First Horizon Corporation (NYSE: FHN) Q4 2021 earnings call dated Jan. 20, 2022
Corporate Participants:
Ellen Taylor — Investor Relations
Bryan Jordan — President & Chief Executive Officer
Hope Dmuchowski — Chief Financial Officer
Susan Springfield — Chief Credit Officer
Analysts:
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Brett Rabatin — Hovde Group — Analyst
Chris Marinac — Janney — Analyst
Michael Rose — Raymond James — Analyst
Steve Alexopoulos — J.P. Morgan — Analyst
Jared Shaw — Wells Fargo Securities — Analyst
Brady Gailey — Keefe, Bruyette & Woods — Analyst
Presentation:
Operator
Welcome to the Financial Horizon Corporation Fourth Quarter 2021 Earnings Release. My name is Juan, and I will be coordinating your call today. [Operator Instructions]
I will now hand over to your host, Ellen Taylor, Head of Investor Relations to begin with. Please Ellen, go ahead.
Ellen Taylor — Investor Relations
Thanks, Juan. Good morning, everyone. We really appreciate you joining us on such a busy day. First, our President and CEO, Bryan Jordan will provide opening remarks. And then, we’re really excited to have the newest member of the executive team, Chief Financial Officer, Hope Dmuchowski, to cover off on our financials. Then of course, we’ll be happy to take your questions. We’re also really pleased to have our Chief Credit Officer, Susan Springfield with us as well.
Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties, and we ask you to review the factors that may cause our results to differ from our expectations on Page 2 of our presentation and in our SEC filings. Additionally, please be aware that our comments will refer to adjusted results, which exclude the impact of notable items. These are non-GAAP measures, so it’s really important for you to review the GAAP information in our earnings materials and on Page 3 of our presentation. And last but not least, our comments reflect our current views, and you should understand that we aren’t obligated to update them.
And now, I’ll hand it over to Bryan.
Bryan Jordan — President & Chief Executive Officer
Thank you, Ellen. Good morning, everyone, and thank you for joining us. I’ll start on slide 5. While 2021 proved to be an interesting year for the U.S. economy and the banking industry as a whole, I’m very proud of the resilience of the First Horizon team and the continued progress and results that we delivered, once again highlighting the benefit of our business model. The team remain strongly focused on understanding and anticipating the needs of prospects and clients alike in order to deliver value-added advice and services across an increasingly competitive landscape.
Our specialty businesses and higher growth markets helped to drive the momentum in the second half of the year. And coupled with funding discipline, our focus on expenses and improving credit quality resulted in EPS of $0.48 per share in the fourth quarter and an adjusted return on tangible common equity of 17.5%. For the full year, adjusted EPS was $2.07, up $0.85 over 2020, driven by the benefit of the IBERIABANK merger.
While pressure on short-term rates continued and the competitive landscape amplified, our client-focused value proposition with a broader product set continued to provide a point of differentiation and generated better than expected results. Strong focus on deposit pricing helped drive net interest income up 1% despite a $5 million reduction in net merger accretion and paycheck protection program benefits. Core NII was up 3% with commercial loan growth of 2% excluding the impact of the PPP portfolio. We continue to see momentum in our commercial business and ended the quarter with unfunded commitments up 8% to just over $20 billion.
Our focus on reducing our deposit cost has really paid off. In the fourth quarter, our interest-bearing deposit cost declined 6 basis points and declined 18 basis points from year end 2020. As many of you know, we are extraordinarily well positioned to benefit in a rising rate environment and a strengthening economy. We ended the quarter with our interest rate sensitivity profile of a 16% increase in net interest income to 100 basis point rate shock across the yield curve.
As expected, we continue to see further moderation of fixed income and mortgage banking fees given both the impact of higher long-term rate and seasonality as well as additional pressure from our recent reduction in NSF OD pricing. Expense control is an area of focus and expenses were down 1% despite a $3 million increase tied to special bonuses we paid to our frontline associates, primarily designed to reward associates who have served clients continuously during the pandemic throughout our banking and our call centers.
