Q1 2025 Earnings Call Transcript

Greetings, and welcome to the Huntington Bancshares Incorporated First Quarter 2025 Earnings Conference Call. A question and answer session will follow the formal presentation. 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.

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.

A replay will be available starting about one hour from the close of the call. Our presenters today are Stephen Steinour, Chairman, President and CEO, and Zach Wasserman, Chief Financial Officer. Brendan Lawlor, Chief Credit Officer, will join us for the Q&A. Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information, are available on the Investor Relations section of our website.

With that, let me now turn it over to Steve.

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We delivered exceptional results for the first quarter.

I'll share a few highlights upfront, 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 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 maintained an allowance for loan losses that is well above the peer median. Our foundation of 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. And those efforts are now helping us deliver leading deposit We also expanded our three focused areas of fee revenue and we're seeing good results in those areas as well.

Huntington Bancshares Incorporated 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.

We 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 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 leverage 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 Bancshares Incorporated 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 multiyear 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 PP and R growth. As I said, the business is performing very well and continuing to build momentum. Are optimistic about Huntington Bancshares Incorporated's future and the opportunities that lie ahead. As a reminder, the board and management are collectively a top ten 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. 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 the 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 six 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, $9 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.

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 ten.

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 eleven, Our level of cash and securities at quarter-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 twelve. 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 twelve 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 thirteen, 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 fourteen. 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 continue 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 fifteen. 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 sixteen. 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 seventeen.

GAAP non-interest expense decreased sequentially by $26 million primarily because of a seasonal reduction in incentives and revenue-driven compensation. Slide eighteen recaps our capital position. We continue to drive common equity Tier one 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 we into our operating range of 9% to 10% over time.

As Steve stated in his remarks, the Board approved a $1 billion share repurchase program which provides Huntington Bancshares Incorporated flexibility 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 nineteen. 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 twenty, 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 twenty-one, for our outlook for 2025. Clearly, 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 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% to 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. 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% to 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% to 7% based on our strong first-quarter performance and benefiting 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% to 6% prior range.

Expense growth is also tracking to the prior range of 3.5% to 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. Fee revenues are expected to grow modestly from their seasonal Q1 low.

We expect expenses of approximately $1.17 billion, the sequential increase of approximately $20 million driven approximately half from the full quarter impact of annual merit, and the remainder higher expected revenue-driven compensation from growing fee revenues. Lastly, we expect Q2 net charge-offs within our full-year range. Turning to Slide twenty-two. 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 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 and 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.

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.

Thank you, Tim. Pressing the star keys. And please ask us one question and one follow-up. And if you have additional questions as time allows, One moment while we pull for questions. First question today is from the line of Erika Najarian with UBS. Please proceed with your question.

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 you know, what you said. Should we think about flat net interest margin trends relative to the 3.10 or should we take out the interest recoveries?

And 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 flatten net interest margin thought process for the rest of the year?

Good morning, Erika. Great to hear you, and thanks for the question. I just want me to unpack a bit of that. So for the first quarter, I'd say prior remarks, really the big driver of the outperformance for us was deposit pricing.

And for frankly, the team's executed exceptionally well and beat our own internal plan. You know, if you just think about that topic for a second, through the fourth quarter of last year, we achieved a cumulative deposit beta of down 24%. And our expectations as we go into this year was to see continued sort of gradual improvement on that down beta getting to the high thirties by the end of 2025. We achieved actually 37% just in the first quarter. So it was a significant acceleration of that performance and, you know, just really, really great results.

And that's really primarily what drove us above what we expected to be, you know, flat to the 3.03 roughly level we were at in Q4. You know, so I think about the kind of run rate from here to the second part of your question, We're looking at our current run rate as around 3.07, Erika, to be to answer your question. And I see under most scenarios here, and there's clearly a wider range of scenarios that one might think about at this point. But in our most 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 3.07. For the remainder of this year.

