past '25, but we're kind of managing the dynamic nature of the environment right now and so that's how I think about it, sustaining about accelerating loans and really purposely managing the deposit volumes to ensure that we can have a solid NIM and drive overall revenue growth, which is the objective in the end.

Brian, this is Steve. There's also seasonality to consider. As a large asset finance lender, we typically experience a strong fourth quarter. When annualizing that quarter, it doesn't account for the seasonality in asset finance and other seasonal businesses. However, we are entering 2025 with momentum. This year, we are approximately 50% better than last year with pipelines in most of our businesses. We feel very confident about loan growth within the range we discussed, and if the positive outlook continues, we may have a chance to exceed our expectations.

That's really helpful. Maybe as a follow-up, regarding the eight states and three verticals, is there anything that stands out positively? Do you think there have been some challenges? As you consider investments for 2025, will it primarily focus on the eight and three, or could there be potential for new verticals or states?

Thank you for the great question, Brian. We have made significant investments in our core markets, as well as in three new geographic areas and eight verticals. Over the past year and a half, we have added several hundred relationship managers and business generators, and we are very pleased with the overall performance. Our results have been outstanding, particularly in the Carolinas and Texas where we have had a strong start. Our Funds Finance business has grown faster than any specialty business we have launched. Overall, these businesses are performing well and exceeding expectations. Specifically, both the Carolinas and Texas turned a profit on a direct expense basis last year. We are encouraged by this progress and have confidence in our team. We are well positioned for continued growth, and organic growth remains our top priority. We will focus on the areas where we have made investments. Additionally, earlier this month, we introduced two new initiatives in aerospace, defense, and FIG, with the possibility of adding more specialty verticals as we move forward, though likely not at the same pace as in recent years.

Thanks so much.

Thank you.

Hi, thanks. Good morning.

Hi, Jon.

Hi, Steve. I wanted to follow up a bit on loan growth. In your prepared comments, you mentioned that these are some of the most attractive opportunities you've encountered since joining Huntington, with 50% higher pipelines. Can you share some insights on the borrower feedback you've been hearing over the last few months? Also, could you elaborate on the core growth? The $3.1 billion in core growth was significantly stronger, and you pointed out lower CRE. I'm curious if there's been a change in sentiment and what’s driving that core growth.

Yes. Jon, customer sentiment is consistently positive. The outlook after the election has changed, as reflected in confidence measures for both consumers and businesses. I've engaged with about 100 customers and prospects since the election, and nearly all are optimistic about 2025 and beyond. There seems to be a consensus on expected growth and increased inventories. We experienced record asset finance in the fourth quarter, approximately $600 million more than our previous record, indicating a shift in expectations. There was quite a bit of deferred financing activity in the first half of the year, as everyone was waiting to see the election results before making significant investment decisions, which were evident in the fourth quarter. December was particularly strong for us in asset finance. The momentum we have reflects the situation and gives us confidence as we enter the year. Regarding core growth, there is some seasonality in the fourth quarter, particularly with asset finance. We believe commercial real estate is nearing its bottom, and we are ready to increase our outstandings and commitments there, as the book has performed exceptionally well. Overall, the Group is performing very well. While we discuss loan growth, we also consider fees and deposits in relation to our 2024 performance. We approach the new year with significant confidence in our growth prospects.

Yes. Good. That's very helpful, Steve. And then one more for you with the new administration coming in and some changes in the regulatory leadership, what regulatory changes would you like to see, what could help Huntington? Thanks.

I think the business community as a whole will benefit from a more positive pro-business orientation with the new administration and so I think you'll see more of acquisition and combinations in the business community as a whole. I think in banking, we will have more stability and less uncertainty about liquidity and capital and other issues. I think the banks generally are well capitalized and this overhang of Basel III, I think, will get addressed fairly quickly. Beyond that, I believe a more constructive dialogue about willingness to do business with less oversight and constraint is probable and we'll just have to see if that develops.

Okay. Thank you. Very nice results. Yes.

Thank you.

Hi everyone. This is Nate Stein on behalf of Matt O'Connor. I wanted to ask about the NIM components. In October, you said NIM should be above 3% in the second half of '25, but you're above 3% now. I heard you say modestly lower NIM in the first quarter, but can you elaborate on your NIM outlook for the full year?

