Huntington Bancshares Incorporated (NASDAQ:HBAN) Q4 2023 Earnings Conference Call January 19, 2024 9:00 AM ET

Company Participants

Tim Sedabres - Vice President & Head of Investor Relations
Stephen Steinour - Chairman, President & Chief Executive Officer
Zach Wasserman - Senior Executive Vice President & Chief Financial Officer
Brendan Lawlor - Deputy Chief Credit Officer

Conference Call Participants

Manan Gosalia - Morgan Stanley
Erika Najarian - UBS
John Pancari - Evercore ISI
Steven Alexopoulos - JPMorgan
Jon Arfstrom - RBC Capital Markets
Ebrahim Poonawala - Bank of America

Operator

Greetings, and welcome to Huntington Bancshares 2023 Fourth Quarter Earnings Review. At this time, all participants are in listen only mode. A question-and-answer session will follow the formal presentation. [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.

Tim Sedabres

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we'll be reviewing today can be found on 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

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.

Zach Wasserman

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, including the impact of payoffs and normal amortization. And 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 stabilized 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 forecast lower short-term rates, many of our fixed-rate loan portfolios 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 is bounded on the lower end by a scenario which 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 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. 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 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 outlooks changed over the course of the fourth quarter, we focused our objective incrementally on the protection of NIM in down rate scenarios and actively reduced instruments that were 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 upgrade 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 and as tighter 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 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 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, 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 $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 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 in 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 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, 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 five 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, 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 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 result of 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. 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. 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.

Tim Sedabres

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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today is coming from the line of Manan Gosalia with Morgan Stanley. Please proceed with your questions.

Manan Gosalia

Hi, good morning.

Stephen Steinour

Good morning, Manan.

Manan Gosalia

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. So just hoping you could elaborate more on what's going into that? And also, if there is a similar flex on the expense side as there is on the revenues, so for instance, if you get to -- you were down 2% NII number with more rate cuts, does that drive a little bit of flex in the expense side as well?

Zach Wasserman

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 and insights to 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 [indiscernible] represent the differences, up to 4.5% [indiscernible] it’s about $5 million a quarter, so relatively small.

I think you are -- and the underlying drivers of that are unchanged from what we have discussed before. We'll continue to drive significant efficiencies and core [indiscernible] 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, get ahead of the coming regulations and we'll execute on the really attractive commercial growth opportunities we 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 marginal sensitivity of it. Certainly, there will be just some degree of that. I think the expense that we guide is generally calibrated interest sort of the middle of the ranges we've guided in terms of revenues and so we saw potential upside of expenses. All of the revenues hit the high-end, likewise some potential opportunity if the revenues went lower.

Manan Gosalia

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?

Zach Wasserman

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, both across both consumer and commercial is the -- as we are looking stack, 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 prepared for what will likely be soon a down grader environment with a shortening, for example, time deposit terms with a change 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 down grader moves.

With respect to your specific question on consumer [indiscernible] will 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 at a decelerating rate through the pause period until such time if there is a rate reduction. And so, that's our expectation as well.

I won’t say the go-to-market pricing is generally here, pretty consistent if not, again testing somewhat lower price points, but there is of course of sort of embedded momentum of somewhat upward bias in terms of pricing for at least another quarter here and then we'll see. We got rates cuts in March, some aggressive in our view is possible which creates downgrade [indiscernible] rate environment holds out of deposits until September, which is will be kind of a longer period of [indiscernible]

Manan Gosalia

Great. Thank you.

Zach Wasserman

[indiscernible]

Operator

Our next question comes from the line of Erika Najarian with UBS. Please proceed with your question.

Erika Najarian

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 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 [indiscernible] differently to outperform. And 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 opportunity for this year?

Stephen Steinour

Erika, this is Steve, I'll start with that because you've asked a broader history. And then secondly -- 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 [indiscernible] and it has helped us as we've decided with this just to pursue and whatnot to see.

With that in mind, we've been very purposeful and strategic about growing these businesses. And you saw at the Investor Day a mid-teens rate of growth in like a 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 is performing very-very well.

