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Q1 2024 Huntington Bancshares Inc Earnings Call

Participants

Brendan A. Lawlor; Executive VP & Chief Credit Officer; Huntington Bancshares Incorporated

Stephen D. Steinour; Chairman, President & CEO; Huntington Bancshares Incorporated

Timothy R. Sedabres; Executive VP & Head of IR; Huntington Bancshares Incorporated

Zachary J. Wasserman; CFO & Senior EVP; Huntington Bancshares Incorporated

Ebrahim Huseini Poonawala; MD of United States Equity Research & Head of North American Banks Research; BofA Securities, Research Division

John G. Pancari; Senior MD & Senior Equity Research Analyst; Evercore ISI Institutional Equities, Research Division

Jon Glenn Arfstrom; MD of Financial Services Equity Research & Analyst; RBC Capital Markets, Research Division

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Kenneth Michael Usdin; MD and Senior Equity Research Analyst; Jefferies LLC, Research Division

Manan Gosalia; Equity Analyst; Morgan Stanley, Research Division

Matthew Derek O'Connor; Research Analyst; Deutsche Bank AG, Research Division

Peter J. Winter; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division

Robert Scott Siefers; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Steven A. Alexopoulos; MD and Head of Mid-Cap & Small-Cap Banks; JPMorgan Chase & Co, Research Division

Presentation

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.

Timothy R. Sedabres

Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found on the Investor Relations section of our website, www.huntington.com. As a reminder, this call is being recorded, and a replay will be available starting in about 1 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 D. Steinour

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We are 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 5 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 loan growth, with balances growing by $1.6 billion from a year ago and have grown by a 4% CAGR over the past 2 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 remained 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 2 quarters, we've added teams in the Carolinas and Texas. We have also launched new commercial specialty verticals, including fund finance, health care 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.