Our asset quality trends continue to show strong performance, highlighted by net charge-offs of only 1 basis point and a 21% decrease in non-performing loans. The stabilizing economic outlook and overall credit quality improvement drove another robust reserve release with a provision credit of $65 million in the quarter. Our capital levels remained strong with a CET1 ratio of nearly 10%. And given the lower growth environment, we increased our return of capital to shareholders, including the repurchase of 9 million common shares in the quarter and a total of 24 million shares repurchased for the year. This drove a year-over-year decrease of 4% in our share count. Despite the impact of dividends and buybacks, tangible book value per share of $11 was up 1% in the quarter and 8% for the full year.
We have made substantial progress towards our upcoming systems conversion in February, including additional mock conversions, further upgrades to online banking platforms and finalizing client communications. We believe the planning and focus on investments in technology, products and people positions us well to capitalize further on the power of the combined platform into ’22 and beyond. As of the fourth quarter, we have identified approximately $45 million in revenue synergies related to the merger. We remain confident in our ability to deliver at least $200 million in net annualized cost savings by the fourth quarter of this year.
As the world continues to deal with the impacts of COVID and variants, I’m very optimistic about the continued macroeconomic recovery and the momentum and strength of our combined organization is providing towards our commitment to delivering top-quartile returns. I am very grateful for the dedication and hard work of our associates as they continue to navigate the various impacts of the pandemic, and at the same time, deliver value for all of our constituents; clients, communities and shareholders. I’m also pleased to introduce our new CFO, Hope Dmuchowski. While she joined our team less than two months ago, she has already added tremendous value. I’m confident that her expertise, forward thinking passion for change and commitment to excellence will be instrumental in helping to drive continuous improvement.
With that, let me turn it over to Hope to take the call from here. Welcome.
Hope Dmuchowski — Chief Financial Officer
Thank you, Bryan. Good morning to you all. I am excited to be with you today. I’d like to start off by saying, I’m deeply honored to serve this company and our shareholders as the Chief Financial Officer. I am grateful to everyone that has encouraged, supported and believed in me all along the way. I could not have asked for a warmer welcome from the First Horizon team. I am so thankful for the incredible foundation they have provided me, and I’m excited about the future of our company.
Now starting on Slide 6, which provides the highlights of the quarter, some of which Bryan has already covered. Overall, our results reflect solid quarter with improvement in core net interest income and continued strength in credit quality and capital return. As we look towards the upcoming systems conversion in February and our trajectory in the coming year, we believe we are well positioned to capitalize on the strength of the combined organization, particularly given our higher growth footprint and our highly asset-sensitive balance sheet in light of accelerating improvements in the economy.
Turning to Slide 7. We outlined the notable items in the quarter, which reduced our results by $41 million after-tax or $0.08 per share. In addition to net merger-related notable items of $35 million, we recorded a $3 million non-cash charge on retirement of the remaining legacy IBERIABANK Trust preferred securities. $6 million of deferred compensation costs resulting from litigation tied to a company that was fully divested more than 10 years ago. $10 million tied to derivative valuation adjustments related to prior Visa Class B share sales. This was triggered by the fact that Visa funded additional escrow balances related to their litigation prior to year end.
Turning to Slide 8, we provide highlights on our adjusted financials and key performance metrics for the quarter. We generated better than expected PPNR of $274 million as solid improvement in net interest income was driven by lower funding costs, higher other interest earning assets and commercial loan growth excluding PPP. This helped to mitigate expected declines and fee income driven by the impact of higher long-term rates and seasonality.
Adjusted expenses of $474 million was in line with expectations, which included the impact of the special bonus for employees of $3 million. The stabilizing economic outlook and continued improvement in asset quality led to a provision credit of $65 million this quarter, which was down from the $85 million credit last quarter. This reduction drove a $0.03 decline in earnings per share. Adjusted ROTCE was 17.5%. And adjusted ROTCE before the impact of the provision credit was 14%. Tangible book value per share came in at $11, up 1% as GAAP net income was largely offset by a $0.24 impact tied to return of capital and an $0.08 decline tied to the mark-to-market impact on the securities portfolio.
Turning to Slide 9. We are really pleased to report that our fully taxable equivalent NII was up $7 million linked quarter despite a $5 million reduction in net merger accretion and PPP revenue. Our strong focus on reducing interest-bearing deposit costs through disciplined pricing benefited NII in the quarter by over $6 million. As a result, core NII was up $12 million or 3%, reflecting improvements tied to lower funding costs as well as growth in commercial loans and other interest-earning assets, which more than offset the impact of spread tightening in the quarter.
