Zachary Wasserman
Senior Executive Vice President, Chief Financial Officer at Huntington Bancshares
Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our fourth quarter results. We reported GAAP earnings per common share of $0.26 and adjusted EPS of $0.28. The quarter included $39 million of notable items, primarily related to the updated FDIC Deposit Insurance Fund special assessment of $32 million, which was driven by higher losses from last year's bank failures. Additionally, we incurred $7 million of costs related to incremental business process offshoring efficiency plans that were finalized during the quarter. These items collectively impacted EPS by $0.02 per common share.
Return on tangible common equity, or ROTCE, came in at 14.2% for the quarter. Adjusted for notable items, ROTCE was 15.3%. Average deposits continued to grow during the quarter, increasing by $1.1 billion or 0.7%. Cumulative deposit beta totaled 43% through quarter-end. Average loan balances increased by $701 million or 0.6% for the quarter. Credit quality remained strong with net charge-offs of 30 basis points. Allowance for credit losses was stable and ended the quarter at 1.97%.
Turning to Slide 7, as I noted, average loan balances increased quarter-over-quarter and were higher by 1.3% year-over-year. For the quarter, loans increased at a 2.3% annualized pace. We expect the pace of future loan growth to accelerate over the course of 2024. Loan growth was commercial-led for the quarter with total commercial loans increasing by $691 million. Commercial balance growth included distribution finance, which increased by $352 million, benefiting from normal seasonality. Auto floorplan increased by $313 million. CRE balances declined by $31 million. All other commercial portfolios were relatively unchanged on a net basis. Within other commercial, we saw notable strength in regional and business banking balances, as a result of sustained production levels and the continued retention of all SBA loan production on balance sheet.
In total consumer loans, average balances were flat overall for the quarter. Within consumer, residential mortgage increased by $137 million, benefiting from production, as well as slower prepay speeds. Average auto balances declined by $59 million, however increased by $180 million on an end-of-period basis. RV/marine average balances declined by $42 million, and home equity was lower by $35 million.
Turning to Slide 8, as noted, we drove another quarter of solid deposit growth. Average deposits increased by $1.1 billion in the first quarter. On a year-over-year basis, deposits have increased by $4.6 billion, or 3.1%. Total cumulative deposit beta continued to decelerate quarter-over-quarter and ended at 43%, consistent with our expectations for this point in the rate cycle. Our current outlook for deposit beta remains unchanged, trending a few percentage points higher, so long as there is a pause from the Fed, and then beginning to revert and fall when we see rate cuts. Market expectations for rate cuts have clearly been pushed out compared to our January earnings call. We continue to believe that there will be rate cuts over time and the impact of beta will be a function of the duration in this pause from the Fed.
Turning to Slide 9, non-interest bearing mix shift is tracking closely to our forecast. Average non-interest bearing balances decreased by $1.3 billion or 4% from the prior quarter. We continue to expect this mix shift to moderate and stabilize during 2024.
On to Slide 10, for the quarter, net interest income decreased by $27 million or 2% to $1,300 million. Net interest margin declined sequentially to 3.01%. Cumulatively, over the cycle, we have benefited from our asset sensitivity and earning asset growth, with net interest revenues growing at a 6% CAGR over the past two years. Reconciling the change in NIM from Q4, we saw a decrease of 6 basis points. This was primarily due to lower spread net of free funds, which accounted for 9 basis points, along with a 1 basis point benefit from lower average Fed cash and 2 basis points positive impact from other items, including lower hedge drag impact. We continue to benefit from fixed-rate loan re-pricing. We have seen notable increases in fixed asset portfolio yields thus far in the rate cycle, and many of our fixed rate loan portfolios retain substantial upside re-pricing opportunity through 2024 and into 2025.
As a reminder, we continue to analyze and develop action plans for a wide range of potential economic and interest rate scenarios for both short-term rates, as well as the slope and level of the curve. The basis of our planning and guidance continues to be a central set of those scenarios that are bounded on the low end by a scenario that includes three Fed fund cuts in 2024, which tracks closely to the current Fed dot plot. This scenario is also aligned to the forward curve from the end of March for longer durated time points. It's important to note that the level of the curve in the two to five-year term points is an important driver of our asset re-pricing and spreads. The higher scenario assumed rates stay higher for longer with no Fed fund rate reductions this year. This scenario also assumes the longer durated time points remain at or above the levels at quarter-end. In both of these scenarios, as we project further out into 2025, we continue to believe that it is most likely that there will eventually be rate cuts at some point as we get into next year.
