Prepared remarks
Greetings, and welcome to the Huntington Bancshares Fourth Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tim Sedabres, Director of Investor Relations. Please go ahead.
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 the 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 by 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 3 basis points 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 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 are 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. Tim, over to you.
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, he or she can add themselves back into the queue. Thank you.
Questions and answers
Today's first question is coming from Manan Gosalia of Morgan Stanley. Please go ahead.
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. Great question, Manan. I appreciate your focus on that and the short answer to your question is we're very confident that we can drive revenue growth within that range. Ultimately, when we see the year playing out, obviously, still pretty dynamic here in terms of the short-term rate outlook and even what's going on in the belly in the longer-term part of the curve. But we see the ability to manage the NIM within any reasonable range of zero cuts to up to two or three cuts at approximately flat throughout the course of 2025, rising as we go into 2026 and beyond with the normal upward sloping yield curve and just continued growth in the high return areas, but generally flat in NIM for 2025. It's really going to be loan growth therefore and earnings asset growth overall that drives the revenue performance this year. And we think we've set the range at a level that's very achievable and within the run rates that we're seeing now.
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?
Yes, that's another good point. In terms of loan growth, we are currently in the fourth quarter and have achieved a growth rate of 5.7%, which exceeds the 5% growth rate we had projected. I'm very encouraged by this. As we mentioned in our prepared remarks, about 60% of this growth is from our core activities, while 40% comes from new initiatives, representing a solid mix of growth. Looking ahead to 2025, we anticipate loan growth to range from 5% to 7%, mostly maintaining this current run rate. We expect the growth composition in 2025 to be roughly evenly split between core and new initiatives, which indicates a balanced approach and strong performance overall. Regarding our loan-to-deposit ratio, we have intentionally focused on strong deposit growth over the past couple of years. We have indicated that we were somewhat pre-funding anticipated loan growth, and it's gratifying to see that strategy working out. For our 2025 plan, we expect to continue growing deposits between 3% and 5%, primarily funding most of the loan growth through our core deposits, while benefiting from a slightly reduced loan-to-deposit ratio. This positions us well to continue executing our beta plan, which has performed well so far this quarter and allows for further reductions in deposit pricing even as we ramp up loan growth.
Great. Thank you.
Thank you. The next question is coming from John Pancari of Evercore. Please go ahead.
Good morning.
Hi, John.
On the topic of loan growth, can you provide insights into the new money loan production yield compared to your existing yield? Additionally, what is the new money yield on the $1.1 billion generated from the new initiatives this quarter?
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.
Thank you, Zach. Regarding capital, I understand the CET1 is at 10.5%, adjusted for AOCI it's 8.7%, and you're aiming for 9% to 10%. With buybacks currently on hold, how long do you anticipate that situation will continue? Do you foresee any changes to this perspective based on your projected capital generation for the year? I'm trying to understand how we should approach capital return.
Yes. Good question. As you think about capital for us, we're focused on the goals that we've had that are unchanged, most important of which is funding high-return loan growth and so we're pleased that that's really been a great opportunity for us to deploy our internally generated capital. That adjusted CET1 ratio of 8.7%, our objective remains the same, which is to drive that up into the 9% to 10% operating range and I expect that we'll do that within the first half of 2025 and then continue to drive that higher solidly within that range. My working forecast at this point, John, is that if we continue to see RWA growth and loan growth as we're forecasting, it will likely be bouncing around the kind of the low 9s throughout the course of 2025. It obviously also depends on where the longer end of the yield curve is, just where the AOCI marks trend. Yet under that scenario, there's relatively little capacity to do share repurchases in the near term. Over the longer term, as we continue to drive share - CET1 up into that range, I would expect us to return to more normal distribution, including share repurchases. So, 2025 will to some degree really be dependent on that pace of loan growth and where the longer end of the yield curve ends up coming through.
Okay, great. All right. Thanks, Zach.
Thank you.
Thank you. The next question is coming from Ebrahim Poonawala of Bank of America. Please go ahead.
