Huntington Bancshares Incorporated Q1 2024 Earnings Conference Call April 19, 2024 8:00 AM ET
Company Participants
Tim Sedabres – VP & Head of IR
Stephen Steinour – Chairman, President & CEO
Zach Wasserman – Senior EVP & CFO
Brendan Lawlor – Deputy Chief Credit Officer
Conference Call Participants
Manan Gosalia – Morgan Stanley
John Pancari – Evercore ISI
Scott Siefers – Piper Sandler
Steven Alexopoulos – JPMorgan
Ebrahim Poonawala – Bank of America
Ken Usdin – Jefferies
Jon Arfstrom – RBC Capital Markets
Peter Winter – D.A. Davidson
Matt O’Connor – Deutsche Bank
Operator
Hello and welcome to the Huntington Bancshares First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Tim Sedabres, Director of Investor Relations. Please go ahead, Tim.
Tim Sedabres
Thank you, Operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found in 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 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 first quarter results, which Zach will detail later. Again, these results are supported by our colleagues 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 executing our organic growth strategies and leveraging our position of strength. As planned and managed over the years, our liquidity and capital metrics are top tier. Second, we delivered loan growth in the quarter and expect the pace to accelerate over the remainder of the year. Our teams are acquiring new customers and relationships in both commercial and consumer categories.
We are maintaining our momentum in deposit gathering with a well-managed beta. Third, we expect to drive sequential increases in net interest income and fee revenues from the level reported in the first quarter, supported by accelerating loan growth, coupled with effective balance sheet management. Fourth, we continued to rigorously manage credit, consistent with our aggregate moderate to low risk appetite. Finally, we are positioned to power earnings expansion over the course of the year and into 2025.
Our investments are delivering results and the underlying core is performing well. I will move us on to Slide 5 to recap our performance. We delivered long growth with balances growing by $1.6 billion from a year ago and have grown by a 4% CAGR over the past two years. This pace reflects our intentional optimization efforts last year, and we believe we are positioned to accelerate growth over the course of 2024 and carrying into 2025. Deposit balances also increased, growing $7.9 billion, or 5.5% over the past year.
Capital remains strong with reported common equity tier 1 of 10.2% and adjusted common equity tier 1 of 8.5%, inclusive of AOCI. Liquidity remains top tier with coverage of uninsured deposits of 205%, a peer-leading level. Credit quality was stable as debt charge-offs improved by 1 basis point from the fourth quarter to 30 basis points. We are sustaining momentum and growth of our primary bank relationships, with consumer and business increasing by 2% and 4% respectively year-over-year.
We continue to seize opportunities to add talented bankers. Over the past two quarters, we’ve added teams in the Carolinas and Texas. We’ve also launched new commercial specialty verticals including Fund Finance, Healthcare ABL and Native American Financial Services. The momentum we have across our markets, coupled with our strong culture, continues to attract great banking talent to Huntington. We expect to add additional colleagues and capabilities as we move through the year. We have clear objectives for 2024, focused on executing our organic growth strategies. This should result in accelerated loan growth, sustained deposit growth, and expanded fee revenue streams.
Coupled with our expense outlook, we expect to see PPNR expanding over the course of the year and into 2025. The macro environment is conducive to growth with customer demand holding up well in a resilient and stable economy. The addition of new markets and bankers is supporting expanding loan pipelines with late-stage commercial pipelines ending the quarter at the highest level in over a year. Zach, over to you to provide more detail on our financial performance.
Zach Wasserman
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 remains 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 floor plan 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 mixed 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 repricing. 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 repricing 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 3 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-year to five-year term points is an important driver of our asset repricing and spreads. The higher scenario assume 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 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 repricing 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 repricing 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 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 effect 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 received 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 and down rate environment and to protect capital and potential up rate scenarios.
The pay fixed swaps, which have been effective in protecting 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 received fixed swaps in the first quarter. Additionally, through the first two weeks of April, we added another $2 billion of forward starting received 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 year and a half, 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 in 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-fixed 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 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.