When you add to that these specialties that have been put in place, just three new ones last year, which by the way they're all off to a terrific starts. And then the expansion. We've been in like Dallas and Charlotte for a decade or more. When we see opportunities, we then pursue them. An example of that is in the Carolinas, where we believe we've got fantastic group of new colleagues coming to us with teams in to some -- just outstanding people who 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 these TCF markets. We are doing incredibly well in Michigan, but I would say, we're early-stage still in Chicago, the Twin Cities and Denver. And we like those markets, each of those margins. 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 potential in the next few years, and that's where the -- I didn't talk about the asset finance business. So our distribution finance business is a horse. They had a phenomenal year last year. Our auto business is one of our best businesses. We've got one of the really terrific teams in that area and 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 budget it and expect our colleagues to do so in the coming years. This is -- I can just talk on two things. First of all, thanks for the compliment on the guidance and all the credit to our terrific Investor Relations team. But just, one thing I would add on top of that is, we were pretty purposeful about staying on a growth footing 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 wanted to do in terms of data automation capabilities, would result in an overall expense growth that 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, the long-term earnings potential of staying in that growth posture is so much more advantageous than worry to have really significantly rationed back investments and expenses. And so, a bit of short-term challenge with respect to operating that will yield very significantly better earnings growth trajectory through the course of 2024 and 2025, the earnings outlook looks exceptionally strong as well. So just to tap on Steve's point, I think the whole system is really working and [indiscernible] results here.

Erika Najarian

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, how does some of the [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 in a similar discipline? And I wonder if you could give us maybe your expectations on deposit beta for the first hundred basis points of rate cut.

Zach Wasserman

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. And you'll see that come out in the Q. I'm sorry, in the K. As we've discussed over time, the business is naturally asset-sensitive. And so clearly on the way up with the industry cycle, we've benefited very significantly in terms of margin expansion and revenue growth.

I will note as well, something just as important to assess as you're thinking about asset sensitivity is, in our securities portfolio, as you know, we've 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 Dow 100 [rapid] (ph) 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 about a 12-month period thereafter.

The other thing I'll just say is that, as an important point is, 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 pretty carefully 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 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 be incrementally adding 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 in fact begin to fall in March and then have five cuts in, even though it’s little more than your scenario, we would expect to see about a 20% roughly down data 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.

Erika Najarian

So clear. Thanks so much.

Zach Wasserman

Thanks, Erika.

Operator

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

John Pancari

Good morning.

Stephen Steinour

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 their 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.

Zach Wasserman

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 with respect to managing capital and capital priorities throughout the course of 2023, as we've talked about, actively modulating the pace of loan growth to balance additional loan growth and revenue, but also accreting capital and balance sheet equally in the fourth quarter benefiting significantly from a recapture of AOCI, which allows us now to even yet again accelerate the pace of loan growth, as we discussed earlier.

And for the foreseeable future, I see us continuing on with that posture, driving the most important capital priority 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 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'll reassess our posture with respect to share repurchases.

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

Stephen Steinour

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.

John Pancari

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 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 and regulators.

Stephen Steinour

Well, that's a series of questions, John. I'll try to answer them, but I may miss on one aspect. Let's just back up for a moment. We had three idiosyncratic banks fail. And you've seen the rest of the industry sort of adjust and adapt and respond very quickly. And the core strength of the industry, I don't think, is in question now. For us, we believe in having a very focused, disciplined, and 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 announcements from us this year in terms of organic growth moves. And I expect that we will continue to be maybe a bit 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 three failures, is raising questions about how much [indiscernible] will the industry or 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 of [indiscernible] 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 I arrived in 2009. So I don't know how we compare -- really compare to other banks. We've always viewed the stress test results where we've been top quartile or even leading in terms of the portfolio stresses 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. 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 to us. And I don't see that activity in 2014. I think we've got a tremendous amount of core growth to deliver and we're excited by that.

John Pancari

Great. Thanks, Steve.

Stephen Steinour

Thanks, John.

Operator

Our next question is from the line of Steven Alexopoulos with JP Morgan. Please proceed with your question.

Steven Alexopoulos

Hey, good morning everybody.

Stephen Steinour

Good morning, Steve.

Steven Alexopoulos

So I want to start -- for you, Zach, big picture. So historically, a steep yield curve has been a positive catalyst for bank margins and earnings. But given how you position the balance you write with the use of hedges, have you in essence created a way much of that potential benefit in order to have a more stable NIM today?

Zach Wasserman

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 funding costs, which would represent solid margins against where asset yields are. I think we're in this really strange environment with inverted yield curves and with the dramatic 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 moderate terms in 2024, one, we're going to continue to benefit very significantly from fixed asset repricing. I tried to provide some incremental clarity about that in the prepared remarks and the presentation. But see 50 basis point to 100 basis point moves in overall portfolio yield in key categories will continue to see that benefit us, not only to 2024, but to 2025 and beyond.