During the quarter, we continue to put additional excess cash to work with security purchases of an incremental $700 million at a yield of approximately 1.7%. We ended the quarter with excess cash of $14.1 billion and our securities to interest-earning assets totaled 11%. As the rate environment changes, we will continue to reevaluate opportunities to redeploy excess cash and manage our overall asset sensitivity prudently. The net interest margin was up 1 basis point linked quarter and stable on a core basis. We lowered our interest-bearing deposit costs by 6 basis points, which helped drive a 4 basis point benefit to the margin from total deposit costs.
Turning to Slide 10. As we anticipated, headline fee income was down around 8% in the quarter, driven by expected declines in fixed income and mortgage banking. Fixed income fees remained relatively resilient and were down in line with expectations. Average daily revenue came in at $1.1 million compared with $1.3 million last quarter and resulted in a full year average of $1.4 million. Service charges and fees were stable despite a modest decrease related to our recent NSF pricing changes, which was partially offset by higher volumes.
Mortgage banking and title fees were down $6 million as the impact of lower secondary origination volumes was partially offset by higher gain on sale margins in the quarter. We continue to shift more of our production on balance sheet. Card and digital banking fees were down $2 million, driven by a $4 million decreased tied to a revenue sharing adjustment, which more than offset the benefit of seasonally higher transaction volumes in the quarter. Other non-interest income increased $4 million, largely reflecting higher SBA servicing income in the quarter.
Turning to Slide 11. Let’s review our expense trends. Adjusted expenses of $474 million was down $6 million in the quarter, driven by a $12 million decrease in personnel. The decrease was driven by lower incentives and commissions, largely tied to reductions in fixed income and mortgage banking fees. These results were partially offset by the $3 million impact of a special bonus to our frontline associates, which Bryan mentioned earlier.
Personnel costs also reflected lower salaries and benefits, reflecting merger sales and lower 401k costs, which were partially offset by increase in FICA taxes from unusually low third quarter levels. Outside servicing remained stable. The slight increase was primarily from branding initiatives and advertising related to the upcoming conversion. Our non-interest expense increased $4 million, driven by a DDA product reward accrual catch-up as well as higher travel and entertainment expenses as well as an increased FDIC cost.
On Slides 12 and 13, we covered loan and deposit growth. Our efforts to broaden our reach and market penetration across our footprint helped generate another quarter of underlying momentum in loan growth. Average PPP loans were down $1.5 billion in the quarter with forgiveness coming in faster than we originally expected. As Bryan mentioned, annualized loan growth before the impact of PPP loans was 5%, driven by linked quarter commercial loan growth of 2%. On a period-end basis, we generated 2% loan growth before the impact of PPP and loans to mortgage companies. This was driven by a 5% increase in other C&I.
We continue to see great traction in our specialty businesses, particularly equipment finance, asset-based lending, franchise finance and correspondent as well as growth in our markets such as Florida, Tennessee and our Mid-Atlantic region. These results have been muted some by reductions in commercial real estate given high levels of refinancing activity in the capital markets as well as lower balances in the energy portfolio. Deposits continued to drive our balance sheet growth again this quarter with $1.8 billion increase in average DDA or 7%, which continued to further improve the deposit mix. I mentioned the success and benefit of driving down our interest-bearing deposit costs, which were reduced by 6 basis points to 11 basis points for the quarter and also reduced total funding cost by 5 basis points.
Turning to Slide 14, I’ll cover asset quality and reserves. Credit quality continues to be strong with exceptionally low levels of charge-offs and non-performing loans. Our allowance coverage ratio remains healthy at 1.34% and 1.48% excluding loans to mortgage companies and the PPP portfolio. We recorded a $65 million provision credit giving the stabilizing economic outlook and overall improvement in credit quality. This was the fourth consecutive quarter with the provision credit.
Turning to capital on Slide 15. Our CET1 ratio of 9.9% remained strong, but decreased modestly linked quarter. As Bryan mentioned, we returned $225 million in capital to common stockholders during the quarter, including $144 million or 9 million shares of common stock repurchased.