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. We’ll now be conducting a question-and-answer session. [Operator Instructions]
Our first question is coming from Manan Gosalia from Morgan Stanley. Your line is now live.
Manan Gosalia
Hi good morning. So your comments on the NII guide were very thorough, so I really appreciate that. I think, so the lower end of your guide is now for three cuts, and I think your guide is a little bit more conservative on deposit betas than some of the other comments we’ve heard. So I was wondering if you can expand on that a little bit. Is that based on conversations you’re having with customers or what’s driving that?
Zach Wasserman
Sure, Manan. Thanks for the question. This is Zach. I’ll take that. Broadly speaking, we’re seeing the NIM outcome, but very similar to the view we had before, just as I mentioned, the sort of moderate tuning lower, you know, clearly the biggest change in the environment over the last three months, since we gave guidance in January, was the expectation for a much longer pause in this Fed posture or any rate reductions. And so at the margin, really we’re seeing slightly higher deposit funding costs and overall interest-bearing liability costs.
The other thing that’s important, and I’m trying to note this in the prepared remarks as well, is that the deposit volumes are coming in very strong and slightly at the higher end of our prior expectation as well. And so that’s contributing somewhat, although really good core funding clearly for the accelerating loan growth over time. So that’s really the driver. You know, as we entered the quarter, we [just provide one last piece of color] (ph) on that. As we entered the quarter, the market forward was for the first rate reduction to be in March. We always knew that — that was, we took the view — that was likely not to be the case, but clearly that was the forecast of the market broadly.
And we were beginning to execute the early stages of down beta actions. We’ve discussed shortening CD term duration, changing other elements of our pricing. You know, as we went throughout the quarter, clearly that reset. And so we’ve had to continue to be dynamic, as we would always be in managing deposit pricing, and likely now those more substantive downgrade actions will be pushed further out. So that’s really the biggest driver of it, sort of the timing of when we’ll begin to see more significant downgrade actions.
Over time, we would expect to be just as effective going forward as we’ve been in the past on that — and it’s really just, you know, when will that occur? And hence, a few bps of additional funding costs here in 2024.
Manan Gosalia
Now, is any of that because you’re also planning ahead of this accelerating loan growth that you’re expecting?
Zach Wasserman
You know, it’s a good question Manan, but the posture, we’re in this custody moment here, clearly, of when will rate cuts reduce, and also not only when will the first one happen, but what will be the expected trajectory by the market, and by customers really thereafter. For us, we’re very dynamic and granular in how we manage this to really optimize the next best unit of funding here. So continually thinking about when is that rate cut going to happen and obviously attempting to play in front of it.
With that being said, we’re talking about marginal tuning here and I wouldn’t overplay it.
Stephen Steinour
And then if I could add, this is Steve. Our commercial pipeline is very robust and each month of the quarter has improved. So we’re going into the second quarter with a very good, healthy outlook. As we think about our guidance for the year, we think on the loan side, we’re going to be closer to the top end, which is in part the consideration for adding the deposits at the rate that we’re doing here at this earlier stage of the year. Manan, thanks for the question.
Operator
Thank you. Our next question is coming from John Pancari from Evercore ISI. Your line is now live.
John Pancari
Good morning.
Stephen Steinour
Good morning, John.
John Pancari
So Thanks for the color on the NII guide. Just to confirm again, it does indicate that you are factoring in a higher for longer environment when all said and done in your outlook. But again, you maintain the NII guide of down 2% to up 2%. Is the primary reason for the maintaining that versus any upside by it would be if it mainly the deposit costs that you just discussed coming in higher, or is there any other factor?
Zach Wasserman
That is the primary driver. So yes is the answer to that. Seeing a little lower, few basis points lower NIM, but incrementally somewhat stronger loan growth, those things are largely offsetting, and continue to see the ultimate results in that guidance range. And importantly, the keeping for us is that trajectory, growing net interest income on a dollar basis out of the first quarter into the second quarter, and continuing on to the third and fourth quarter, and the outcome of that’s going to be solidly expanding revenue growth and solidly expanding profit growth as well. So yes to the fundamentals of your question and the overall outlook, generally unchanged.