Comparing our latest outlook for those scenarios to the range of outlook we shared in our January guidance, there have certainly been changes, given the volatility of rates over the past quarter. Both scenarios now expect Fed funds to stay elevated for longer, which will drive some incremental deposit beta, while the belly of the curve has improved, which will also support asset yields and re-pricing benefit. It's difficult to predict exactly how the rate environment will play out over the course of the year.
As we look at the impact of this rate outlook on our business, the fundamental elements of our prior guidance remain unchanged. There's much of the year left to play out, and as a result, we're maintaining our range for full year spread revenue growth. At the margin, we're seeing somewhat higher funding costs as the expected timing of rate cuts has been pushed out. If this plays out for the full year, our view is that the overall NIM outcome could be a few basis points lower than our previous guidance in both scenarios. Importantly, we're also seeing strong continued deposit growth that is more likely to be at the top end of our deposit growth guidance range, which provides good core funding for our accelerating loan growth. We continue to see Q1 as the trough for net interest income on a dollar basis. We expect sequential growth in spread revenues from this level during the remaining quarters of the year.
We also continue to project that a higher rate scenario will produce a higher overall NIM. In this scenario, we would see a more extended trend of higher deposit beta, and hence, overall funding costs would be higher. We would also see an incrementally higher fixed asset re-pricing benefit. Importantly, our core focus is on driving revenue growth. And as I noted, we continue to forecast that the combination of this margin outlook, coupled with accelerating loan growth, will drive solid revenue expansion from here. This will support accelerating earnings growth rates as we move throughout this year and continue on into 2025.
Turning to Slide 11, our level of cash and securities increased as we benefited from higher funding balances from sustained deposit growth, as well as our senior note offering and ABS transactions in the first quarter. We expect cash and securities as a percentage of total average assets to remain at approximately 27% to 28% as the balance sheet grows over time. We are reinvesting securities cash flows in short-duration HQLA, consistent with our approach to continue to manage the unhedged duration of the portfolio lower over time. We have reduced the overall hedged duration of the portfolio from 4.1 years to 3.5 years over the past seven quarters.
Turning to Slide 12, you can see an updated outlook for AOCI. Based on the rate environment at quarter-end, AOCI moved incrementally higher. AOCI at quarter-end was 21% lower than the levels we saw in the third quarter. Our outlook continues to forecast a substantial portion of AOCI recapture over the next couple of years.
Turning to Slide 13, we have updated the presentation of our balance sheet hedging program in order to more directly illustrate the intent of the hedging program. This view shows the effective swap profile in the future, including the effects of forward starting swaps, so you can see more directly the hedging exposures as they will play out over the next two years. Slide 43 in the appendix provides the total notional swap exposure similar to our prior reporting.
As of March 31, we had $16.8 billion of effective receive fixed swaps and $10.7 billion of effective pay fixed swaps. Our hedging program is designed with two primary objectives: to protect margin and revenue in down-rate environment; and to protect capital in potential up-rate scenarios. The pay fixed swaps, which have been effective in producting [Phonetic] capital during this rate cycle, have a weighted average life of just over three years and will begin to mature beginning in the second quarter of 2025. As these instruments mature, our asset sensitivity will reduce.
Over time, we intend to gradually add to our down-rate protection program at a measured pace. As the rate outlook moved over the course of the first quarter and the yield curve became less negatively inverted, we incrementally added to our down-rate protection hedges. We added $3.5 billion of notional forward starting receive fixed swaps in the first quarter. Additionally, through the first two weeks of April, we added another $2 billion of forward starting receive fixed swaps. The forward starting structure minimizes near-term negative carry, while protecting moderate-term net interest margin in 2025 and 2026. These instruments will also reduce the overall asset sensitivity of the business. We will remain dynamic to manage the hedging and interest rate positioning of the balance sheet, and we may make further changes over time. Our current approach is designed to gradually reduce asset sensitivity throughout the next 1.5 years, while allowing us to maximize the benefit from the current rate environment.
