Huntington Bancshares - Earnings Call - Q1 2025

Transcript

Operator (participant)

Thank you and welcome to the Huntington Bancshares First Quarter 2025 Earnings Conference Call. At this time, all participants will be in listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, Tim.

Tim Sedabres (Head of Investor Relations)

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 now turn it over to Steve.

Stephen Steinour (Chairman, President and CEO)

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We delivered exceptional results for the first quarter. I'll share a few highlights up front, and then Zach will take you through the numbers. Before we turn to the quarter, let me share a couple of thoughts on recent market volatility and our overall approach to managing the company through a period of economic uncertainty. I've seen quite a number of economic disruptions over my more than four decades in banking, and believe me, we have a robust playbook for managing through periods like this. Based on the current environment, we feel confident in our overall strategy for 2025 and continue to execute against it. We continue to drive progress against our objectives every day.

Now, with that being said, we recognize that the probability of adverse economic scenarios has increased in recent weeks, and those scenarios, in turn, could create additional headwinds within our industry. Regardless of the path the economy takes, we are well-positioned and expect to continue outperforming our peers. Our long-standing aggregate moderate-to-low-risk appetite has proven to help us deliver strong and more predictable results through the cycle. Even in the best of times, we are steadfast in our approach to credit and risk management, and this has resulted in consistent top quartile credit performance for net charge-offs. We also maintain an allowance for loan losses that is well above the peer median. Our foundation of strong risk management begins with disciplined client selection. We are intentional with whom we do business, and in our selection of the geographies, industries, and exposures, we want to underwrite and hold.

We ensure broad diversification and adhere to strict limits with no outsized concentrations, as you've seen in our commercial real estate portfolio. We have a well-balanced and granular loan portfolio, which we rigorously and proactively manage. All of this provides us with confidence in the foundation of the company, and it allows us to capitalize on opportunities where others sometimes cannot. Two years ago, in 2023, when many banks pulled back due to liquidity, capital, or credit concerns, we chose to invest. We took a different road. We demonstrated breakout performance, and we invested for long-term growth. We took share and accelerated new customer acquisition. We hired hundreds of talented bankers, added capabilities and expertise, and executed very well. Those efforts are now helping us deliver leading deposit and loan growth.

We also expanded our three focused areas of fee revenue, and we're seeing good results in those areas as well. Huntington has never been better positioned. Now, on to slide four. There are four key messages we want to leave you with today. First, we sustained the momentum from year-end through the first quarter with robust loan growth and continued deposit growth. The business is performing exceptionally well, and through the first quarter, we are ahead of our plans for the year. I'd like to thank all of my colleagues and teammates for their extraordinary efforts this quarter and everything they do for our customers and company every day. Second, we're driving revenue and profit growth year-over-year, consistent with the strategy we shared at Investor Day. Profit growth is supported by our earning asset growth, expanded net interest margin, growth of value-added fee revenues, and disciplined expense management.

Third, credit performance continues to be strong. We are proactively managing all of our loan portfolios. Fourth, our strong financial foundation enables us to operate through a range of potential economic scenarios. Turning to slide five, I'll recap our performance in the first quarter. We grew average loans by almost $9 billion year-over-year, supported by both core businesses and new initiatives. Average deposit growth continued and increased by almost $11 billion year-over-year. Our deposit strategy remains focused on acquiring and deepening primary bank relationships, and we grew primary bank relationships by 3% in consumer and 4% in business banking over the previous year. Importantly, we are maintaining disciplined deposit pricing while delivering this growth. Our investments in value-added fee revenues continue to deliver, with fee income increasing over 6% year-over-year, led by payments, wealth, and capital markets.

We are continuing to invest in these areas. For example, in capital markets, we're excited to welcome Chris Wood to lead the continued build-out of our leveraged finance program and private equity coverage. We invested in talent and launched two new verticals: Financial Institutions Group and Aerospace and Defense. In North and South Carolina, we are accelerating our branch expansion plans. We're excited to bring the entire Huntington franchise to this region. These investments will drive long-term value creation for shareholders and contribute to the medium-term goals. Our capital levels improved as well, with adjusted CET1 growing by 20 basis points from the prior quarter to 8.9%. In anticipation of reaching our operating range, the board approved a $1 billion multi-year share repurchase authorization, which provides us flexibility for capital deployment.

Turning to slide six, let me take a moment to share the top-level revenue and PPNR trends we've delivered: 10% year-over-year revenue growth and 24% year-over-year PPNR growth. As I said, the business is performing very well and continuing to build momentum. We're optimistic about Huntington's future and the opportunities that lie ahead. As a reminder, the board and management are collectively a top-10 shareholder, and we are fully aligned and committed to our investors to drive outperformance and additional shareholder value. With that, I'll ask Zach to provide an overview of the financial performance.