Hi, good morning.
Morning, Ebrahim.
I wanted to follow up on the loan-to-deposit ratio comments. Considering loan growth and deposit growth in 2025, could you share your expectations for the incremental margin and the additional cost of deposits in relation to how you anticipate the rest of the portfolio will reprice?
Yes, good questions. Our loan-to-deposit ratio at the end of Q4 was 79%. This presents us with a strong opportunity to continue growing loans at a faster pace than deposits for some time, even as we focus on core funding. The marginal spreads we are currently experiencing align with what we observed previously. In the near term, we anticipate acquisition deposit rates will decrease and we will benefit from the lower yield curve due to the Federal Reserve's rate reductions. However, over the long term, we expect our net interest margin to start increasing as we approach 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 as the core business grows faster, there are more opportunities for fee revenue. This aligns with our new growth initiatives in the Carolinas, Texas, and some of the new specialty commercial businesses. As these areas expand, we’re noticing a positive impact on fees, especially in treasury management. Additionally, another key aspect of the fee strategy is to fully penetrate existing opportunities. For instance, I wouldn’t classify wealth management as being highly dependent on loan growth; it’s more about the depth of our penetration in the market. While there is a broad correlation, the strategies we are implementing are also quite independent. Looking ahead, I expect that payments, wealth management, and capital markets will see revenue growth in the high single digits to low double digits consistently over the long term.
Got it. Thank you.
Thank you.
Thank you. The next question is coming from Brian Foran of Truist. Please go ahead.
Hi, all. I guess
Hi, Brian.
Hi, I understand your 2025 loan and deposit growth guidance. Most of your competitors seem to have flat growth or up by 2%, so your growth remains a leader in the industry. However, I notice it appears to be flat or decelerating compared to current growth rates. Can you explain why you might experience a slowdown? Is it due to macroeconomic factors or the seasoning of investments? What might cause this change in the growth trend?
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 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 just 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 is also seasonality to consider. As you know, we are a significant asset finance lender, which usually experiences a strong fourth quarter. Annualizing that fourth quarter does not accurately reflect the seasonality in asset finance and other seasonal businesses. However, we are entering 2025 with positive momentum. We are seeing about 50% improvement this year compared to last year in our pipelines across most of our businesses. Therefore, we are very confident in the loan growth within the range we discussed, and if the outlook remains strong, we may have the chance to exceed expectations.
That's really helpful. Maybe as a follow-up, the eight states and three verticals. The eight verticals and three states, anything you would highlight as kind of the standout on the good side? Do you think that's been maybe a little bit more challenging? And as you think about investments for '25, is it mostly about continuing to invest in the eight and the three? Or is there anything that could potentially be new verticals or new states on the docket?
Thank you for the question, Brian. We have made investments in our core markets, as well as in three new geographic areas and eight verticals. Over the past year and a half, we've added several hundred Relationship Managers and new business generators. Overall, we are very pleased with our performance, which has been outstanding. We're seeing strong results in both Carolinas and Texas. Our Funds Finance business has experienced faster growth than any other specialty business we've had. All around, we are significantly exceeding our expectations. The Carolinas and Texas regions were profitable on a direct expense basis last year, which is encouraging. We are confident in our team and well-positioned to sustain this growth. Our primary focus is on organic growth, and we will keep seeking growth from our investments. As mentioned earlier this month, we launched two new verticals in aerospace, defense, and FIG, with the possibility of adding more specialty verticals in the future, although not at the same pace as we have in the last year and a half.
Thanks so much.
Thank you.
Thank you. The next question is coming from Jon Arfstrom of RBC Capital Markets. Please go ahead.
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 seen since joining Huntington, with pipelines 50% higher. Can you share some insights on the borrower feedback you’ve received in the last few months? Additionally, could you also discuss the core growth? The $3.1 billion in core growth was significantly stronger, and you've indicated lower commercial real estate. I'm curious if there has been a shift in sentiment and what is driving that core growth.