Moving on to Slide 14, our fee revenue growth is driven by three substantive areas: capital markets, payments and wealth management. In capital markets, total revenues declined from the prior quarter, driven by lower advisory revenues. Commercial banking-related capital markets revenues increased sequentially since troughing in the third quarter. As commercial loan production continues to accelerate, this will support growth in areas such as interest rate derivatives, FX and syndications. Debt capital markets is also expected to notably benefit over the course of the year. Within advisory, pipelines and backlog continue to remain robust, and we expect advisory to contribute to growth in capital markets revenues over the remainder of the year. Payments and cash management revenue was seasonally lower in the first quarter and increased 7% year-over-year.
Debit card revenue continues to outperform industry benchmarks. Treasury management fees have increased 10% year-over-year as we have deepened customer penetration. We have substantive opportunities across the board in payments to grow revenues over the coming years. Our wealth and asset management strategy is delivering results with revenues up 10% from the prior year. We are seeing great execution and the benefits of our investments in this area. Advisory relationships have increased 8% year-over-year, and assets under management have increased 12% year-over-year.
Turning to slide 15, on an overall level, GAAP non-interest income increased by $62 million to $467 million for the first quarter, excluding the impacts of the mark-to-market on the pay fix swaptions in the prior quarter, and the CRT fees declined seasonally by $12 million quarter-over-quarter. Our first quarter fee revenue is generally the low point for the year, and we expect non-interest income to grow sequentially from this quarter's level.
Moving on to Slide 16, on expenses. GAAP non-interest expense decreased by $211 million, and underlying core expenses decreased by $24 million. During the quarter, we incurred $32 million of incremental expense related to the FDIC Deposit Insurance Fund special assessment, as well as $7 million related to our ongoing business process offshoring program to drive efficiencies. Excluding these items, core expenses were marginally lower in the first quarter than we expected, largely due to timing of certain spend on tech and data initiatives, as well as lower incentive compensation. We continue to forecast 4.5% core expense growth for the full year. From a timing standpoint, we expect core expenses to be higher in the second quarter at approximately $1,130 million. This level should be relatively stable for the third quarter and fourth quarter. There may be some variability, given revenue-driven compensation, as well as the pace of expected new hiring activities. This level of expense supports our investments into organic growth strategies, as well as data and technology initiatives.
Slide 17 recaps our capital position. Common Equity Tier 1 ended the quarter at 10.2%. Our adjusted CET1 ratio, inclusive of AOCI, was 8.5% and has grown 60 basis points from a year ago. 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 18, credit quality is coming in as we expected and continues to perform very well. Net charge-offs were 30 basis points in Q1, 1 basis point lower than the prior quarter. They remain in the lower half of our through-the-cycle range of 25 basis points to 45 basis points. Allowance for credit losses was stable at 1.97%. Non-performing assets increased approximately 4% from the previous quarter to 60 basis points, while remaining below the prior 2021 level. The criticized asset ratio also increased approximately 3% quarter-over-quarter with sequential increases slowing quarter-over-quarter. The overall health of the portfolio is strong and tracking to our expectations.
Let's turn to our outlook for 2024. Overall, our guidance ranges are unchanged. On loans, we expect to drive accelerated growth from the first quarter, totaling between 3% and 5% on a full-year basis. This will be driven by solid performance in our core, as well as meaningful contribution from the new teams and market expansions. On deposits, we're keeping the overall range the same at between 2% and 4%. We do see it more likely to end up at the higher portion of that range, based on our momentum and the traction we're seeing with deposit gathering.
Net interest income is expected to be within a range of down 2% and up 2% on a full year basis. As I noted, we see NIM likely a few basis points lower than our earlier guidance. We project spread revenue to expand on a dollar basis from the Q1 level into the second quarter and throughout 2024. Fee growth strategies remain on track, and we continue to see core non-interest income growth of 5% to 7% for the full year.
Expense outlook is unchanged, expecting 4.5% core expense growth for the full year. Credit quality, as I mentioned, is tracking closely to our expectations, and we continue to expect full year net charge-offs between 25 basis points and 35 basis points.
With that, we'll conclude our prepared remarks and move to Q&A. Tim, over to you.