Turning to the merger integration on Slide 16. We continued to make substantial progress across a number of fronts, including conducting additional mock conversions, rolling out additional upgrades to online banking platform and completing our client communications. We’ve achieved a $104 million in annualized run rate savings against our net annualized target of $200 million by the end of this year. Additionally, we continued making solid traction on revenue synergies with $45 million of annualized revenue synergies that are largely tied to commercial loans with additional synergies tied to debt capital market, mortgage and private client wealth. We are extremely focused on retaining and growing our client base and leveraging our expanded set of products and services.
Turning to Slides 17 and 18, we provide our outlook for full year 2022 and for the first quarter. Our expectations reflect a relatively robust economic outlook with rate hikes in March, July and December. We also incorporate full year unemployment of approximately 3.7% with real GDP growth of around 4.5% and a house price index increase of 4.5%. For full year 2022, we expect NII to be relatively stable with a roughly $120 million reduction in net merger accretion and PPP benefit, largely offset by the benefit of higher rates, loan growth and reduced funding costs. We expect to generate loan growth excluding PPP in the mid-single-digit percent range. At period end, we had a total of $1 billion in PPP loans with remaining fees of approximately $17 million. We now expect the vast majority of the portfolio to be forgiven by the end of the second quarter.
We recognize that there has been a fair amount of volatility in the expectation of rates recently. So we thought it might be helpful to provide some additional information on our sensitivity. First, it is important to note that nearly 90% of our interest rate sensitivity is concentrated at the short end of the curve. This predominantly reflects the fact that roughly 65% of our loan portfolio is variable rate. Here I would note that about $8 billion of those loans are subject to floors with about half of those in the money by approximately 40 basis points.
We estimate that a 25 basis point increase in Fed funds is worth approximately $16 million per quarter on an 8 basis points of margin benefit. Additionally, we assume approximately 15% interest-bearing deposit betas in our outlook, given the high levels of excess liquidity. We provided some additional information on our interest rate sensitivity profile in the appendix.
Regarding non-interest income, we expect a low-teens percent decline driven by further pressure in fixed income and mortgage banking, partially offset by improvement in wealth, service charges and card fees. We expect non-interest expense to remain relatively stable with lower incentives and commissions resulting from fee income and the continued benefit of merger saves, which will be offset by the impacts of inflationary pressures. Our full year outlook for net charge-off is in the 5 to 15 basis point range. And while credit quality continues to be strong, we expect that it is likely we will need to begin building reserves to support loan growth in the second half of 2022.
Finally, we expect our full year CET1 ratio to remain in the 9.5% to 10% range as we focus on organic growth and opportunistic share repurchases. For the first quarter, we expect NII to be down at the high end of the mid-single-digit range given the outlook for reduced net merger accretion and PPP benefit. Core NII will decline given a $7 million impact tied to day count as well as increased pressure from seasonally lower warehouse balances and continued spread tightening. We expect low-single-digit percent growth excluding PPP and loans to mortgage companies.
Regarding non-interest income, while we anticipate relatively resilient results in our fixed income business, we expect fee income to be down in the mid-single-digit range with additional decreases tied to our previously announced NSF pricing changes and seasonality. We expect non-interest expenses to decrease in the low-single-digit percent range with seasonally higher salaries and benefits more than offset by lower incentives and commissions as well as other costs.
Our outlook calls for charge-offs to be stable to up modestly with continued positive credit grade migration and reserve outflows near-term. On capital, as with the full year outlook, we expect our CET1 ratio to remain in the 9.5% to 10% range. Given our recent performance with strong underlying growth dynamics and expanded product set, we feel very well positioned to capitalize on our diversified business model to deliver enhanced value for our shareholders.
Finally, turning to Slide 19. We believe we are well positioned to capitalize on the opportunities of our diversified business model, highly attractive franchise and asset-sensitive balance sheet, particularly given the improving economic landscape and outlook for higher rates. Beyond our upcoming systems conversion, we are well positioned to capture additional revenue synergies as well as continue to pivot expenses and capital investments for higher growth opportunities. We also remain committed to making prudent investments to support the dynamic digital needs of our clients and associates and drive further efficiencies. As we continue to actively work to improve our overall balance sheet profile and prudently manage capital and risk, we believe we are well positioned to deliver attractive returns near-term and into the future.
Now I will turn it back to Bryan.