Zachary J. 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 floorplan increased by $313 million. CRE balances declined by $31 million.
All other commercial portfolios were relatively unchanged on a net basis. Within other commercial, we saw notable strength in regional and business banking balances as a result of sustained production levels and the continued retention of all SBA loan production on balance sheet.
In total consumer loans, average balances were flat overall for the quarter. Within consumer, residential mortgage increased by $137 million, benefiting from production as well as slower prepay speeds. Average auto balances declined by $59 million, however, increased by $180 million on an end-of-period basis. RV/Marine average balances declined by $42 million, and home equity was lower by $35 million.
Turning to Slide 8. As noted, we drove another quarter of solid deposit growth. Average deposits increased by $1.1 billion in the first quarter. On a year-over-year basis, deposits have increased by $4.6 billion or 3.1%. Total cumulative deposit beta continued to decelerate quarter-over-quarter and ended at 43%, consistent with our expectations for this point in the rate cycle.
Our current outlook for deposit beta remains unchanged, trending a few percentage points higher so long as there is a pause from the Fed and then beginning to revert and fall when we see rate cuts. Market expectations for rate cuts have clearly been pushed out compared to our January earnings call. We continue to believe that there will be rate cuts over time, and the impact of beta will be a function of the duration in this pause from the Fed.
Turning to Slide 9. Noninterest-bearing mix shift is tracking closely to our forecast. Average noninterest-bearing balances decreased by $1.3 billion or 4% from the prior quarter. We continue to expect this mix shift to moderate and stabilize during 2024.
On to Slide 10. For the quarter, net interest income decreased by $27 million or 2% to $1.3 billion. 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 2 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 2- to 5-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 on 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 cost 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 hedge duration of the portfolio from 4.1 years to 3.5 years over the past 7 quarters.
Turning to Slide 12. You can see an updated outlook for AOCI. Based on the rate environment at quarter end, AOCI moved incrementally higher. AOCI at quarter end was 21% lower than the levels we saw in the third quarter. Our outlook continues to forecast a substantial portion of AOCI recapture over the next couple of years.
Turning to Slide 13. We have updated the presentation of our balance sheet hedging program in order to more directly illustrate the intent of the hedging program. This view shows the effective swap profile in the future, including the effect of forward starting swaps, so you can see more directly the hedging exposures as they will play out over the next 2 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 fix swaps. Our hedging program is designed with 2 primary objectives: to protect margin and revenue in down rate environment; and to protect capital in potential uprate scenarios.
The pay fix swaps, which have been effective in protecting capital during this REIT cycle, have a weighted average life of just over 3 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 2 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 1.5 years, while allowing us to maximize the benefit from the current rate environment.
Moving on to Slide 14. Our fee revenue growth is driven by 3 substantive areas: capital markets, payments and wealth management. In capital markets, total revenues declined from the prior quarter driven by lower advisory revenues. Commercial banking related capital markets revenues increased sequentially since troughing in the third quarter. As commercial loan production continues to accelerate, this will support growth in areas such as interest rate derivatives, FX and syndications. Debt capital markets is also expected to notably benefit over the course of the year.
Within advisory, pipelines and backlog continue to remain robust, and we expect advisory to contribute to growth in capital markets revenues over the remainder of the year. Payments and cash management revenue was seasonally lower in the first quarter and increased 7% year-over-year. Debit card revenue continues to outperform industry benchmarks. Treasury management fees have increased 10% year-over-year, as we have deepened customer penetration. We have substantive opportunities across the board in payments to grow revenues over the coming years.
Our wealth and asset management strategy is delivering results, with revenues up 10% from the prior year. We are seeing great execution and the benefits of our investments in this area. Advisory relationships have increased 8% year-over-year, and assets under management have increased 12% year-over-year.
Turning to Slide 15. On an overall level, GAAP noninterest income increased by $62 million to $467 million for the first quarter, excluding the impacts of the mark-to-market on the pay fix swaptions in the prior quarter and the CRT fees declined seasonally by $12 million quarter-over-quarter. Our first quarter fee revenue is generally the low point for the year, and we expect noninterest 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 billion. 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 to 45 basis points. Allowance for credit losses was stable at 1.97%. Nonperforming 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 a 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 noninterest 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 and 35 basis points.
With that, we'll conclude our prepared remarks and move to Q&A. Tim, over to you.

Timothy R. Sedabres

Thanks, Zach. Operator, we will now take questions. (Operator Instructions) Thank you.

Question and Answer Session

Operator

(Operator Instructions) Our first question is coming from Manan Gosalia from Morgan Stanley.

Manan Gosalia

So your comments on the NII guide were very thorough, so really appreciate that. I think -- so the lower end of your guide is now for 3 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?

Zachary J. 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. And clearly, the biggest change in the environment over the last 3 months, as we gave guidance in January, was the expectation for much -- a much longer pause in this Fed posture before 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, I'm trying to note this in the prepared remarks as well, is the deposit volumes are coming in very strong and slightly at the higher end of our prior expectations as well. And so that's contributing somewhat, although really good core funding clearly for -- with the accelerating loan growth over time.
So that's really the driver. As we entered the quarter, and just to provide one last piece of color 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 -- that was likely not to be the case. But clearly, that was the forecast of the market broadly, and we are beginning to execute the early stages of down beta actions.
We've discussed shortening [CE] internal duration, changing other elements of our pricing throughout the quarter and, 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 were pushed further out.
So that's really the biggest driver other than 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. And we're not sure really just when will that occur and hence a few bps of additional funding costs here in 2024.

Manan Gosalia

Is any of that because you're also planning ahead of this accelerating loan growth that you're expecting?

Zachary J. Wasserman

It's a good question, Manan. The posture where these cuts (inaudible) here clearly of when will rate cuts [reviews]. And also, not only when was the first one happened, 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 not to overplay it.

Stephen D. Steinour

If I could add, this is Steve, our commercial loan pipeline is very robust, and each month of the quarter has improved. So we are going to the second quarter with a very good healthy outlook. And 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 heart of 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

Our next question is coming from John Pancari from Evercore ISI.