Sure, this is Zach. Thank you for the question. Throughout the year, I expect to see a net interest margin of around 3%, give or take a few basis points each quarter, but generally stable over the year. As I noted earlier, we see potential to increase the net interest margin as we move into 2026 and beyond, especially due to the continued normalization of an upward sloping yield curve. Looking at the factors affecting net interest margin in 2025, one significant advantage we have seen is from fixed asset repricing, which has been a strong contributor throughout 2024. In 2024, we gained about 12 basis points from fixed asset repricing. For 2025, I anticipate a similar benefit, estimating around 10 basis points from recent increases in the mid to longer term segments of the yield curve. This trend should continue well into 2026 and beyond, serving as a key driver for a long-term increase in net interest margin. Additionally, we expect deposit pricing and costs for interest-bearing liabilities to decrease. We made significant progress in adjusting deposit pricing faster than initially planned in the fourth quarter, which was a key factor in our outperformance during that period. We remain optimistic about managing deposit costs effectively throughout the year, although this will depend on the interest rate environment and market sentiment regarding potential rate changes. We believe there are further opportunities to lower funding costs, even as 50% of our loans are tied to variable pricing that will track SOFR. We anticipate SOFR to decrease in the first quarter after the Fed's late December rate cut. This is why I mentioned a likely lower net interest margin in the first quarter. However, over the year, we can adjust for the impact of variable yields with reductions in funding costs. Lastly, in terms of hedging, we experienced benefits in the fourth quarter as hedge drag declined, and I expect to see modest benefits in the middle of this year. If the yield curve remains stable, we may have a slight drag again in the latter half of the year. Overall, looking at the whole year regarding our hedging strategy, we expect a slight benefit on an annual basis. In summary, the outlook for net interest margin in 2025 is dynamic with different quarterly drivers, but we foresee it being stable this year and increasing in 2026 and beyond.

Okay, great. Thank you. And then separately, can you talk about the securities repositioning you did this quarter? You sold $1 billion of securities and I get there was a big march up in the long end of the yield curve, but are you planning on doing more of these repositionings?

Yes, that's a good question. The short answer is that we are not likely to do more repositioning. We sold about $1 billion of corporate securities that carried a higher risk weight. By selling and repositioning the portfolio, we were able to unlock capital at an attractive return. The teams have now finished reinvesting in new securities with higher yields, and we anticipate a payback of less than two years on that. Although the overall size is somewhat limited, it remains attractive on its own. One key difference for Huntington compared to other regional banks is that we effectively hedged our securities portfolio before interest rates began to rise, which means we have less opportunity for significant repositioning. Our plan for the securities portfolio is to maintain our current strategy and leverage the hedges we established previously.

Thank you.

Hi, good morning.

Good morning, Erika.

Good morning. Many investors have been asking about your current position in the investment cycle. They appreciate the accelerated revenue growth at Huntington and your willingness to invest while others were more cautious. Looking ahead, do you believe there are still opportunities for growth? Will the investment demands be higher for the time being? I suppose we'll hear more about this at the upcoming Investor Day. Is there a point at which you expect to see improved operating leverage, considering you have already made significant investment expenditures?

Erika, this is Steve. Thank you for your question. We have strong momentum based on our investment decisions, and we have been approached regarding nearly all of those specialty businesses and regions. We're seeing business opportunities come to us through various channels, sometimes directly from management and sometimes through colleagues. In the past year and a half, we have rarely used recruiting firms for our new team members or these investments. We have a list of areas that we have consistently explored over the years and continue to update that list whenever a promising opportunity arises. We are not at the end of an investment cycle. That said, we currently have significant momentum and confidence in our growth potential, especially since many of these investments are relatively new. We plan to continue pursuing this momentum and will provide more updates at the upcoming IR Day on February 6. We are performing exceptionally well and have momentum. I believe it would be a mistake to pull back too soon, and I expect to see more opportunities in 2025.

Got it. And just a follow up. I know it's an off-cycle year for category for banks on the stress test. I'm wondering, how you feel about participating this year and readdressing that stress capital buffer?

Yes, Erika, this is Zach. I'll take that one. Our stress capital buffer right now is at the minimum, 2.5%, which we were pleased to see.

So you'll leave it alone. Got it.

Clarifying to that, I think, we'll leave that one alone. We run internal stress tests every single year. It's a very rigorous process. We continue to feel very, very good about the ability for the capital base to withstand stress environments as we go from here.

Yes, because as you saw a year and a half ago, the quality of the deposit franchise, the absolute amount of insured to total on the backup facilities that Zach and our treasury team have put in place gives us just a unique position of confidence combined with capital and stable credit, notwithstanding challenges at that moment. We remain very confident in our credits as you've heard and we'll run the stress test and, obviously, review output carefully and we're in a period where there's more geopolitical volatility, et cetera, but we think our capital and overall position is very strong and when we look at capital plus reserves, we're top tier.