Zachary Wasserman (CFO)

Thanks, Steve, and good morning, everyone. Slide seven provides highlights of our first quarter results. We reported earnings per common share of $0.34. Return on tangible common equity, or ROTCE, came in at 16.7% for the quarter. As Steve noted, pre-provision net revenue, PPNR, expanded by 24% year-over-year to $783 million. Adjusted for notable items, PPNR rose 18% year-over-year. Average loan balances grew by $2.7 billion, or 2.1% from the prior quarter. Average deposits increased by $2.2 billion, or 1.4% versus prior quarter. Reported CET1 ended the quarter at 10.6%, increasing approximately 40 basis points from last year. Tangible book value per share has increased by over 13% year-over-year. We continue to demonstrate strong credit performance, with net charge-offs of 26 basis points. Allowance for credit losses ended the quarter at 1.87%. Turning to slide eight.

Consistent with our plan and prior guidance, loan balances grew for the sixth consecutive quarter, driven by commercial loans, which increased $2.2 billion, or 3.1% from the prior quarter. Year-over-year, loans grew 7.3%, driven by continued production in the core business and contributions from the new initiatives. During the quarter, growth from new initiatives continued to accelerate from the prior quarter and represented $1.3 billion, or approximately half of the total growth. The primary drivers of new initiative loan growth in the quarter included Financial Institutions Group, Mortgage Servicing, Funds Finance, North and South Carolina, and Texas. Of the remaining $1.4 billion of loan growth from existing businesses, we delivered $697 million from Corporate and Specialty Banking, $439 million from Regional Banking, commercial, and industrial, $209 million from seasonally higher balances within Distribution Finance, and $301 million from auto.

Offsetting a portion of this growth was lower commercial real estate balances, which declined by $261 million. Turning to slide nine. Since the first quarter of 2023, we have consistently delivered deposit growth well above peer levels, and our positive momentum continued into the first quarter of 2025. Average balances increased by $2.2 billion, or 1.4%, driven by continued household growth. We lowered our overall cost of deposits in the quarter by 13 basis points to 2.03%. This outperformed the expectations we shared in January and reflects our disciplined deposit pricing. On to slide 10. During the quarter, we drove $31 million, or 2.2% growth in net interest income. This reflects almost 11% growth year-over-year and the fourth consecutive quarter of net interest income dollar growth. Net interest margin was 3.1% for the first quarter, up seven basis points from the prior quarter.

The increase in interest margin from the prior quarter included two basis points higher spread net of free funds, a one basis point reduction from higher cash balances, a four basis point benefit from lower drag from the hedging program, and a three basis point benefit from interest recoveries and other smaller items. We were very pleased with the performance of the underlying 307 basis points of NIM in the quarter, which beat our earlier expectations primarily as a result of strong performance in deposit beta. Turning to slide 11. Our level of cash and securities at quarter's end remained at 28% of total assets, consistent with the prior quarter, and we held modestly higher cash balances in the quarter. We have continued to reinvest cash flows into treasuries, which now represent 20% of our total securities portfolio, up 8% from a year ago.

As I have previously stated, we expect to manage the duration of the portfolio at approximately the current range. Turning to slide 12. We continue to manage our hedging program to both protect net interest margin from a lower rate environment as well as protect capital from potential higher rates. Over the last 12 months, we have reduced our asset sensitivity to a near-neutral level. During the first quarter, we added to our down-rate risk hedges with approximately $4 billion in floor spreads. We continue to analyze multiple potential rate scenarios and will remain dynamic as we continue to calibrate to the most likely rate environment. Moving to slide 13. On a GAAP basis, non-interest income increased by 6%, or $27 million from the prior year. We continue to see solid growth driven by payments, wealth management, and capital markets.

As a reminder, the first quarter is generally a seasonal low for fee revenues, and we expect fee revenues to grow over the course of the year. Moving to slide 14. Within payments, we saw 6% growth year-over-year in the first quarter, driven by a 15% increase in commercial payment revenues. Treasury management fees grew 10% as we continued to penetrate and deepen within our customer base and benefited from an increasing contribution from our new merchant acquiring model. Moving to wealth management on slide 15. Fees increased by 15% on a year-over-year basis. AUM continued to grow, increasing 6% from the prior year, with wealth advisory households up 11% year-on-year. We've gathered approximately $1.4 billion in net flows over the last year as we continue to execute our strategy to deepen our advisory penetration into our customer base. Moving to slide 16.

Capital markets grew 20% year-over-year, supported by commercial loan production-related capital markets activity, including notable strength in underwriting and syndications. Turning to slide 17. GAAP non-interest expense decreased sequentially by $26 million, driven by lower personnel expense, primarily because of a seasonal reduction in incentives and revenue-driven compensation. Slide 18 recaps our capital position. We continue to drive Common Equity Tier 1 higher, and our capital management strategy remains focused on our top priority to fund high-return loan growth while continuing to drive adjusted CET1, inclusive of AOCI, into our operating range of 9%-10% over time. As Steve stated in his remarks, the board approved a $1 billion share repurchase program, which provides Huntington flexibility in our expected capital distribution plan over the next several years.