So pretty flat within the reasonable range of 3.07 the next three quarters. I continue to model numerous scenarios as you know out of the longer term, and all of those really continue to indicate opportunity for us to see rising NIMs at 2026, aligned to what we talked about at length at our investor did a couple of months ago. So pretty similar kind of shape of that curve just phase shifted up a little bit to 3.07 in the near term.

Exactly. And my second question, if I may, is for Steve. I thought the $1 billion in buyback authorization is interesting. You know, it's pretty clear from the performance in the quarter and your outlook that your business momentum continues to be, you know, 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. So 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'm just trying to, you know, not to put words in your mouth, but in the over decade that I've covered you, you've never been a huge fan of buybacks.

So just wanted to, get your thought process on that.

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, third to other uses, including buybacks.

We expect to buy back a bit this year, and we've got a multiyear opportunity. And so 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.

Got it. I'll requeue. Thank you.

Thank you.

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

Good morning.

Morning, John.

On the deposit cost progress in the quarter, definitely better than expected. Could you maybe give us a little bit of color on where you're seeing that success? Is it tied into the new efforts on the certain product side or is it programs that you've been pushing through and across the, you know, pricing programs across the products? It's just if you could help us get a, you know, a better picture around the success on that front versus the competitive backdrop?

Thanks.

Yeah, good question John. This is Zach, I'll take it. In general, I would characterize the outcome that really is 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, so the five key levers that we had highlighted us 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, you know, 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. And that's a meaningful piece of that overall deposit cost reduction.

Because the third part of our downgraded plan was as we acquired in volume, acquiring that in money market as opposed to time deposits, and that really, again, a high beta product allows us to either manage through for potential future interest rate reductions. You know, fourth, we reduced our go-to-market price 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, And we look, you know, almost every day, if not certainly every week, at where's the competitive pricing and we have purposely reduced our pricing within that overall sphere.

And then lastly, fifth, selectively reducing pricing on existing segments. And no, 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. And we challenged ourselves to some degree to go even harder than that. And to the team's credit, they really performed very, very well.

The last thing I'll say is, you know, to some degree, you may remember when we set Q1 guidance, we also expected deposits to be about flat actually quarter to quarter. And not only do we have a four-month deposit cost, we actually have to four-month volume as well and grew that. I think it's just another testament to the deposit franchise is incredibly strong.

Great. Thank you, Zach. Appreciate the color there. Then on loan growth, I know you indicated that the new initiatives are being generated about half of the loan growth in the quarter.

And, you know, 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 are you you've got to win that share from someone. And therefore, is it pricing that's getting you there, or is it just getting stepping up the focus in these areas where you haven't had the And and 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 about what yield these new these new papers coming on at? Thanks.

Yes. It's a great question, John. And the short answer, I will go back and forth. 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 you know, we've talked about this a lot. We have hired extraordinarily experienced bankers who have deep connectivity and relationships. And 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 expertise the deep, deep expertise of our industry vertical specialist banking leaders is really what's causing us to win here, not pricing.

And 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 talked about the fact that the Carolinas, you know, achieved profitability last year during the year. It's a great sense of how the pricing is going. So not leveraging well, overall pricing there and seeing, you know, a lot of good strength.

And I think you know, when we look at the outcome of them, that's a testament to that. We're not seeing any kind of degradation in our run right now. Even as we really accelerate loan growth throughout the last part of last year. And the guidance would tend as well.

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

Thanks, John.

Our next question is from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.

Hey, good morning.

Morning, Ebrahim.

Just maybe one question is, you had a very, very strong first quarter. I think head and shoulders about most of your peers. Just talk to us in terms of how things evolved during the quarter, Steve. Maybe did things start off extremely strong and then 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?

We as we announced it at year-end, we had a very strong pipeline coming into the first quarter. And we also had activity that didn't close in the fourth quarter that spilled into the first. So we had a good start. January was a very good month, but we've had each of the months have been very good.

There hasn't 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. And that is largely an equipment finance and tariff-related issues or concerns. But 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 in the first quarter.

So our second quarter unless something dramatically happens, should be reasonably strong as well. So we're not seeing a material drop-off by any stretch, and things that are being deferred have the potential to be stacked into the second half of this year. And, you know, we usually have a very strong fourth quarter.