John Pancari
Got it. Okay, thanks for that, Zach. And then separately, back to the loan growth topic, Steve, you just discussed that you’ve got confidence in the outlook, particularly given your pipelines. Can you talk about where demand stands now, where utilization is now, and what type of inflection do you see here? Because it seems like you’ve got confidence in the back half strengthening. I mean, what anecdotal data do you have to kind of support that acceleration? Thanks.
Stephen Steinour
Thanks, John. We see the commercial pipeline for the second quarter, particularly the high probability of close level to be very, very good, very strong relative to the last five quarters. So as I said, each month has improved in the first quarter. Second quarter strength is obvious now at this stage. We’re also seeing good business banking, loan growth, and we have the benefit of these new initiatives, none of which have [books] (ph) that they’re carrying. So the three new initiatives, especially banking last year, and the Carolinas off to a really good start. Texas was there a couple of weeks ago. Got a great team there as well. All of those investments will bolster our activities throughout the year.
And then, as you know, we’ve got one of the largest [split-up] (ph) finance companies in the country. That tends to be somewhat seasonal fourth quarter. So those would be the combination of factors that give us a lot of confidence that we’ll be at or near that upper end of our guide for the full year.
Operator
Thank you. Our next question today is coming from Scott Siefers from Piper Sandler. Your line is now live.
Scott Siefers
Good morning, guys. Thanks for taking the question. I kind of wanted to revisit the margin as well. So on the deposit pricing, is it possible to make sort of a broad comment about is this sort of something that you’re seeing and reflecting kind of market pricing pressures or would you say you’re more on sort of the leading? Because it sounds like we’re trying to support the loan growth, which is obviously a very positive differentiated factor. But are you all kind of leading with pricing on the deposit side to fund that growth or what does the competitive dynamic look like as well?
Zach Wasserman
Great question, Scott. This is Zach. I’ll take it. I would characterize the competitive intensity of the market as generally consistent today with how it was at this time last quarter. So I don’t think there’s any substantive change. It remains a competitive market, and clients are clearly aware of rate and the competitive rate environment on the consumer, the small business, the commercial side. So it’s a transparent market. I think what has happened, part of what we’re seeing is, and I’m giving you guidance on it, it’s not just what’s happening right now in the market, but the outlook for the whole year. So that’s really, I think the way you should interpret these comments is. Whereas before, there was a fairly strong conviction of the marketplace, and even our prior guidance ranges had the first cuts beginning somewhere between March and August, clearly that time frame where cuts has been pushed out. And so the period of time before we can begin to manage substantive downgrade actions has just been extended. And that’s really the main driver here.
I think our pricing strategy is pretty much the same, which is, continue to price in competitive ways but not lead the markets to be clear and really drive the fundamentals of deposit growth from customer acquisition. We talked about 2% primary bank relationship growth in consumer, 4% in business banking, growing on the commercial side as well. And so that’s the underpinning of — the pricing strategy is really just designed to ensure that there’s fair and appropriate pricing as we got on those deposits.
Scott Siefers
Okay. All right. Perfect. And I think you actually touched on sort of my loan-growth questions in prior responses. So that does — I appreciate the color.
Zach Wasserman
Yeah. Thanks so much.
Operator
Thank you. Next question is coming from Steven Alexopoulos from JPMorgan Chasing Company. Your line is now live.
Steven Alexopoulos
Hey, good morning, everyone.
Zach Wasserman
Good morning, Stephen.
Steven Alexopoulos
Not to beat a dead horse on the net interest income guidance, but last quarter with three cuts, that got us to the high end of the range. And now three cuts get us to the low end of the range. And I’m somewhat confused. Zach, I always think your hedge fund magic keeps us relatively stable over short periods of time. I’m a little confused why three cuts now puts us down two versus up two last quarter.