The timing of repurchases will be discretionary and depend on a number of factors, including the macroeconomic and interest rate environment, as well as the pace of loan growth. We would expect any repurchases in 2025 to be modest. Turning to slide 19. Credit quality continues to outperform. Net charge-offs decreased four basis points in the quarter. Allowance for credit losses was 1.87%, lower by one basis point from the prior quarter, and up $32 million sequentially, reflecting strong loan portfolio growth and continued solid credit performance. Turning to slide 20, the criticized asset ratio increased to 3.98%. The non-performing asset ratio ended the quarter two basis points lower at 61 basis points. Let's turn to slide 21 for our outlook for 2025. Clearly, there is more uncertainty in the economic outlook for 2025 today than there was at the beginning of the year.

As Steve noted earlier, we run the business with a highly dynamic approach where we continually analyze multiple potential economic scenarios and ensure that we have action plans ready not only to manage but to outperform in all of them. The business performed exceptionally well in Q1, and we have momentum going into Q2. Based on our results thus far in 2025, our full-year guidance is the best estimate for how we will perform this year. On loans, we continue to expect growth within the prior range of 5%-7%. Based on the robust performance in Q1 and the momentum that is carrying into Q2, we are well on track to achieve that objective, notwithstanding the less certain economic outlook. In a less volatile economic environment, we would likely have increased our guidance.

On deposits, we expect to drive growth within the prior range of 3%-5% as we focus on growing primary banking relationships and new households. For net interest income, we're increasing our guidance on a dollar basis to plus 5%-7% based on our strong first quarter performance and benefiting from a stronger NIM. As noted previously, this level would reflect record net interest income on a full-year basis. Fee revenues are tracking within the 4%-6% prior range. Expense growth is also tracking the prior range of 3.5%-4.5%, driven by sustained investments in revenue-producing initiatives and overall growth in the business. On credit, we continue to expect net charge-offs for the year to be between 25 and 35 basis points. I will also share some color on expectations for the second quarter. We expect sequential average loan growth between 1% and 2%.

Deposits are expected to grow as well as we focus on self-funding our loan growth. We expect net interest income to grow modestly into the second quarter, driven by earning asset growth and a relatively stable run rate NIM. Fee revenues are expected to grow modestly from their seasonal Q1 low. We expect expenses of approximately $1,170,000,000 million with the sequential increase of approximately $20 million, driven approximately half from the full quarter impact of annual merit and the remainder from higher expected revenue-driven compensation from growing fee revenues. Lastly, we expect Q2 net charge-offs within our full-year range. Turning to slide 22. In closing, we remain focused on driving long-term shareholder value creation. Our performance is driven by our culture and our purpose. We operate a powerful franchise that is both scaled and diversified, with multiple sustainable growth levers from a position of strength.

Risk management is deeply embedded in our culture. Throughout the years, we have consistently demonstrated top-tier performance in stressed environments, as measured by DFAST and CCAR data. Our focus on adjusted CET1, inclusive of AOCI, demonstrates the rigor of our capital management approach. Our liquidity remains top-tier in the industry. The organic growth we are driving continues to significantly outpace our peer group and supports the attractive revenue and profit growth we are delivering. With that, we will conclude our prepared remarks. Before we move to Q&A, let me take a moment and thank Tim Sedabres for his leadership of our investor relations program over the past four years. Many of you know him well, given his strong relationships, and his counsel has been of great value to us.

Tim will be taking on a new role within our finance organization as part of his development plan, leading our corporate forecasting and profitability team. We look forward to accepting our new head of IR in the coming weeks. Tim, thank you, and over to you for questions and answers.

Tim Sedabres (Head of Investor Relations)

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.

Operator (participant)

Thank you, Tim. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, you may press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue.

You may press star two if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Please ask just one question and one follow-up, and if you have any additional questions, this time allows you to place yourself back into the queue. One moment while we pull for questions. Thank you. The first questions today are from the line of Erika Najarian with UBS. Please proceed with your questions.

Erika Najarian (Managing Director)

Hi. Good morning. Just my first question. Good morning. My first question is for Zach. The net interest margin clearly came in higher than expectations. Sort of just wanted to unpack what you said. Should we think about flat net interest margin trends relative to the 310, or should we take out the interest recoveries?

As we contemplate what you've said in the past and obviously the neutral rate positioning that you showed us, should we then apply sort of that flat net interest margin thought process for the rest of the year?

Zachary Wasserman (CFO)

Good morning, Erika. Great to hear you, and thanks for the question. Let me unpack a bit of that. For the first quarter, as I noted in prepared remarks, really the big driver of the outperformance for us was deposit pricing. Frankly, the teams executed exceptionally well and beat our own internal plan. If you just think about that topic for a second, through the fourth quarter of last year, we'd achieved a cumulative deposit beta of down 24%.