You picked up a lot of talent just wondering, is there an amount of growth that's coming from the bankers that you've 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 Bancshares Incorporated's loan or deposit growth?

Absolutely. Our new colleagues remember this, roughly an average 20-year tenure on that and they are outstanding. We just had our board session in Charlotte, to meet the entire teams in the North and South Carolina, like, you know, obviously very enthused by our directors about what's been accomplished and encouragement to do more. So they're an important part of the overall results, and we expect that they'll have runway now for years, but I would also suggest the core is performing very, very well.

And our colleagues in the more traditional business lines are just doing a great job. Our commercial real estate which has run-offs quite a bit in the last year is stabilizing. And we expect to have a stable, if not, modest growth in pretty this year. So it's all coming together as planned.

We shared these expectations at the Investor Day just roughly 60 days ago, and we're executing against it. And we're not changing our plan now. We're all in force, and we're gonna continue to execute.

Excellent. Thank you.

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

Hi. Good morning, all. Steve, can you expand on what you're hearing on the ground from clients since April second? You know, what is the sentiment? What are they telling you? And what actions are they taking in this environment?

There's a wide range of issues if you will to talk about in this regard. 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. As a result of the intro. Because there's less potential, less competition, certainly less price competition. Tariff activity.

We've got a lot of trade that goes on between Canada, 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.

So there are pockets of real strength here. There are other areas, large distribution, finance, for example, where there's some import restriction, being felt 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. At the name.

But again, a broad spectrum, there are winners not just losers. I think the headlines suggest, well, everybody's impacted. And in a negative way, that is not the case. There are a number of businesses that are gonna do very well.

And as you know, we have a very broadly diversified portfolio. So we'll have those that are gonna be winners and some others that'll be temporarily impacted.

Very helpful. And then maybe as a follow-up, you saw pretty strong loan growth this quarter. Noted that you would have increased the guide in normal circumstances. But then you also said you're not really expecting a drop-off in loan growth in the second quarter.

So 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. So are you just being more conservative here and if not, what would cause you to pull back on loan growth in this environment?

We have had an aggregate moderate to low-risk appetite for a decade and a half. That hasn't changed. That and that's not going to change. So we will run the company with that in mind.

It's our policies, our credit processes, etcetera, And we will be consistent in generating new business. We're being a bit cautious with that second-half guide, and hopefully, overly cautious, because this could be an exceptional year where we've got a very strong start, We're confident in the second quarter. If things come together, with the individual tariff negotiations with a variety of countries, I think we'll have an opportunity to beat that guide.

Got it. Thank you, and all the very best, Tim.

Thank you.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

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

Well, good morning, Jon, and thanks for the question. You know, like most of my career early on was at risk and credit risk specifically. So we have been very, very diligent on portfolio management now for a number of years. And we will continue to do that.

But the things stale information, things that might reflect some challenge with our customers. Our view is we're here to support our customers. And so if there's bad news, we want to hear it, and we want to be in a position to help them get through it. And so it's a very constructive view, and that's both consumers and business.

And so there's an active outreach effort, if you will, that with an extra alert around the environment. That we're emphasizing. There's no one particular portfolio of unique focus. I would say the portfolio management efforts are and have been broad-based and will continue.

And as we get more capabilities in terms of data and use of data, think of what's coming with generative AI, we'll do more and more inquiry. And review.

Okay. Good. That's good. Thank you. And then, Zach, for you, non-interest income guide for modest growth sequentially. It looks like in your materials, you're pointing to the year-over-year growth rates, and I'm just curious how you want us to think about that modest growth. And I guess I'm particularly interested in capital markets and what kind of a bounce back you expect there? Thanks.

Yep. Great question, Jon. Just, you know, in the area fees, I will note some feel really, really good about the strategy and where this is going over the moderate term. You know, 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.

