Zachary "Zach" Wasserman
Senior Executive Vice President & Chief Financial Officer at Huntington Bancshares
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 41 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 [Phonetic] million. 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 move 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 operate 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 forth 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 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 like wise 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 two 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 and 35 basis points.
With that, we'll conclude our prepared remarks and move to questions-and-answers.
Tim, over to you.