Our expectations as we went into this year was to see continued sort of gradual improvement on that down beta, getting to the high 30s by the end of 2025. We achieved actually 37% just in the first quarter. It was a significant acceleration of that performance and just a really, really great result. That is really primarily what drove us above what we expected to be flat to the 303, roughly level we were at in Q4. I think about the kind of run rate from here to the second part of your question. We are looking at our current run rate as around 307, Erika, to answer your question.

I see under most scenarios here, and there's clearly a wider range of scenarios that one might think about at this point, but there are most scenarios of either zero cuts or as many as three or four that are in the curve right now, pretty consistent within a few basis points outcome around that 307 for the remainder of this year. Pretty flat within the reasonable range of 307 for the next three quarters. I continue to model numerous scenarios, as you know, out of a longer term, and all of those really continue to indicate the opportunity for us to see rising NIMs in 2026 aligned to what we talked about at length at our investor meeting a couple of months ago. Pretty similar kind of shape of that curve, just phase shifted up a little bit to 307 in the near term.

Erika Najarian (Managing Director)

Thank you, Zach. My second question, if I may, is for Steve. I thought the $1 billion in buyback authorization is interesting. It is pretty clear from the performance in the quarter and your outlook that your business momentum continues to be best in class because, to your point, you were able to zig when everyone else was zagging, given your superior capital and risk management in 2023. Is that just really a message of, you know, if tariff uncertainty continues to hit the banking sector, you wanted flexibility to support your stock because you see inherent higher value? I am just trying not to put words in your mouth, but in the over a decade that I have covered you, you have never been a huge fan of buyback, so I just wanted to get your thought process on that.

Stephen Steinour (Chairman, President and CEO)

Thank you, Erika. Since you've covered us a bit before, we've had a consistent approach to capital allocation. First, the growth. And we're getting really good growth now, as you pointed out, best in class. Second, to the dividend, and third, to other uses, including buybacks. We expect to buyback a bit this year, and we've got a multi-year opportunity. Depending on the economic situation, we're prepared now to do buybacks and expect that we will on some modest basis this year and then continuing as we go forward.

Erika Najarian (Managing Director)

Got it. I'll read to you. Thank you.

Operator (participant)

Thank you. Our next questions are from the line of John Pancari with Evercore ISI. Please proceed with your question.

John Pancari (Senior Managing Director)

Good morning.

Stephen Steinour (Chairman, President and CEO)

Morning, John.

John Pancari (Senior Managing Director)

On the deposit cost progress in the quarter, definitely better than expected. Could you maybe give us a little bit of color?

Where you're seeing that success, is it tied to the new efforts on the certain product side, or is it programs that you've been pushing through across the pricing programs, across the products? Just if you could help us get a better picture around the success on that front versus the competitive backdrop. Thanks.

Zachary Wasserman (CFO)

Yep. Good question, John. This is Zach. I'll take it. In general, I would characterize the outcome of that really as a function of the consistent plan we've had around down beta. So not really any sort of change in that strategy, just a great execution of it and outperformance of it.

Just if I remind you of sort of the five key levers that we had highlighted as integral to our down beta plan over the last several quarters, the first was decreasing the mix of CDs within the overall funding base and secondly, shortening their duration, thereby setting us up to be ready to see a higher beta on that product set over time. That continues to work very well. I will note, by the way, in the CD area, we're seeing historical CDs expire, and we're retaining the large majority of those customers at significantly lower rates, something like approximately 100 basis points lower. That's a meaningful piece of that overall deposit cost reduction. The third part of our down beta plan was, as we acquired in volume, acquiring that in money market as opposed to time deposit.

That really, again, a high beta product allows us to continue to manage through for potential future interest rate reductions. Fourth, we reduced our go-to-market pricing. I think, as we've talked about a number of times in the past, we are incredibly segmented in terms of how we think about deposit pricing in the consumer and business world, very much on a regional basis. In the commercial world, looking at industry segments and size bands. We look almost every day, if not certainly every week, at where's the competitive pricing. We have purposely reduced our pricing within that overall sphere. Lastly, fifth, selectively reducing pricing on existing segments. We had a lot of confidence as we came into the year that we would be able to execute our overall beta plan very, very well.

We challenged ourselves to some degree to go even harder than that. To the team's credit, they really performed very, very well. The last thing I'll say is, to some degree, you may remember when we set Q1 guidance, we also expected deposits to be about flat, actually, quarter to quarter. Not only did we outperform on deposit costs, we actually outperform on volume as well and grew that. I think it's just another testament to the deposit franchise is incredibly strong.