You know, as you go into Q2, are expecting to be higher quarter to quarter as I noted. You know, 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 management income and cap markets. You know, what's interesting in the cap market space I think we've discussed this a night before, you know, about two-thirds of that business is commercial loan production related. And are expecting 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 that the strength in risk management activities, for example, and loan syndication. So that should continue. We should see that continue to track higher. Obviously, M and A Advisory is the one that is the most sensitive probably of any of our businesses to uncertainty.

And 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. And I think that's gonna be to some degree what happens there as a function of how this uncertainty in the economy resolves. If I talk to our m and a adviser team, they're still pretty bullish on the I will say.

I mean, the pipeline looks good. Look 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. It's just gonna come down to, you know, things closing a couple of weeks before the quarter or potentially pushing it out to the next.

So I do expect to see growth and, you know, so I pull back maybe lastly, Jon, to answer your question, you didn't ask, but it's related. In that fee guide of 4% to 6%, I think the biggest puts and takes for us 'll push us to the top end versus the bottom of that range is really that m and a advisory world, what happens with the cap markets. And so, you know, that'll be what we have to watch here. But strategically, the team is executing exceptionally well and look what we've got.

Somebody's trying to be high. Okay. Jon, just to add a bit, we had a record number of had kept on a record number of initiatives in the first quarter, so the year set up very well, Obviously, current activities will cause some delay. But this could be a very strong capital market share for us on the IP side as well.

Okay. Alright. Thanks, guys. Appreciate it.

Thanks, Jon.

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

Good morning, everyone.

Hi, David.

I understand that the credit metrics for you guys look real good right now. But specifically, what is the what are the uncertain backdrops impact been on your quantitative CECL model and overall reserve levels?

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. It's, you know, as we think about the economic environment is the component of it.

We have a we're a Moody shop. And so we use, you know, a baseline scenario a somewhat positive scenario, which at this point doesn't look much different than the baseline scenario. And then we also incorporate a downside scenario. We will weigh the output that comes out of our modeling to derive the quantitative.

And what we've seen over the last quarter is that as the scenarios for Moody's have softened, have seen much more of the risk being picked up through the quantitative modeling that we've done. And so, you know, that's where we then will step in and provide the qualitative side of it. To get to the strong reserve coverage that we've have posted and been pretty consistent with. So you know, I feel really good about the position we're sitting in at this point.

And you know, we look forward to as this evolves, we'll reevaluate every quarter through that same lens.

David, as you'll recall, we have typically top tier or even best off in all the d test prior tests. So there's a consistency in terms of stress credit risk within the portfolio. It's one of the reasons for the last fifteen years we've released quarterly data on the consumer book. And those trends are consistent now for that period of time.

If anything, they've actually become a bit more conservative over time. So we feel very good about the credit foundation within the company, and optimistic about the future performance. The modeling we do would reflect that.

Got it. Thank you for that color. 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?

As we announced it 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. And I think it was last September when we announced we were planning to open fifty-five branches over five years in Carolinas. Looks like that'll be closer to three, so that's a bit of acceleration. Three years, and, you know, we're continuing to look to increase our capabilities in a variety of our markets.

We're adding colleagues in Chicago, a substantial number of colleagues. An example. So we're pressing forward, building out the franchise, in multiple ways, both pre-existing and the newer aspects of it.

Got it. So it sounds like that you guys continue to play offense despite any, you know, increase in uncertainty in the economic backdrop.

Well, we are very cognizant of what's going on around us. We have contingent plans. We've got a range of opportunities both on the expense and management side that are well laid out internally. So we and our board know what we'll do under various scenarios.

But we are gonna continue to execute the plan. We've delivered great growth. We are optimistic that we're gonna get through this challenging period of uncertainty, and the as the country not be in good shape, economy in good shape, and we're gonna move forward. With there will be pockets of issues, no doubt, but that's why we have such a well-deserved side and actively managed portfolio.

Great. Steven. Thanks for taking the questions.

Thanks, David.

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

Good morning. I wanted to ask a question regarding slide sixty-two, the criticized commercial loans. You guys one of the few that give all this detail. And, I mean, the kind of overall is quite strong, but always looking for kind of early indicators of the inflection.