Zach Wasserman
Yeah, good question. I appreciate it. And I think what I’ll just bring back to is the two key things here. Overall, the NIM outlook for us in both scenarios is a few basis points lower, mainly as a function of the timing of when rate reductions will begin and when we’ll see substantive downgrade action. It’s somewhat higher funding cost environment than we expected. And that’s with the main driver. Second thing I would say is the four key factors for us that are driving the NIM this year remains the same. The biggest positive factor is fixed asset repricing, which I’ve just shared in the prepared remarks, we expect to see about $4 billion quarterly repricing of fixed assets. We should drive substantive benefit on the order between 10 basis points and even 12 basis points or 13 basis points, depending on how the value of the curve maintains here over the course of this year.
The second positive factor is a gradual reduction to the amount of hedge drag we’ve got in the NIM. In Q1, we had 16 basis points of hedge drag. And I expect to see something between 5 basis points to up to 8 basis points, to maybe even 10 basis points, again, depending on how the curve moves here over the course of the rest of this year until Q4. Those are the two biggest positive factors. The other two factors are what’s going on with variable yields, and what’s going on with funding costs. Those are largely offsetting each other in both of those moving off of a direct cost direction, to be clear, in either a higher rate path or a lower rate path scenario.
And those are modestly net negative for the full year. It would offset those positives and keep these overall NIM in a generally flat to rising position from here. So none of that has really changed. The last thing I’ll say, a third point, is that all of the modeling we’re doing continues to indicate that a higher rate scenario overall, all things equal, drives a higher NIM for us. Clearly the — how this plays out over such a short period of time, three quarters, will really depend on the shape and trajectory and timing and everything. But that’s the best we can do. And I think the guidance we’re trying to give here with this range of scenarios is designed to allow us to give you stability in terms of the revenue guidance, which ultimately is the most important thing.
Steven Alexopoulos
Got it. Zach, if we put all this together, you’re saying NII bottomed in the first quarter. But I didn’t hear you say NIM bottomed in the first quarter. Does that imply NIM has not bottomed in the first quarter?
Zach Wasserman
I expect to see NIM bouncing around these levels, or rising over the course of the rest of the year, depending on how the scenario plays out. And for that, kind of flat to rising NIM, coupled with accelerating loan growth, to drive accelerating net interest income on a dollar basis out of the first quarter into the second quarter of growth and then continuing to grow into the third and the fourth quarter.
Steven Alexopoulos
Got it. Okay. If I just — one separate question on the non-interest bearing deposits. Balance is down pretty sharp, average of period end, we’re seeing some of your peers showing in February and March good stability in those balances. Did you guys see that as well? Or did you see balances decline through the quarter? Thanks.
Zach Wasserman
Balances were modestly declining through the quarter. As we look at that — we see a few things. One is the trajectory of dollars of non-interest bearing actually decelerating in terms of their mix shift. Secondly, for the most part, all of the mix shift that we think will happen within consumer has happened. And where there is continued drift in Q1 is really in the business and commercial side. Another point would be we expect the non-interest-bearing mix shift, mix of the percentage to continue to stabilize in the high teens over the course of this year, which is 19.4% as of Q1.
You know, and lastly I’ll say, as you think about that percentage, it’s very notable to measure that percentage if overall deposits are shrinking versus if they’re growing. For us, overall deposits are growing strongly as we’ve said. So the mix is one thing, but the dollars are really the most important thing. In fact, we see stabilizing here over the course of the next couple of quarters.
Steven Alexopoulos
Got it. Thanks for taking my question.
Operator
Thank you. Next question is coming from Ebrahim Poonawala from Bank of America. Your line is now live.
Ebrahim Poonawala
Good morning.
Stephen Steinour
Good morning, Ebrahim.
Ebrahim Poonawala
I guess I just wanted to go back to something, Steve, you mentioned, I think in your prepared remarks, you said that the outlook in the economy is more conducive for growth. Your [indiscernible] probably the most upbeat, I’ve heard this over the last week. If you don’t mind spending some time in terms of breaking down what you’re seeing from customers in terms of strength and loan demand, looking into 2Q and beyond, and how much of this strength is just because of the proactive action Huntington has taken to hire bankers in Carolinas, Texas, would love some color around both those aspects. Thank you.