Another thing is, for us, 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, by the way, in Q4, it was around 17 basis points of drag. We've talked about likely we'll see about 10 bips of that come back to us. We believe the scenario will pretty align a forward curve here over the next four quarters. Funding costs, again, in a steeper yield curve environment where [indiscernible] rates have fallen, will really start to benefit us in terms of beginning to pivot toward down beta, and actually executing on down beta, since Erika's question earlier. And those things in total essentially offset for us in our NIM, the variable yield reduction that we'll see if and when the short end comes down. So I still believe that that [indiscernible] scenario of a nice upward slope in yield curve is accretive to margin, sort of supportive of it. And the goal we've got is the same, to try to really collar the NIM here, put a floor under it, and really position for upside.

And I think the last thing I'd say is, kind of picking up to your question as well. The modeling that we have done about 2025, and we've been saying this for a while, really highlights NIM expansion opportunities, which again, is sort of an indication that the upward slope in yield curve is positive.

Steven Alexopoulos

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. But 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 played out, given what's on and what's rolling off. Where the NIM could be long term for Huntington?

Zach Wasserman

Sure. Yesh. But the point on the higher NIM and the scenario will stay higher for longer, it's not only a scenario where short end stays higher for longer, but also longer end 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. Look over the longer term I see north of three -- into the low three’s in terms of NIM as 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 3 to 3.10 in a quicker rate reduction scenario, maybe as much as 10 bips higher than that, if rates stay higher for longer through 2024. And then I would see another step up into 2025, assuming the yield curve holds generally [indiscernible].

Steven Alexopoulos

Okay, Thanks for taking my question.

Zach Wasserman

Thanks so much.

Operator

Our next question is from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your questions.

Jon Arfstrom

Hey, thanks. Good morning.

Stephen Steinour

Good morning, Jon.

Jon Arfstrom

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?

Zach Wasserman

Good question. Q1, by the way, is typically seasonally lower, just with day count and just other mixed 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 so, it's really the trajectory from there that's really 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 Q4 and year around 2%. And 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.

And likewise, in terms of NIM, I think it's likely that the NIM will likely meet its lowest point in the year in the first quarter and then kind of rising pretty heavily depending on the scenario you look at. But that's a general trajectory I'm expecting.

Jon Arfstrom

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. And 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?

Zach Wasserman

That's an excellent point, I really appreciate the chance to clarify that. Broadly speaking, the answer is yes. The dollar amount of expenses overall we saw in 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, coincidentally. In my [indiscernible] illustrate this picture for you, there's a variety of factors that are 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 on 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 cumulating in 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 sort of a series of factors that are netting together, but the result of it is basically dollars that are pretty consistent with [indiscernible] to Q4.

Jon Arfstrom

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

Zach Wasserman

Thank you.

Operator

Thank you. [Operator Instructions] Thank you. And our next question will be from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.

Unidentified Analyst

Hey, good morning. This is [Nate Stein] (ph) 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? Thank you.

Brendan Lawlor

Sure, Nate. This is Brendan. I'll take that. For the quarter, yes, we did see on a basis of my perspective, there was 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. And 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 that there is potential for lost 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.

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 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

So, Nate, it’s Steve. The charge-offs -- gross charge-offs in Q3 and Q4 were $2 million apart. It was very, very similar. The difference was in all of their coverings. The pre-portfolio is performing very well. The office portfolio has had minimal losses, 23 bips for the year. Q1 charge-offs is outstanding. We're very pleased with how the performance has occurred, and we're confident going forward. Thanks for the question.

Unidentified Analyst

All right, thank you. And 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?

Brendan Lawlor

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 criticize 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.

Stephen Steinour

Thank you for the question.

Operator

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

Ebrahim Poonawala

Hey, good morning.

Stephen Steinour

Good morning, Ebrahim.

Ebrahim Poonawala

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. Not -- sorry if I missed it, but give us a sense of how much of this is just market share gain that you expect versus the underlying growth that you're seeing in these markets and your expectations, I guess, like the GDP growth?

Stephen Steinour

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. And so, we'll capture a share from that, but we also have these specialty banking initiatives in the Carolinas, and they begin with no portfolio, so there's no prepayment, repayment risk, obviously, and that's all net long-run, but those groups are off to terrific starts. We're very, very pleased with the quality of the colleagues who've been able to attract to Huntington, and I'm quite confident in our teams, both the core teams that they'll deliver in our footprint, the speciality 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

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

Stephen Steinour

The markets have -- broadly speaking, we're talking about 11, 12 states that were in with our network. But here in Columbus, which is what you're referring with the [Intel] (ph) 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 will also benefit the broader region. And that's one of just many sectors that have chosen the Midwest. Think about batteries from East Michigan, Ann 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, and certainly for us with our leadership position in many of these areas. Thanks for the question.

Ebrahim Poonawala

Thank you.

Stephen Steinour

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. 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. And that creates strong long-term alignment with our shareholders generally. And 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.

Operator

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