John Pancari (Senior Managing Director)

Great. Thank you, Zach. I appreciate the color there. On loan growth, I know you indicated that the new initiatives, they generated about half of the loan growth in the quarter. Can you help us a little bit in terms of what new yields you're bringing the paper on?

I mean, there's questions out there like you've got to win that share from someone. Therefore, is it pricing that's getting you there, or is it just stepping up the focus in these areas where you haven't had before since there are new businesses? I know the margins have been competitive because of your funding dynamics, but how about the new loan yields? Is there any way to help us think about what yields this new paper is coming on at?

Zachary Wasserman (CFO)

Thanks. Yeah. It's a great question, John. The short answer, and I will unpack it with more detail, but the short answer is the new yields are coming on pretty consistent with our overall production yields, not leveraging any kind of overly aggressive pricing to win there.

We are seeing, and we've talked about this a lot, we have hired extraordinarily experienced bankers who have deep connectivity and relationships. The model we have to bring the expertise of a large bank down to a local level in the Carolinas and Texas, and then separately, the deep, deep expertise of our industry vertical specialist banking leaders is really what's causing us to win here, not pricing. In fact, when I look at the return on capital of those deals through our capital approval committees, they look very attractive. Just as an indication, we're talking about the fact that the Carolinas achieved profitability during the year, and there's a great sense of how the pricing is going. Not leveraging what we're all pricing there and seeing a lot of good strength.

I think when we look at the outcome of NIM, that's a testament to that. We're not seeing any kind of degradation in our run rate NIM, even as we really accelerate loan growth throughout the last part of last year, and the guidance would extend it forever as well.

John Pancari (Senior Managing Director)

Great. Thank you, Zach. And good luck, Tim. Best of luck in the new role.

Zachary Wasserman (CFO)

Thanks, John.

Operator (participant)

Our next questions are from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.

Ebrahim Poonawala (Managing Director)

Hey, good morning.

Stephen Steinour (Chairman, President and CEO)

Morning, Ebrahim.

Ebrahim Poonawala (Managing Director)

Just maybe one question is you had a very, very strong first quarter. I think head and shoulders above most of your peers. Just talk to us in terms of how things evolved during the quarter. Steve, maybe things start off extremely strong in March and maybe even the last couple of weeks.

Have you seen that weakness that we all worry about in terms of the economy and clients being on the sidelines? Or just how would you describe how the quarter evolved?

Stephen Steinour (Chairman, President and CEO)

As we announced at year-end, we had a very strong pipeline coming into the first quarter. We also had activity that did not close in the fourth quarter that spilled into the first. We had a good start. January was a very good month, but each of the months have been very good. There has not been a tail off per se, but some of the activity that we actually thought would fund in the first quarter has been deferred, just a modest amount of it. That is largely in equipment finance and tariff-related issues or concerns. As you know, we had a really good first quarter.

Our pipeline going into the second quarter, again, with high probability close, is almost the same level as it was at the first quarter. Our second quarter, unless something dramatically happens, should be reasonably strong as well. We are not seeing a material drop-off by any stretch. Things that are being deferred have the potential to be stacked into the second half of this year. We usually have a very strong fourth quarter.

Ebrahim Poonawala (Managing Director)

That is helpful, Steve. I guess the other component to growth is you picked up a lot of talent. I am just wondering, is there an amount of growth that is coming from the bankers that you have hired bringing on their books of business, which should happen no matter what? Is there a component of that that we should keep in mind when we think about Huntington's loan or deposit growth?

Stephen Steinour (Chairman, President and CEO)

Absolutely.

Our new colleagues, remember, there's roughly an average 20-year tenure on them, and they are outstanding. We just had our board session in Charlotte to meet the entire teams in the North and South Carolina. Obviously, very enthused by our directors about what's been accomplished and an encouragement to do more. They are an important part of the overall results, and we expect that they'll have runway now for years. I would also suggest the core is performing very, very well. Our colleagues in the more traditional business lines, if you will, just are doing a great job. Our commercial real estate, which has run off quite a bit in last year, is stabilizing. We expect to have a stable, if not modest, growth in pre this year. It is all coming together as planned.

We shared these expectations at the investor day just roughly 60 days ago, and we're executing against it. We're not changing our plan now. We're on course, and we're going to continue to execute.

Ebrahim Poonawala (Managing Director)

Excellent. Thank you.

Stephen Steinour (Chairman, President and CEO)

Thank you.

Operator (participant)

Our next question is from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

Manan Gosalia (Executive Director)

Hi. Good morning, all.

Stephen Steinour (Chairman, President and CEO)

Hi, Manan.

Manan Gosalia (Executive Director)

Steve, can you expand on what you're hearing on the ground from clients since April 2nd? What is the sentiment? What are they telling you, and what actions are they taking in this environment?

Stephen Steinour (Chairman, President and CEO)

There's a wide range of issues, if you will, to talk about in this regard. I'll try to do it in a summary fashion. We have customers that are not reliant on imports or exports.