Stephen Steinour
Thank you, Ebrahim. The economy, we all see the aggregate metrics that are released. There’s an underlying strength. We’re seeing that, particularly because we’ve been proactive with our lending activities through last year, the core is performing well. We’re getting growth in our [auto book] [ph], our distribution finance in particular, our business bank, so very localized levels, principally here in the Midwest.
We’re also getting growth in a number of our other areas. And these new verticals that have been added, they’ve all closed the loans. They’ve all generated lending activity and other activity. And the Carolina expansion and Texas expansion are delivering results and look very promising to us. So we’ve positioned the bank both with the core activities and these incremental investments, I think, to outperform peers in loan growth and perhaps in a number of other respects as well, certainly through this year and potentially beyond.
The pipeline activity I referenced earlier is very promising. And again, the strength of the first quarter with every month improving gives us a lot of confidence. Our investment banking activity, Capstone related, their pipeline is bigger than they’ve ever had, as an example. So we’ve got a lot of opportunity in front of us, so now we have to deliver it.
Ebrahim Poonawala
That was helpful. And Zach, a couple of follow-ups for you. One, apologies on NII. I feel like I’m more confused after some of this back and forth. Should we expect if we don’t get any rate cuts or maybe just one cut, NII tends towards up 2%. Is that the right takeaway?
Zach Wasserman
It will really be a [technical difficulty] take there. So I think the outcome will be somewhere between that range of EV. When we give these ranges, we try to generally box our plan and land in the middle of it. But of course, there’s a bit of variance and just normal variability that’s hard to forecast with such decision. So that’s the expectation. I think we’ll see, as I noted, just to clarify, a flat to rising NIM, a slightly higher NIM in the higher rate scenario, albeit with different drivers, and really coupling that with accelerating loan growth will drive dollars out of the level we’ve seen in Q1, up into Q2 and beyond, and to land for a full year somewhere in the middle of that range.
Ebrahim Poonawala
All right, so multiple scenarios, middle of the range. And any scenario where this could exceed that up 2%?
Zach Wasserman
Certainly it’s possible. We’ll have to see how the rate environment plays out here. I think really at this point, we’re probably parsing the precision more than is reasonable. It’s still a pretty moving target in terms of where the yield curve is now, but I think we’ll land somewhere in that range is our best estimate.
Ebrahim Poonawala
Got it. Thank you.
Operator
Thank you. [Operator Instructions] Our next question is coming from Ken Usdin from Jefferies. Your line is now live.
Ken Usdin
Hi, thanks. Good morning. And thanks for that incremental slide on the swaps detail. I’m wondering if you can just kind of help us understand as we get through the end of this year, both in terms of what that swaps impact looks like and as important, that fixed rate repricing, how should we think about those kind of combined benefits as we get out of ‘24 and think about ‘25? Thanks.
Zach Wasserman
Yeah, it’s a terrific question. Just maybe I’ll say a few things on that. One is the fixed asset repricing benefit that we saw, and as mentioned earlier, somewhere between 10, 11, 12, 13 basis points outside this year from that $4 billion turning quarterly. Our modeling indicates that we’ll continue on into 2025 at kind of a similar pace. It’s really a very long-term phenomenon, and [indiscernible] significant support to the NIM as we get into 2025.
On the hedge drag factor within NIM, that’s 16 bps in Q1, reducing down by something like 5 basis points to 8 basis points, as much as 10, depending on the rate scenario, lower by the end of Q4. That should also continue on into the early part of 2025 as well. You probably get to about neutral position if there are some rate reductions. And if you just look at the rate curve, the forward rate curve, there is an expectation in the forward curve at this point that there will be, in fact, reductions either in the back half of this year, certainly into the early part of next year. And so if that comes to pass, then we’ll see that 16 basis points sort of fully resolved by the middle of 2025.