Excellent. Thank you.

Thank you, Erika.

Hi, I was just trying to wrap my head around provisioning for and reserve build first release in '25, and I know under CECL, it's almost impossible to forecast and guide with any kind of precision. But can you just talk about like where you're, on the one hand, you got a reserve for loan growth, which is pretty good. On the other hand, I didn't realize it till just now, but I mean, your criticized assets are now down 20% over nine months and your reserve is pretty high versus peers while your charge-offs are pretty low. But kind of where do you see the puts and takes? I mean, should we think about dollars of reserve release in '25 or is it more about provision that brings the ratio down, but is a stable reserve in dollars or just kind of any kind of central tendency that you would give us on whether we should be thinking about reserve release build or somewhere in between?

Sure. Brian, that's a great question. I'll address that. If we take a step back and look at our reserve from a strategic perspective, the goal is to always maintain a strong and consistent reserve. As Steve mentioned earlier, this not only provides protection against credit situations but also serves as a better form of capital. We feel confident about our current reserve levels. To give you some context, on CECL day one, our credit reserve was at 1.70%. During the toughest period of COVID, it rose to about 2.3%. While many in the industry quickly reduced their reserves in 2021, we were more cautious and only made slight reductions because we were aware that the economic environment was still fragile and there was more to unfold. This approach has positioned us well. We've always anticipated that uncertainties in the economy—such as the potential for soft or hard landings, interest rate trends, and political instability—would eventually provide an opportunity to reduce reserves if conditions improved, which they have. We've seen this reflected in the last four quarters with a gradual release of reserves. Currently, our reserve ratio is at 188, which is higher than the initial 170 from CECL. If the economy continues to perform well and given the expected loan growth, it's conceivable that the ACL coverage ratio may decrease, even if the dollar amount remains stable or increases with loan growth. So, strategically, we assess this on a quarterly basis with thorough analysis. There's no preset determination. We are monitoring the situation as it evolves each quarter. If everything continues as we expect, I believe we will see a further decline in the ACL coverage ratio over time, while we also aim to maintain or grow the dollar amount of loans.

That's awesome. If I could sneak one last one in. I get a lot of questions about if M&A kind of eases, will Huntington be a buyer? And I would say with the context, there's three or four other regional banks, five or six even that I cover who I get the same question. So it's not unique to you. But maybe, you could just remind us where you are in terms of deal mode, attractive, unattractive right now, on the priority list, not on the priority list. Certainly appreciate you've shown the ability to grow organically and there's a lot on your plate there, but it is something that comes up a lot.

Brian, it's Steve, great question. I was anticipating when this would come up. Over the years, we have been very focused on achieving top-quartile organic growth. We have made substantial investments in our core business, as well as in our regional expansions and eight verticals, so the core is also receiving significant investment. We are managing expenses, as Zach has mentioned previously, continually working on reducing core expenses through various actions while still making investments, resulting in a net growth in expenses. We are pleased with this balance. We believe there are significant opportunities for core growth along with these new investments, and we are very focused on that. The business is performing exceptionally well. Historically, we have demonstrated the ability to make acquisitions, as seen in the last decade with two bolt-on depository acquisitions. We are excited about Capstone, which just had a record quarter. While we have the capacity to pursue opportunities, our main priority remains organic growth. As we have stated before, we are very disciplined in our selection process. The TCF acquisition was a success, allowing for nearly $500 million in expense savings along with substantial revenue synergies and the addition of great businesses and colleagues. If an opportunity makes sense, we would consider it, but to be very clear, our priority is organic growth. Thanks for the question.

In closing, our team delivered exceptional results for the fourth quarter, marked by our strong loan and deposit growth and record fee income. Our credit trends remain stable, and we are very pleased with the risk management practices we have maintained for years. Our management team is focused and executing the strategies I shared earlier, as we aim to sustain our growth momentum into 2025 and beyond. We look forward to sharing more details about our growth outlook during our upcoming Investor Day on February 6, and we hope many of you can join us in person for this event. Additionally, the Board executives and our colleagues are top 10 shareholders, and we believe this strong alignment is crucial for creating value for all shareholders. Lastly, I want to thank all my colleagues for their outstanding work this quarter. We appreciate your interest in Huntington, and have a great day.