Bryan Jordan — President & Chief Executive Officer
Thank you, Hope. I’m excited about the results of the combined organization this year and what momentum I see as we look into 2022 and beyond. We have an attractive franchise, we have a very diversified business model in higher growth markets as well as a strong interest rate sensitivity that Hope described. So I think we’re very, very well positioned.
The merger continues to deliver revenue synergies and the team is highly focused on delivering value-added advice to clients with improved products and technology, all the while supporting our communities. I’m confident that we are well on our way to becoming a top-performing regional bank and delivering enhanced returns to our shareholders.
This concludes our prepared remarks. Juan, we can now open it up for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question comes from Ebrahim Poonawala from Bank of America. Please Ebrahim, your line is now open.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Thank you, and good morning.
Bryan Jordan — President & Chief Executive Officer
Good morning, Ebrahim.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Good morning, Bryan. Just around loan growth, the mid-single-digits guidance. Two things. One, what are you assuming happens to the mortgage warehouse in 2022 year-over-year? How much of a drag is that? And secondly, in terms of the mid-single-digit growth, talk to us in terms of upside risks especially once you get the systems conversion done? I would think your market should outperform national GDP, which should probably lead to much stronger loan growth as things land back up. So give us a perspective on what could drive upside risk to that loan growth number?
Hope Dmuchowski — Chief Financial Officer
Yeah. This is Hope. I’ll be happy to take that. Fannie and Freddie project a 20% decline in origination volume in Q1 and a 29% decline in full year 2022. So we are in line with that on a balance as well as compressing spread. However, we hope to mitigate the decline by developing customer-specific strategies to increase utilization and using some of our available tools in both pricing and other credit metrics as we move forward in the business.
Susan Springfield — Chief Credit Officer
This is Susan, Ebrahim. I’ll add-on in terms of potential upside to loan growth. Just looking at the momentum that we had in the second half of 2021 third and fourth quarter, we saw some period end loan growth in the number of our core markets was up significantly. So the Mid-Atlantic, North Carolina market, Middle Tennessee, Georgia and really the whole State of Florida, we saw quarter-over-quarter growth in those markets ranging from over 3% to almost 9% and in C&I — largely C&I some CRE and some consumer.
And then as mentioned earlier — so I think, Bryan you mentioned, when you think about — these markets are very vibrant. And when you looked at what happened during the pandemic and both businesses and individuals moving into many of these markets, we have seen opportunity to do more with existing clients as well as with new prospects. That’s the other thing I saw Ebrahim as I looked at new production in the second half of the year.
Third and fourth quarter we saw increased percentage of new-to-bank clients while also serving existing clients. That’s the combination of our existing RMs and our track record of attracting seasoned RMs in many of these growth market. And in the specialty businesses that were mentioned previously, equipment finance has really been one of our main synergy items. We’ve seen good growth in equipment finance, franchise finance, asset-based lending. So I do think, as you mentioned, there could be upside assuming things with the economy continue to improve.
Bryan Jordan — President & Chief Executive Officer
Ebrahim, two additional thoughts, first on mortgage warehouse lending. As Hope described, we think there are a number of levers there, while we would broadly acknowledge that refinance activity is likely to drop and overall purchase money activity is going to drop. We have done an outstanding job in my view of sort of repositioning the portfolio and gaining additional market share from existing customers. So while we could be down a bit, I think we’ve done a good job taking the lows out of that business by repositioning with our customer base.
And as Susan said, we see great opportunities in these higher growth markets that we serve both with existing customers and new-to-bank. I was really pleased with all of the great work our bankers did with new-to-bank customers. And as we said in previous calls, we like everybody saw a bit of a headwind in commercial real estate as projects went to the permanent markets earlier and it really put pressure.
Originations have been good there. And I think I mentioned in my opening comments, our commitments were up strongly at year end. Then I look at that as a spring loading on the balance sheet that will drive growth, particularly as it relates to CRE where those projects will fund up over time. So we’re pretty optimistic about our ability to do, as Hope said, deliver something in those mid-single-digits.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Got it. And if I may one more, Bryan, just big picture. When you talk to shareholders, I think look back any reasonable timeframe, two, three, four, five years, the stock has underperformed regional bank peers. Talk to us in terms of the importance of this year? And then as you emerge out of this integration of actually getting the stock to work, like what do you think is needed? And do you think 2022 will be the year we actually finally see some of these — the power of the First Horizon franchise actually work for shareholders?