And when I looked at the upgrades to past, and the pay downs, they were both down a decent amount. I'm just wondering if you guys also view that as kind of, like, a very early indicator of a central reflection, or is it just a matter of seasonality, timing, things when it gets so good, or just elaborate on that chart. I thought it was pretty interesting. Thanks.

Sure, Matt. This is Brendan. I'll take that. We spent a lot of time talking about that as the quarter evolved and really what you're seeing pick up specifically in that line item of the upgrades past, they 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, and they just didn't the refinancing or the support that they were bringing in, it drifted over into the first two weeks of the month.

And so what we've seen is, you know, for the quarter, we had an 8% increase in quick class overall. I'd say to you, about a third of that got picked up you know, would've would've if it had closed two weeks earlier, you know, would've been picked up in this number. So it was a little bit of timing, frankly, than anything else. And that's what gives us comfort that, you know, even the strong position that we're sitting in front here, I think we're gonna probably be flattish for the remainder of this year.

As you know, Matt, we've come down very substantially over the last year. At some point, we'll plateau. I don't think we're 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 grid or class at this stage. Brendan and I review the top fifty every month and have a confidence in that modest loss expectation. Thank you for the question.

Thank you. That's helpful.

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

Hey, good morning, guys. This is Ben on from Ken's team. Zack, a 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 NIM this quarter. And then just how are you thinking 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 in the rate curve? Thanks.

Yep. You got it, Ben. Good. Excellent question.

Thanks. So in terms of hedging, this is maybe also answer your second one first. More strategically how we can you I'll come back to the nuances around the hedge trajectory. You know, we've been very intentional on coming through in the discussions you've had in the last several quarters of gradually reducing our asset sensitivity as rates reach their peak and as we now expect to kind of likely a down trajectory, but still with a fair amount of uncertainty around whether that'll happen and when.

And so we think this sort of neutral positioning that we're at now is really very optimal. It's our general expect now, and I will say we look at it every single month, and we did rigorously, and we dynamically manage it. So it could change. But 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, the less less less declarative, I would say. I'm expecting probably a regrowth in asset sensitivity as we go into 2026. But at this point, we've got a fair line of sight to the rest of this year, and it's pretty neutral. And that neutrality is really what kind of underlies the statements I made earlier. I think it's Erika who asked us in terms of just the kind of the potential range of scenarios right now.

We see a pretty flat NIM outcome within a few bps of the 3.07 run rate NIM we generated in Q1 for the rest of this year. And then rising into next year, and it's sort of supported by that neutral position. So that only gets to the trajectory this year. In the fourth quarter, last you know, just 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 we're coming to pass exactly was a four basis point reduction of that. The benefit of four bps in Q1 and it left us with a hedge drag of four bps in the quarter. Well, we expect that to get down to about neutral by the middle of the year. We could get back all four bips into Q2. It might be a little bit more leaking into Q3. We'll see.

It'll be dependent on, you know, what really happens, obviously, with Fed fund actions here. But effectively neutral, and then probably a little bit of drag coming back in by the end of the year. If you take the implied forward from March thirty-first, it would be something like four bps of drag by Q4 of 2025. And so you can imagine in your mind that sort of a u shape right, a four bip drag going down to roughly zero and then going back up to four. So that's why I think about it just, you know, sort of the beginning of this year to the run rate exit of this year it's about neutral.

It's not that much delta between that. But, again, if rates are different, we'll see obviously a different result there. It just if I share one last thought, if you look at it to 2026, it looks about flat to that four, maybe even reducing a little bit as we go out from there. So I think most of the action will occur this year, and then it'll be about neutral to go out into 2026.

Great. Thank you for all the color.

Welcome. Good question.

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. Stephen Steinour for closing remarks.

Thank you for joining us today. In closing, our teams continue to deliver exceptional results highlighted by our leading loan and deposit growth, and PP and R 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 outperformance. So finally, thank you to the nearly twenty thousand 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 Bancshares Incorporated today.

Have a great one.

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