If anything, they feel more bullish because there's potential less competition, certainly less price competition as a result of the interim tariff activity. We've got a lot of trade that goes on between Canada and Mexico that is exempt because of USMCA, and so no effect. If you'll recall, the auto dealers did very, very well, some of their best years in a COVID environment where they had more margin on new and used as well. There are pockets of real strength here. There are other areas, large distribution finance, for example, where there's some import restriction being dealt through tariffs, and that utilization has dropped off a bit. I mentioned equipment finance where some of what we finance gets imported, and decisions to defer have been made. Again, a broad spectrum, there are winners, not just losers.

I think the headlines suggest, well, everybody's impacted in a negative way. That is not the case. There are a number of businesses that are going to do very well. As you know, we have a very broadly diversified portfolio, so we'll have those that are going to be winners and some others that will be temporarily impacted.

Manan Gosalia (Executive Director)

Very helpful. And then maybe as a follow-up, you saw pretty strong loan growth this quarter. You noted that you would have increased the guide in normal circumstances. You also said you're not really expecting a drop-off in loan growth in the second quarter. Your guide would then imply a pretty meaningful slowdown in loan growth in the second half of the year relative to what you're seeing right now. Are you just being more conservative here?

If not, what would cause you to pull back on loan growth in this environment?

Stephen Steinour (Chairman, President and CEO)

We have had an aggregate moderate to low risk appetite for a decade and a half. That has not changed, and that is not going to change. We have run the company with that in mind. It is our policies, our credit processes, etc. We will be consistent in generating new business. We are being a bit cautious with that second-half guide and hopefully overly cautious because this could be an exceptional year. We have got a very strong start. We are confident the second quarter, if things come together with the individual tariff negotiations with a variety of countries, I think we will have an opportunity to beat that guide.

Manan Gosalia (Executive Director)

Got it. Thank you. All the very best, Tim.

Operator (participant)

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

Jon Arfstrom (Managing Director)

Hey, thanks. Good morning.

Stephen Steinour (Chairman, President and CEO)

Hi, Jon.

Jon Arfstrom (Managing Director)

Echo that on Tim. Nice job. Thanks for everything. Steve, where are you the most focused right now in terms of risk management? You have obviously a strong record historically in risk, but what are you telling your teams to kind of double and triple-check at this point?

Stephen Steinour (Chairman, President and CEO)

Good morning, Jon. Thanks for the question. Most of my career early on was in risk and credit risk specifically. We have been very, very diligent on portfolio management now for a number of years, and we will continue to do that. Things, stale information, things that might reflect some challenge with our customers, our view is we are here to support our customers. If there is bad news, we want to hear it, and we want to be in a position to help them get through it.

It is a very constructive view, and that is both consumers and business. There is an active outreach effort, if you will, with an extra alert around the environment that we are emphasizing. There is no one particular portfolio of unique focus. I would say the portfolio management efforts are and have been broad-based and will continue. As we get more capabilities in terms of data and use of data, think of what is coming with generative AI, we will do more and more inquiry and review.

Jon Arfstrom (Managing Director)

Okay. Good. That is good. Thank you. Then, Zach, for you, just on the non-interest income guide for modest growth sequentially, it looks like in your materials, you are pointing to the year-over-year growth rates. I am just curious how you want us to think about that modest growth.

I guess I'm particularly interested in capital markets and what kind of a bounce back you expect there. Thanks.

Zachary Wasserman (CFO)

Yep. Great question, Jon. Just in the area of fees, I will note we feel really, really good about the strategy and where this is going over the moderate term. 11% year-over-year growth in those key fee areas of focus, payments, wealth management, capital markets is in line with what we discussed at investor day, and just the underlying trends there look exceptionally good. As you go into Q2, we are expecting to be higher quarter to quarter, as I noted. The amount of that will be a function of kind of where we land in the equity market levels to some degree that affects our wealth management income and cap markets.

What's interesting in the cap market space, and I think we've discussed this at length before, about two-thirds of that business is commercial loan production related. We are expected to have a solid quarter of growth in commercial loan production, and that should flow through into cap markets activities. We noted in the presentation the strength in risk management activities, for example, and loan syndication. That should continue. We should see that continue to track higher. Obviously, M&A advisory is the one that is the most sensitive, probably of any of our businesses, to uncertainty. We did come into Q1 expecting to have a somewhat stronger Q1 than it ultimately came to pass. We saw some delays of deal-making activity. I think that's going to be, to some degree, what happens in function of how this uncertainty in the economy resolves.

If I talk to our M&A advisory team, they're still pretty bullish on the year, I will say. I mean, the pipeline looks good, not only good in terms of size, but in terms of quality. The companies that are in it are very high quality and should be able to transact. To some degree, it's just going to come down to things closing a couple of weeks before the quarter or potentially pushing it out to the next. I do expect to see growth. I pull back maybe lastly, John, to answer your question. You did not ask, but it's related. In that fee guide of 4%-6%, I think the biggest puts and takes for us that will push us to the top end versus the bottom of that range is really that M&A advisory world, what happens with the cap markets.