If there are great reductions, then you see less of that hedge drag coming back. But obviously, then – because there are different environment overall, regardless. The other thing I’ll just say, you didn’t ask it, but I’ll share it is, if you look at the sum total of all of our hedging activities, which, as you know, are always designed to protect capital against up-rate scenarios, protect NIM in down-rate scenarios. That chart that I illustrated in the prepared remarks has a gradual shifting of that exposure as you get into and throughout 2025. The net result of that should be that by the end of 2025, asset sensitivity should be about one-third less. And so that’s sort of the intent of that program, more broadly from an interest rate risk and asset sensitivity management perspective.
Ken Usdin
Okay, cool, and then my follow-up, I’ll just separate them. On just the fixed rate repricing, on the asset side, so we know about the meaningful help that you get this year, but then how did that layer in in terms of incremental fix rate benefit that happens into next year?
Zach Wasserman
So, as I noted a bit ago, I think it’s about the same benefit as we go out into 2025, and that’s fairly similar churn of quarterly volumes, and continue to see the belly of the curve that’s largely on those assets are priced, significantly higher than the historical rate of those assets. Over time, of course, you’ll begin to see that benefit reduce on a sequential basis. At some point, it starts to [indiscernible] but likely not until the latter part of 2025, at the earliest at this point, based on how the curve is shaping up.
Ken Usdin
Okay, my mistake, Zach. I didn’t separate the two in your answer. My mistake.
Zach Wasserman
No worries. Appreciate your question.
Operator
Thank you. Next question today is coming from Jon Arfstrom from RBC Capital Markets. Your line is now live.
Jon Arfstrom
Hey, thanks. Good morning. Can you touch a little bit on the fee income outlook and what you expect there? It seems like you’re implying a bit of a step up in that based on what you saw in the first quarter, but talk a little bit about what you’re seeing there. And then confidence in hitting that midpoint of the guide.
Zach Wasserman
Q1 core fees grew by 3% year-over-year. And our guidance over the full year is between 5% and 7% on a full year. So that clearly implies we’re going to see an acceleration of the income and an acceleration on the year-over-year basis, as we looked at this year, and high confidence to achieve that.
The core drivers remain the same, as what we’ve discussed on many prior occasions. Capital markets, payments, and wealth management. You look at, sort of the trends we’re seeing right now, what the performance was in the first quarter. Payments revenue is up 7% in the first quarter. Wealth revenue is up 10%. In capital markets, we saw commercial banking related revenues, around two-thirds of the capital markets activities that are really highly correlated to the pace and volume of commercial banking, that grew sequentially into the first quarter — of the second sequential quarter of growth there.
And I think one of the things that will power continued growth in capital markets from here is the fact that commercial loan production is likewise accelerating as Steve noted earlier. Advisory revenues were really beginning to recover well in the back half of 2023, but typically seasonally lower in Q1 for us in our focus in middle market advisory. We did see those advisor revenues lower into the first quarter. But likewise, our expectation for that is for continued expansion into the remaining part of this year.
Pipelines look very good, very high quality, great firms that have contracted with us to look for M&A support. And so those are really the drivers from here. Payments continuing to perform, wealth continuing to execute the strategy, and then capital markets driving acceleration as well. And overall, continue to feel really good about landing somewhere in that full year’s range.
Jon Arfstrom
Okay, good, helpful. I won’t go back to net interest income, but I do want to ask about credit. Your numbers obviously look good, but anything you want to flag internally that you’re seeing, and I’m curious also what you’re seeing externally from a credit point of view. Thank you.
Brendan Lawlor
Hey, this is Brendan. I’ll take that one. As you sort of noted in your question, the story of the quarter is [indiscernible]. Across all of the credit metrics, pretty much in-line with where we reported either the fourth quarter or seasonally adjusted when you think about delinquencies, looking back at first quarter of last year, we’re right in-line. And we feel really good about the position that we’re sitting in right now. If there’s the one place that everybody continues to focus on and talk about, and we’re highly focused on it ourselves is office and the commercial real estate side. But as we’ve talked about in the past, we have one of the smaller books relative to our office portfolio. And we have a decent reserve against it. So while we’re watching it and actively managing it, we feel very well protected against it at this point
Stephen Steinour
Just to add to that, thanks Brendan. We’ve reduced the office portfolio by about $500 million over the course of the last four quarters. And our largest loan is $40 million. The average is $7 million-ish. So it’s very granular, and it gets a lot of attention. And we expect it will continue to reduce throughout this year.