John G. Pancari

Thanks for the color on the NII guide. So just to confirm again, so it does -- you did 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 bias would be is it mainly the deposit costs that you just discussed coming in higher? Or is there any other factor?

Zachary J. Wasserman

That is the primary driver. So yes is the answer to that, seeing a little lower, a few basis points lower NIM, but incrementally somewhat stronger loan growth, those things are largely offsetting and continue to be the ultimate results in that guidance range.
And importantly, the key thing for us is that trajectory, growing an interest income on a dollar basis out of the first quarter into the second quarter and continuing on to the third and fourth quarter. So the outcome is not 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 G. Pancari

Got it. Okay. And then separately, back to the loan growth topic. Steve, you just discussed it that you've got confidence in the outlook, particularly given your pipeline. Maybe 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 that you have to kind of support that acceleration?

Stephen D. Steinour

Thanks, John. We see the commercial pipeline for the second quarter, particularly in the high probability and close level to be very, very good, very strong relative to the last 5 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 bolstered they're carrying.
So the 3 new initiatives, especially banking last year, and the Carolinas off to a really good start. Texas was there a couple of weeks ago. We've 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 finance companies in the country. That tends to be somewhat seasonal fourth quarter. So those would be a combination of factors that give us a lot of confidence that we'll be at or near the upper end of our guidance for the full year.

Operator

Our next question today is coming from Scott Siefers from Piper Sandler.

Robert Scott Siefers

I kind of wanted -- I 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?

Zachary J. Wasserman

Yes. 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 (inaudible). 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, is not just what's happening right now in the market, but the outlook for the whole year. And so that's really, I think, (inaudible) in terms of these comments is where as 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 time (inaudible) has just been extended. And that's really the main driver here.
I think the -- our pricing strategy is pretty much the same, which is continue to price the -- in competitive ways, but not lead the market, 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 -- the pricing strategy is really designed to ensure that there's fair and appropriate pricing as we got on those deposits.

Operator

Next question is coming from Steven Alexopoulos from JPMorgan Chase & Company.

Steven A. Alexopoulos

Not to beat a dead horse on the net interest income guidance, but last quarter, with 3 cuts that got us to the high end of the range, and now 3 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 3 cuts now has put us down 2% versus up 2% last quarter.

Zachary J. Wasserman

Yes. Good question. Appreciate it, and I think what I'll just bring you back to is the sort of 2 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 to somewhat higher funding cost environment than we expected, and that was the main driver.
Second thing I would say is the 4 key factors for us that are driving them in this [year] remain the same. The biggest positive factor is fixed asset repricing. We try to share in the prepared remarks, we expect to see about $4 billion quarterly repricing of fixed assets, which should drive substantive benefit on the order of between 10 and even 12 or 13 basis points, depending on how the belly of 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 to up to 8 to maybe even 10 basis points, depending on how the curve moves here over the course of the rest of this year until Q4. Those are the 2 biggest positive factors.
The other 2 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 the -- those are moving off in the opposite direction, to be clear, in either a higher rate cut or a lower rate cut scenario. And those are modestly net negative for the full year that would offset those positives and keep the overall NIM in the generally flat to rising position from here. So none of that has really changed.
Maybe the last thing I'll say, a third point, is that all 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, 3 quarters, will be -- 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 A. Alexopoulos

Got it. And Zach, if we put all this together, you're seeing 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?

Zachary J. 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 accelerated 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 A. Alexopoulos

Got it. Okay. If I just -- one separate question. On the noninterest-bearing deposits, balance is down pretty sharp, average at 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?