That will be what we have to watch here. Strategically, the team are executing exceptionally well and look like we have some nice trends behind us.

Stephen Steinour (Chairman, President and CEO)

Okay. Just to add a bit, we had a record number of headcounts on a record number of initiatives in the first quarter. The year set up very well. Obviously, current activities will cause some delay, but this could be a very strong capital markets year for us on the IB side as well.

Jon Arfstrom (Managing Director)

Okay. All right. Thanks, guys. Appreciate it.

Stephen Steinour (Chairman, President and CEO)

Thanks, Jon.

Operator (participant)

Our next question is coming from the line of David Long with Raymond James. Please proceed with your questions.

David Long (Managing Director)

Good morning, everyone.

Stephen Steinour (Chairman, President and CEO)

Hi, Dave.

David Long (Managing Director)

I understand that the credit metrics for you guys look real good right now, but specifically, what has the uncertain backdrop's impact been on your quantitative CECL model and overall reserve levels?

Brendan Lawlor (EVP and Chief Credit Officer)

David, this is Brendan. I'll take that. First of all, we model many different scenarios as we try to come up with a reserve on a quarterly basis as we think about the economic environment and the component of it. We're a Moody's shop, and so we use a baseline scenario, a somewhat positive scenario, which at this point does not look much different than the baseline scenario. We also incorporate a downside scenario. We will weight the output that comes out of our modeling to derive the quantitative. What we've seen over the last quarter is that as the scenarios for Moody's have softened, we have seen much more of the risk being picked up through the quantitative modeling that we've done.

That is where we then will step in and provide the qualitative side of it to get to the strong reserve coverage that we have posted and been pretty consistent with. I feel really good about the position we're sitting in at this point. We look forward to, as this evolves, we'll reevaluate every quarter through that same lens.

Stephen Steinour (Chairman, President and CEO)

David, as you'll recall, we have typically top tier or even best of in all the DFAST prior tests. There is a consistency in terms of stress credit risk within the portfolio. It is one of the reasons for the last 15 years we released quarterly data on the consumer book and those trends are consistent now for that period of time. If anything, they have actually become a bit more conservative over time.

We feel very good about the credit foundation within the company and optimistic about the future performance. The modeling we do would reflect that.

David Long (Managing Director)

Got it. Thank you for that color. The second thing that I wanted to ask about was, what does the pipeline look like for continuing to build out in the Carolinas and Texas and the newer verticals, as well as are there any new geographies or new verticals planned for the rest of the year?

Stephen Steinour (Chairman, President and CEO)

As we announced at the investor day, we expect to add one to two new verticals every year. We had an accelerated effort early on, but we do expect to add verticals this year. I think it was last September we announced we were planning to open 55 branches over five years in the Carolinas. Looks like that will be closer to three, so that is a bit of acceleration, three years.

We are continuing to look to increase our capabilities in a variety of our markets. We are adding colleagues in Chicago, a substantial number of colleagues, as an example. We are pressing forward, building out the franchise in multiple ways, both the pre-existing and the newer aspects of it.

David Long (Managing Director)

Got it. It sounds like you guys continue to play offense despite any increase in uncertainty in the economic backdrop.

Stephen Steinour (Chairman, President and CEO)

We are very cognizant of what is going on around us. We have contingent plans. We have a range of opportunities both on the expense and management side that are well laid out internally. We and our board know what we will do under various scenarios, but we are going to continue to execute the plan. We have delivered great growth.

We are optimistic that we're going to get through this challenging period of uncertainty, and the country's going to be in good shape, the economy in good shape, and we're going to move forward with it. There will be pockets of issues, no doubt, but that's why we have such a well-diversified and actively managed portfolio.

David Long (Managing Director)

Great. Thanks, Steve. And thanks for taking the question.

Stephen Steinour (Chairman, President and CEO)

Thanks, Dave. Thanks. Thank you.

Operator (participant)

Our next questions are from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

Matthew O'Connor (Managing Director)

Morning. I wanted to ask a question regarding Slide 62, the criticized commercial loans. You guys are one of the few that give all this detail. I mean, the credit overall was quite strong, but always looking for kind of early indicators of an inflection.

When I looked at the upgrades to pass and the paydowns, they were both down a decent amount. I'm just wondering if you guys also view that as kind of a very early indicator of some sort of inflection, or is it just a matter of seasonality, timing, things going to get so good, or just elaborate on that chart because I thought it was pretty interesting. Thanks.

Brendan Lawlor (EVP and Chief Credit Officer)

Sure, Matt. This is Brendan. I'll take that. We spent a lot of time talking about that as the quarter evolved. Really, what you're seeing picked up specifically in that line item of the upgrades to pass. There were several transactions that were slated to close as we got closer to the end of the month of March that really just drifted into April.