Yes. Jon, the sentiment among borrowers and customers is consistently positive. The outlook after the election has shifted. This is evident in the confidence measures for both consumers and businesses, and since the election, I’ve engaged with around 100 customers and prospects, and nearly all express a very positive outlook for 2025 and beyond. There appears to be a consensus on expected growth and increased inventories. In the fourth quarter, we saw record asset finance, about $600 million more than our previous record, which indicates a shift in expectations. There is a significant amount of deferred financing activity that took place in the first half of the year while waiting for the election results, leading to substantial investment decisions made in the fourth quarter. December was particularly strong for us in the asset finance segment. As we move forward, the momentum we’re experiencing reflects this settlement and gives us considerable confidence heading into the year.
Regarding core growth, we do observe some seasonality in the fourth quarter related to asset finance. We believe commercial real estate is nearing its bottom, and we are ready to increase outstanding loans and commitments in that area, which has performed very well. Overall, the Group is doing exceptionally well. While discussing loan growth, we also consider fees and deposits as part of our expectations for 2024, and we enter the new year with great 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 the 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.
Thank you. The next question is coming from Matt O'Connor of Deutsche Bank. Please go ahead.
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. Thanks for the question. I expect to see around 3% net interest margin on a quarterly basis this year, generally remaining flat. However, there is potential to increase net interest margin as we move into 2026 and beyond, especially due to the normalization of an upward sloping yield curve. Looking at the factors influencing net interest margin in 2025, one significant advantage has been the impact of fixed asset repricing, which benefited us by about 12 basis points in 2024. I anticipate continued benefits in 2025, estimating about 10 basis points from fixed asset repricing, particularly due to recent increases in the middle and longer parts of the yield curve. This positive trend is expected to carry into 2026 and further. Another favorable factor is the reduction in deposit pricing and interest-bearing liability costs. We accelerated our deposit pricing actions more than initially planned in the fourth quarter, contributing to stronger performance than expected.
We remain optimistic about reducing deposit costs throughout the year, although this will depend on the interest rate environment and market sentiment on rate changes. Additionally, about 50% of our loans are in a variable pricing status and will adjust with SOFR, which is expected to decrease in the first quarter. This may lead to a slightly lower net interest margin initially. Throughout the year, we expect to balance the variable yield impact with funding cost reductions. Lastly, regarding hedging, we experienced benefits in the fourth quarter from reduced hedge drag, and I expect a modest benefit in the middle of the year, along with some drag in the second half if the yield curve remains similar. Overall, the outlook for net interest margin in 2025 is dynamic, with quarterly variations, but I expect it to remain flat this year and increase 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 great question. The short answer is that we are not likely to do more repositioning. We sold approximately $1 billion in corporate securities that had a higher risk-weighted asset value, allowing us to unlock capital by repositioning the portfolio. This was done at an attractive earn-back. The teams have now completed reinvesting in new securities with higher yields, and we anticipate a payback period of less than two years. While this effort is fairly tactical and marginal in overall size, it is beneficial on its own. One key difference with Huntington compared to others in the regional banking space is that we effectively hedged our securities portfolio before the rate cycle began, meaning the scope for significant repositioning is limited. Therefore, our plan for the securities portfolio is to maintain our current strategy and continue to benefit from the hedges we've implemented in the past.
Thank you.
Thank you. The next question is coming from Erika Najarian of UBS. Please go ahead.
Hi, good morning.
Good morning, Erika.
Good morning. I have a question that many investors are asking, which I'm sure you'll cover on Investor Day. Where do you see yourselves in the investment cycle? Investors have really welcomed the accelerated revenue growth at Huntington and appreciate that you chose to invest when others were being cautious. Looking ahead, do you believe there are still opportunities available, and will there be a greater investment effort required for the time being? I'm sure we'll get more insight in a few weeks. Is there a point where you expect to experience greater positive operating leverage due to the substantial investment you’ve made upfront?