Zachary J. Wasserman

Balances were modestly declining through the quarter. As we look at that, we would see a few things. One is the trajectory of dollars of noninterest bearing actually decelerating in terms of their mix shifts.
Secondly, for the most part, all of the mix shifts 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 noninterest-bearing mix shift mix as a percentage to continue to stabilize in the high teens over the course of this year. It was 19.4% as of Q1.
And then the last thing I would say is as you think about that percentage, it's very notable to measure that percentage if overall deposits are shrinking versus if they are growing. And for us, overall, the products are growing strongly as we've said. So the mix is lifting, but the dollars are really the most important thing, and that we see stabilizing here over the course of the next couple of quarters.

Operator

Next question today is coming from Ebrahim Poonawala from Bank of America.

Ebrahim Huseini 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 and the economy is more conducive for growth. You (inaudible) is 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 actions Huntington has taken to hire bankers in Carolinas, Texas? Would love some color around both those aspects.

Stephen D. Steinour

Thank you, Ebrahim. The economy, we also do 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 the last year, the core is performing well. We're getting growth in our auto book, our distribution, finance, in particular, our business bank. So very, 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 well. 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.

Ebrahim Huseini 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 trends towards up 2%? Is that the right takeaway?

Zachary J. Wasserman

It will really be a (inaudible) there. So I think the outcome will be somewhere between that range of EV. When we give these ranges, we try to generally [block] 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 and just to clarify, a flat 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 Huseini Poonawala

All right. So multiple scenarios, middle of the range. And any scenario where this could exceed the up 2%?

Zachary J. Wasserman

Certainly, it's possible. We want to see how the cut -- the rate environment plays out here. I think, really, at this point, we're probably parsing the precision more than -- more than it 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 [next step].

Operator

(Operator Instructions) Our next question is coming from Ken Usdin from Jefferies.

Kenneth Michael Usdin

And thanks for that incremental slide on the swaps detail. I'm wondering if you could 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?

Zachary J. Wasserman

Yes. 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 I mentioned earlier, so between 10, 11, 12, 13 basis points upside this year from that $4 billion turning quarterly.
Our modeling is that will continue on into 2025 at kind of a similar pace. It's really a very long-term phenomenon, and that's going to be a significant support to 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 to 8 basis points and 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, probably get to about neutral position if there are some rate reductions.
And if you just look at the rate curves -- all the rate curve, there is an expectation in the forward curve at this point that there would 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 aren't rate reduction, then you'll see less of that hedge drag coming back, obviously, then because of the different environment overall, regardless.
The other thing I'll just say, you didn't ask it, but I will share 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 uprate scenarios, protect NIM in downgrade scenarios. That chart that I illustrated in the prepared remarks has a kind of 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 1/3 less. And so that's sort of the intent of that program more broadly from an interest rate risk and asset sensitivity management perspective.

Kenneth Michael Usdin

Okay. Cool. And then my follow-up, I'll just separate the -- just the fixed rate repricing on the asset side. So we know about the meaningful health that you get this year. But then how does that layer in, in terms of incremental fixed rate benefit that happens into next year?

Zachary J. Wasserman

Yes. So as I noted a moment ago, I think it's about the same benefit as we go out into 2025, and that's a fairly similar churn of quarterly volumes and continue to see the belly of the curve that largely always goes out to the price 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. And at some point, it starts to (inaudible), but likely not until the latter part of '25 at the earliest at this point based on how the curve is shaping up.

Operator

Next question today is coming from Jon Arfstrom from RBC Capital Markets.

Jon Glenn Arfstrom

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.

Zachary J. Wasserman

Yes. Q1 core fees grew about 3% year-over-year, and our guidance for the full year is between 5% and 7% on a full year. So that clearly implies we're going to see an acceleration of fee income and acceleration on a year-over-year basis, as we (inaudible) 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. If you look at sort of the trends we're seeing right now and what the performance was in the first quarter, payments revenue was up 7% in the first quarter. Wealth revenue is up 10%. In capital markets, we saw commercial banking-related revenues that kind of around 2/3 of the capital markets activities that are really highly correlated to the pace and volume for banking.
That grew sequentially into the first quarter with 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. So we did see those advisory revenues lower to 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. 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 on that full year growth range.