The refinancing or the support that they were bringing in drifted over into the first two weeks of the month. What we have seen is for the quarter, we had an 8% increase in Crit/Class overall. I would say to you about a third of that got picked up; if it had closed two weeks earlier, it would have been picked up in this number. It was a little bit of timing, frankly, more than anything else. That is what gives us comfort that even with the strong position that we are sitting in here, I think we are going to probably be flattish for the remainder of this year.

Stephen Steinour (Chairman, President and CEO)

As you note, Matt, we have come down very substantially over the last year. At some point, we will plateau. I do not think we are at the plateau yet.

I'm a little more bullish on our ability to manage the book than what Brendan just related. But it will plateau. And we don't believe we have significant loss content in the Crit or Class at this stage. Brendan and I review the top 50 every month and have a confidence in that modest loss expectation. Thank you for the question.

Matthew O'Connor (Managing Director)

Thank you. That's helpful.

Operator (participant)

Next question is from the line of Ken Usdin with Autonomous Research. Please proceed with your questions.

Hey, good morning, guys. This is Ben on from Ken's team. Zach, question for you. Can you just talk about how you expect the drag from the hedging program to traject throughout the rest of the year, just given this new rate curve? You got the four basis point benefits in this quarter.

Just how you think of using that hedging program out into the rest of the year and out into the medium term just to manage the rate sensitivity of the bank, just given the volatility and the rate curve. Thanks.

Zachary Wasserman (CFO)

Yep. You got it, Ben. Excellent question. Thanks. In terms of hedging, maybe I'll answer your second one first. More strategically, how we think about it. I'll come back to the nuances around the hedge trajectory. We've been very intentional, I think, as we've been coming through in the discussions we've had the last several quarters, of gradually reducing our asset sensitivity as rates reach their peak. As we now expect kind of likely a downward trajectory, but still with a fair amount of uncertainty around whether that'll happen and when.

We think this sort of neutral positioning that we're at now is really very optimal. It's our general expectation. Now, I will say we look at it every single month, and we read it rigorously, and we dynamically manage it. It could change. At this point, our posture is to maintain that neutrality through the end of this calendar year. As you go out into 2026, at this point, less declarative, I would say. I'm expecting probably a regrowth in asset sensitivity as we go into 2026. At this point, we've got a fair line of sight to the rest of this year, and it's pretty neutral. That neutrality is really what kind of underlies the statements I made earlier. I think it was Erika who asked this in terms of just the potential range of scenarios around NIM.

We see a pretty flat NIM outcome within a few basis points of the 307 run rate NIM we generated in Q1 for the rest of this year, and then rising into next year, and it is sort of supported by that neutral position. Then we get to the trajectory this year. In the fourth quarter, two quarters ago, we had an eight-basis point drag from hedging. As we came into the first quarter, our guidance had indicated, and actually what comes back exactly was a four-basis point reduction of that. The benefit of four basis points in Q1, and it left us with a hedge drag of four basis points in the quarter. We expect that to get down to about neutral by the middle of this year. We could get back all four basis points into Q2. It might be a little bit more leaking into Q3. We will see.

It'll be dependent on what really happens, obviously, with Fed Funds actions here, but effectively neutral. Then probably a little bit of drag coming back in by the end of the year. If you take the implied forward from March 31, it would be something like four basis points of drag by Q4 of 2025. You can imagine in your mind's eye sort of a U-shape, right, of four-basis-point drag going down to roughly zero and then going back up to four. That is why I think about it just sort of the beginning of this year to the run rate exit of this year. It is about neutral. There is not much delta between that. Again, if rates are different, we will see, obviously, a different result there.

If I share one last thought with you, if you look out into 2026, it looks about flat to that four, maybe even reducing a little bit as we go out from there. I think most of the action will occur this year, and then it'll be about neutral as we go out into 2026.

Great. Thank you for all the color.

Welcome. Good question.

Operator (participant)

Thank you. Ladies and gentlemen, we've reached the end of the question-and-answer session. I'd like to turn the call back to Mr. Steve Steinour for closing remarks.

Stephen Steinour (Chairman, President and CEO)

Thank you for joining us today. In closing, our teams continue to deliver exceptional results highlighted by our leading loan and deposit growth and PPNR growth. Looking forward into 2025, while the economic outlook is less certain, we have momentum, and we feel confident in our strategy.

We have experienced management teams and contingency playbooks to deploy to manage through various economic scenarios. We've never been better positioned. We've never been better positioned, and we're confident in our ability to continue to drive out performance. Finally, thank you to the nearly 20,000 Huntington colleagues who would not be able to take care of our customers and drive this level of performance, outstanding performance, without your efforts. Thank you for your interest in Huntington today. Have a great one.

Operator (participant)

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