Jon Arfstrom
Okay, good. If I can ask one more, I’m going to violate the one-in-one follow-up, but just bigger picture, there’s been this myopic focus on the margin and net interest income. Do you guys — do you feel incrementally better or worse about that plus or minus 2% guide? Because on one hand we’re thinking about a lower margin in the very near-term and I get that, but it seems like it’s higher funding costs to fund loan growth, which seems to be at the higher end of it. So I guess, the question is with some of these new developments do you feel better or worse about that higher or lower end of the net interest income guide? I think that would help people. Thanks.
Zach Wasserman
Great question Jon. I’ll take that one. [indiscernible] two statements I would make. First is, I feel really good about the overall performance of the business. For us, it’s about executing long-term growth, long-term value creation. And Q1 set that up really well. We’ve seen confidence in loan growth accelerating, great core funding, and therefore the confidence in being within that range is very strong. At the margin, my revenue outlook is a touch lower than was the case before. But I think we’re in the range of tuning at this point, Jon, and hence, not overly parse this — somewhere in that range, typically try to land in the middle of the ranges that we’re giving.
Jon Arfstrom
Okay. All right, thank you, appreciate it.
Operator
Thank you. Next question is coming from Peter Winter from D.A. Davidson. Your line is now live.
Peter Winter
Good morning. I wanted to follow up on Jon’s question just on credit. If I look at the ACL ratio, it’s at the top end of the peers and credit is really holding in and you feel good about the economy. How are you thinking about reserving going forward? Is the plan to keep the ACL ratio fairly steady and just kind of support loan growth?
Brendan Lawlor
Peter, it’s Brendan. I’ll take a chunk of that. You’re noting the stability quarter-over-quarter, and that’s accurate. I think, as we look forward, it’s really fact specific as to how the ACL coverage will move quarter-over-quarter, as we take into account the modeling of our economic scenarios, the view of credit at that time, as well as the loan growth, as you referenced in your question. We put all of that into the mix to sort of drive out of our modeling what we believe the right level of coverage is. And so — it’s harder for us to, you know, for anybody frankly to — in this environment, to really give any strong guidance, as to which way the ACL will move, as it’s really a quarterly specific metric these days, and the way it’s run. So it’s hard for me to come out and say, well — we think it’ll do this, and we think it’ll do that.
Stephen Steinour
Okay. Peter, this is Steve. I’ll just add to that. We’ve tried to be conservative with reserves over the years. We believe we’re in that posture today and we expect to grow loans above peer this year and potentially beyond with the investments in these new businesses and regions we’ve made. And there’s still a lot of uncertainty about where rates are going to go, when they’re going to move, the geopolitical tension, the uncertainties that can spawn from elections, both ours and other countries. So we’re just trying to be conservative at this stage. Should we continue to perform at the level we are, there will be reserve recapture at some point.
Peter Winter
Okay. Thanks, Steve. Just one quick follow-up. Just that comment that you’re feeling better about loan growth. How much of the loan growth acceleration is new markets versus just core strength? And is part of that positive outlook, given the early success that you’re seeing on the new initiatives?
Zach Wasserman
This is Zach. I’ll take that one. If you look at the full year loan growth outlook that we’ve got, it’s between 3% and 5%. About 60% of that growth, we think will come from the core, and about 40% from these new organic expansion areas [Technical Difficulty]. And the mix of the overall company’s growth will be weighted toward commercial, but consumer also growing pretty well. So that’s the kind of broad answer in terms of the magnitude of them. And really, the other point is yes. The early traction is really very positive.