Bryan Jordan — President & Chief Executive Officer
Yeah. It’s a good question and I think an important one. We have I think in 2022 a number of things that I think will be a catalyst for not only ’22, but I think will start to prove out even further in ’23. First, one of the things that sort of been an overhang that impacted us leading into the transition is our credit performance from the great financial crisis. And I think through this cycle our credit team led by Susan along with our land bankers led by Anthony and Anthony Restel and David Popwell proved that we’ve got very strong credit quality in the balance sheet. So I think we’ve proven that repositioning the balance sheet has work.
We’ve also been dealing with the pandemic and integrating two large organizations in that period of time. And we feel very strongly that that organization, IBERIABANK First Horizon combined truly is better together. We’re seeing great growth opportunities, we’re seeing the benefits of being in 15 of the largest 20 MSAs in the South having strong share, great bankers and the ability to deliver differentiated level of service with a strong balance sheet. And while 2022 will have a bit of reset simply because some of the PPP earnings and purchase accounting accretion will be offset, we think with the rate increases that are likely to occur, Hope mentioned, I think March, July and December, December largely being a driver of ’23 rather than ’22 and growth in the balance sheet. We’re very optimistic, not only about our repositioning this year and delivering shareholder value, but also how it positions us for creating shareholder value in ’23 and beyond.
Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst
Got it. Thanks, Bryan.
Bryan Jordan — President & Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from Brett Rabatin from Hovde Group. Please, Brett, your line is now open.
Brett Rabatin — Hovde Group — Analyst
Good morning, everybody.
Bryan Jordan — President & Chief Executive Officer
Good morning, Brett.
Hope Dmuchowski — Chief Financial Officer
Good morning.
Brett Rabatin — Hovde Group — Analyst
I wanted to first ask on the fee income guidance for 1Q relative to ’22. It seems like the guidance implies that the fee income is fairly soft in the first quarter and then kind of builds thereafter. And so I want to make sure that that was sort of how you were thinking about fee income. And then in terms of 1Q, would you describe the fixed income business as the primary driver of that decrease? And maybe talk about what you’re expecting for average ADR for the quarter?
Bryan Jordan — President & Chief Executive Officer
Yeah. So fee income is seasonal in our business in two ways. One, mortgage activity tends to be lower in the first part of the year and the number of business days also and the fixed income business also impacted. As we look at our average daily revenue across the year, first quarter included, we think it can moderate a little bit from 2021 levels. But we think fixed income will be continued to be reasonably strong given the amount of excess liquidity that still exist in the system, the steepness of the yield curve.
And so I would expect something that looks more like for the full year, something that looks more like what we saw in the fourth quarter. But there is seasonality in a number of these businesses and so first quarter can be a little bit softer. It will build as we get into the second quarter and beyond in our view as we get back to the stronger seasons.
Brett Rabatin — Hovde Group — Analyst
Okay, great. And then on the expense guide and just the integration and the expense savings this year. It’s my understanding that the bulk of the expense savings comes more in 2Q and 3Q rather than the first quarter with the conversion. Can you maybe talk about the remaining expense savings from the transaction and the timing of that this year?
Hope Dmuchowski — Chief Financial Officer
Yeah. This is Hope. I’ll take that. We will not have much in Q1 with conversion in February and our associates that are leaving us after conversion leaving in March. We expect to see the majority comes through in Q2 and Q3. But as I mentioned in my prepared remarks, it will be offset by our increasing inflationary environment as well as our annual raises that will go into effect in March. That will be muted during the quarters, although we will be achieving the expense savings.
Brett Rabatin — Hovde Group — Analyst
As it relates to that, Hope, does the inflationary pressures that everyone has seen has that not changed your outlook from an expense perspective meaningfully?
Hope Dmuchowski — Chief Financial Officer
I guess, how you define meaningfully. We have changed our guidance for 2022 from prior where we said we thought Q2 and Q3 would decrease in Q1 and now we’re saying we expect it to be flattish throughout the year. So that is a change from prior guidance.
Brett Rabatin — Hovde Group — Analyst
Okay. Fair enough. Thanks for the color.
Bryan Jordan — President & Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from Christopher Marinac from Janney Montgomery Scott. Please, Christopher, your line is now open.