Jon Glenn 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.

Brendan A. Lawlor

This is Brendan. I'll take that one. As you sort of noted in your question that the story of the quarter is still [weak] across all of the credit metrics, pretty much in line with where we reported in the fourth quarter or seasonally adjusting 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 it, and we're highly focused on it ourselves, is office in 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 we -- while we're watching it and actively managing it, we feel very well protected against it at this point.

Stephen D. Steinour

Just to add to that. Thanks, Brendan. We've reduced the office portfolio by about $500 million over the course of the last 4 quarters. And our largest loan is $40 million, the average of $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 Glenn Arfstrom

Okay. Good. If I can ask one more, I'm going to violate the one and 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's seems like it's higher funding cost 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 guidance? I think that would help people.

Zachary J. Wasserman

Yes. Great question, Jon. I'll take that one. Look, (inaudible). 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 is (inaudible) 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. And -- but I think we're in a range of tuning at this point, Jon. And hence, we should not overly parse this somewhere in that range, typically try to land in the middle of the ranges that we're giving.

Operator

Next question is coming from Peter Winter from D.A. Davidson.

Peter J. Winter

I wanted to follow up -- I want 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 A. Lawlor

Peter, it's Brendan. I'll take a chug at that. You're noting the stability quarter-over-quarter, and that's accurate. I think, as we look forward, it's really a fact specific as to how the ACL coverage will move quarter-over-quarter. As you know, we take into account the modeling of our economic scenario as 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 -- 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 important. It's a quarterly specific metric these days and the way it's run. So it's hard for me to come out and say, "We think it will do this, and we think it will do that."

Stephen D. Steinour

Peter, this is Steve. I'll just add to that. It's -- 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 on these new businesses and regions we've made.
And there's still a lot of uncertainty about where rates are going to go, where they're going to move, the geopolitical tension, the uncertainties that can spun 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 J. Winter

Okay. 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?

Zachary J. Wasserman

This is Zach. I'll take that one. If you look at the full year loan growth outlook that we've got, 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 we've got. Within -- and the mix of the overall company's growth will be weighted toward commercial, with 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 5 new areas of focus, the 3 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, in payments, in treasury management. So quite good early traction here. We're obviously starting from a low base, as 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 5 of 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 in Texas. But just in terms of the early momentum that we're seeing and based on when they started and were staffed, those 2 will be most significant for '24.

Peter J. Winter

And just one last final. Does the core loan growth assume a pickup in line utilization?

Zachary J. Wasserman

Not in substance. So if you think about kind of the 3 big areas that we have, outstanding lives, in the broad middle market, commercial lines, we 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. It was a typical seasonal pattern. We think the -- that line generally now is in a 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 kind of the cycle of inventory and sales.
And then the last one is auto floorplan. You 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 floorplan business where manufacturing has reached a stable level relative to sales, and we are going to see line utilization generally trending in a pretty consistent area from here in the floorplan business. So not counting on it really for the continued growth, although certainly benefited to some degree from seasonality in the first quarter.

Stephen D. Steinour

And each of those businesses that we referenced, we expect net increase in customers. So they'll have a core organic growth. That's a primary driver.

Operator

Your next question today is coming from Matt O'Connor from Deutsche Bank.

Matthew Derek O'Connor

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 that's incorporated in guidance, which I assume it's not, but any updates on that front?

Zachary J. Wasserman

Yes. 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. And so that's a real benefit to us. The -- if you were to just run the numbers on the proposal as it was proposed, I think it's around $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're initially put forth and when enacted (inaudible) 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 the opportunities to engage our customers that there will be over time ways to mitigate some of that, certainly offset with other payments related growth. As best we can tell at this point, to the extent there is a proposal, it would be at some point mid to latter part of '25, it will take effect. And so not in the guidance for '24, as you just noted.

Operator

We reach 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 D. 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 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 [alignment] 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

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.