We’re seeing customers already being acquired, loans being booked, and the pipelines across all of the five new areas of focus for the three commercial verticals, Carolinas and Texas. The pipeline cumulatively is approaching $2 billion of loans, and also very significant deposit pipeline. Remember, these are tend to be full relationship strategies that are gathering loans, but also deposits, also fee income businesses in capital markets and payments and treasury management. So quite good early traction here. Obviously, starting from a low basis, Steve mentioned, so we’re going to see that build here over the course of time. The last thing I’ll say is, of those five, the most significant contributors in 2024, we expect to be the fund finance vertical in the Carolinas.
Over time, the others will also be very significant, particularly Texas. But just in terms of the early momentum that we’re seeing and based on when they started and were staffed, those two will be the most significant for 2014.
Peter Winter
And just one last final. Does the core loan growth assume a pickup in-line utilization?
Zach Wasserman
Not in substance. So if you think about the three big areas where we have outstanding lines in the broad middle market commercial lines, you saw that tick up just a tiny bit into the first quarter pretty flat, and it’s not our expectation that that will change substantively from here. The second one being distribution finance. And that one we did see a benefit into the first quarter from — and that was the typical seasonal pattern. We think that line generally now is stable level broadly. And we’re just going to see the typical seasonal pattern. It’s highest in the first quarter, it’s lowest in the third quarter, just based on the kind of the cycles of inventory and sales. And then the last one is auto floor plan. We did see that also benefit us somewhat into the first quarter. But again, we think we’re now at a point coming out of COVID, particularly in the auto floor plan business, where manufacturing has reached a stable level relative to sales, and we’re going to see line utilization generally trending in a pretty consistent area from here in the floor plan business. So not counting on it really for the continued growth, although certainly benefiting from some seasonality in the first quarter.
Stephen Steinour
And each of those businesses Zach referenced, we expect net increase in customers. So they’ll have a core organic growth as primary driver.
Peter Winter
Thanks. I appreciate all the color.
Operator
Thank you. Next question today is coming from Matt O’Connor from Deutsche Bank. Your line is now live.
Matt O’Connor
Good morning. Most of my questions have been answered, but just from an industry point of view, are there any updates on the debit card interchange reform and remind us how meaningful that could be for you guys. And if any of — it’s incorporated in guidance, which I assume it’s not. But any updates on that front? Thank you.
Zach Wasserman
Yeah, good question Matt. Thanks. So the answer is no, broadly. No substantive update in terms of where that may be going. For us, we’ve got a really strong debit card franchise, it’s one of the best in the country in terms of relative penetration and utilization within our consumer and small business base. So that’s a real benefit to us. If you were to just run the numbers on the proposal as it was proposed, think it’s around a $90 million annualized impact for us.
With that being said, if history is a guide, often those proposals are changed substantively between the time they were initially put forth and when enacted, either to not come forth at all or to be substantively altered. So we’ll see — for us in our payment strategy, there’s so much growth opportunity and so many opportunities to engage our customers that there will be, over time, ways to mitigate some of that and to certainly offset with other payments related to growth.
As best we can tell at this point, to be fair, there is a proposal that would be at some point mid to latter part of ‘25 that will take effect. And so not in the guidance for ‘24 as you just noted.
Operator
Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to Steve for any further closing comments.
Stephen Steinour
So, in closing, we’re pleased with our first quarter results. We’re seeing momentum build across the bank, which will drive improved performance over the course of the year and beyond. We clearly expect our investments in our businesses to deliver growth this year and the future. The balance sheet is well positioned, ample capital and robust opportunities to support our growth initiatives.
Our focus remains centered on driving core revenue growth, carefully managing expenses and growing loans consistent with our aggregate moderate to low risk appetite. Just as a reminder, the Board Executives, our colleagues, our top 10 shareholder collectively reflecting our strong line to build shareholder value. Finally, we would not be able to take care of our customers without the efforts of our nearly 20,000 exceptional colleagues engaged every day across the bank. Thank you for your support. Thank you for your questions and your interest in Huntington. And have a great day.
Operator
Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.