Thank you for the question, Erika. We’re seeing strong momentum from the investment decisions we've made, and we've been approached by various specialty businesses and regions as a result. Business opportunities are coming to us through multiple channels, often directly from management or colleagues, and we haven't relied on recruiting firms for new hires in the past year and a half. We have a list of areas we've focused on over the years, and we continue to update it as we identify sensible opportunities. We are not concluding an investment cycle; instead, we are confident in our growth potential and are eager to move forward. We plan to discuss this further at our upcoming Investor Relations Day on February 6. Overall, we're performing exceptionally well with significant momentum, and it would be unwise to pull back too soon. I believe there will be even 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% and so, 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, excuse me, 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.
Thank you. We're showing time for one final question. The final question today is coming from Brian Foran of Truist. Please go ahead.
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?
Yes, Brian, that's a great question. This is Zach, and I'll address that. When considering our reserve, it's important to take a step back and view it from a strategic perspective before we get into the tactical details of your questions. Our objective is always to maintain a strong and rigorous reserve, not only as protection against credit scenarios but also as a solid form of capital. We're confident about our reserve levels. Over time, our credit reserve started at 1.70% when we established CECL. During the peak of COVID, it increased to about 2.3%, while many in the industry quickly reduced their reserves in 2021. We did reduce ours as well, but not at the same rapid pace because we recognized that the economic environment was still uncertain and had a lot to unfold. This cautious approach positioned us strongly. As we've navigated the economic uncertainties over the past couple of years, including questions about soft or hard landings and interest rate and political environment trajectories, we anticipated that favorable resolutions could provide opportunities to reduce reserves.
Our loan portfolio has performed well, and you've observed a gradual reduction in reserve ratios over the last four quarters, even as we've maintained or increased our dollar reserves due to loan growth. Currently, our ratio stands at 1.88%, which is higher than the original CECL figure of 1.70%. Assuming continued favorable economic performance and solid outlooks, particularly with anticipated loan growth, it’s feasible for the ACL coverage ratio to decline as a percentage, even if the dollar amounts remain stable or increase. We analyze this on a quarterly basis, and there's no preset determination. We'll observe how things unfold each quarter. If trends continue positively, I expect further declines in the ACL coverage ratio over time, while we also drive higher loan growth. Thus, while dollar amounts may hold steady or grow, the ratio could trend downward.
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 this topic might arise. Over the years, we've been focused on achieving top-quartile organic growth. We've made substantial investments in our core areas, as well as in regional expansions and eight specific verticals, meaning the core is also receiving significant investment. We're managing our expenses effectively, and Zach has discussed this previously, highlighting our continuous reduction of core expenses through various actions while still making investments, resulting in net expense growth. We are quite pleased with this balance. We see considerable growth potential within our core business, alongside the benefits of these new investments, and we are dedicated to pursuing that. The business is performing exceptionally well. Over the past decade, we've demonstrated our ability to execute two bolt-on depository acquisitions, and we are excited about Capstone, which just had a record quarter.
While there is potential for further actions, our main focus remains on organic growth. We have stated before that we are very selective in such opportunities. The TCF acquisition was a significant success, resulting in approximately $500 million in expense reductions, substantial revenue synergies, and excellent partnerships. Therefore, if a situation arises that makes sense, we will consider it, but I want to be clear that our primary focus is on organic growth. Thanks for your question.
Thank you. That brings us to the end of the question-and-answer session. I would like to turn the floor back over to Mr. Steinour for closing comments.
In closing, our team delivered exceptional results for the fourth quarter, highlighted by significant loan and deposit growth and record fee income. Our credit trends remain stable, and we are pleased with the overall risk management practices we have maintained for years. Our management team is focused and is executing on the strategies I've previously shared. We expect to maintain our growth momentum into 2025 and beyond. We look forward to providing more details on 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, our Board, executives, and colleagues are all top shareholders, and we believe this strong alignment is crucial for sustaining value creation for all shareholders. Finally, thank you to my colleagues for their outstanding efforts this quarter. For those on the call, we appreciate your interest in Huntington. Have a great day.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.