Chris Marinac — Janney — Analyst
Hey, thanks. Good morning. Just to get a little more granular on the capital markets business, Bryan and Hope. Do you think that the clients with all of their cash and liquidity, does that help the business as you get through the first quarter? I understand seasonality that you just mentioned, but just that liquidity there was a lot different than what existed the last time that the Fed tightened. Does that help the business as this year plays out?
Bryan Jordan — President & Chief Executive Officer
Yeah. We think it does, Chris. The fixed income business is impacted by a bunch of different dynamics. But when you have a steepening yield curve like we’ve seen over the last several weeks and you see that much liquidity on the side lines, we think it will be helped. And while that’s to be seen, I’m optimistic that we will see a continued activity there. The first quarter, so we’re on the 20th day of January, our average daily revenues this far in the quarter — thus far in the quarter are right in line with our expectations. And we think that as long as that steepness remains in the curve, liquidities in the system, we think that that can be a very, very good business for us.
Chris Marinac — Janney — Analyst
Okay, great. Thank you for that. And then just a follow-up as it pertains to some of the new bells and whistles that you’re going to get for the lending teams once the systems conversion is done. Is it proper to kind of expect maybe two quarters the past line before you can kind of judge some of the new progress on new loans? I’m just kind of curious what’s the fair expectation there.
Bryan Jordan — President & Chief Executive Officer
In terms of — are you asking about volumes?
Chris Marinac — Janney — Analyst
Volumes and new business generation, just some of those sort of organic indicators as you have the systems conversion behind you.
Bryan Jordan — President & Chief Executive Officer
Yeah. I think it will continue to build. There is no doubt about that. When you’re going through an integration, you’re in a inward focus. People are focused on transitioning existing customers, reaching out. We’re also, like everybody else in the industry, dealing with the transition from LIBOR to SOFR or something else. And then I would say, in that context, I’m really excited about the momentum we showed. C&I loan growth for example in the fourth quarter was I think up 2% roughly, 8% annualized, commitments were up. And I think that momentum is building. And I think our teams have done a really good job of doing that, and as I referred earlier, in the framework of our credit risk appetite. So I’m encouraged by that momentum. I think that will continue to build as we see further strengthening in the economy, as we see sort of the receding of the Omicron variant and hopefully lesser impactful waves as we go forward. But I think while we get through this integration, I think that momentum will build.
Susan Springfield — Chief Credit Officer
Chris, hey, this is Susan. I agree with Bryan. When we talked earlier about the revenue synergies and we’ve talked couple of quarters about the very strong referrals, and you referred to them as new bells and whistles, but new products, new specialty lines. So referrals into equipment finance, asset-based lending, franchise finance. And I would say reversed referrals from specialty teams into our markets is building as well. And as bankers see other bankers be successful, introducing specialty businesses, additional cash management, treasury management products, we do think that will continue to build among the bankers in all of our markets in specialty business post-conversion.
Chris Marinac — Janney — Analyst
Great. Thank you both for that color. I appreciate it.
Bryan Jordan — President & Chief Executive Officer
Thank you, Chris.
Operator
Thank you. The next question comes from Michael Rose from Raymond James. Please, Michael, your line is now open.
Michael Rose — Raymond James — Analyst
Hey, good morning. Thanks for taking my questions. Just back to the fixed income business, you mentioned that the curve remained steep, but what if we do get a couple of rate hikes and the curve does flatten out? Is that — I think the guidance that you’ve given previously for ADRs was somewhere in the 1 to 1.2. In that scenario or any other scenarios, could you see downward pressure on that ADR guide? Thanks.
Bryan Jordan — President & Chief Executive Officer
Yeah. If you get a much flatter yield curve or you get an inverted yield curve, it will be less attractive for that business without a doubt. We don’t expect that, but that is a possibility.
Michael Rose — Raymond James — Analyst
Okay. That’s helpful. And then, Bryan, as we think about this coming year, obviously, there has been a lot of work behind the scenes. What are some of your strategic priorities as we move through the year both on the revenue and on the expense side just in broad strokes? Thanks.
Bryan Jordan — President & Chief Executive Officer
Yeah, yeah. First and foremost, it is working with our customers and our communities to get through this integration. There has been a tremendous amount of effort into the planning, the testing, the retesting and the re-retesting. And we’re now doing a lot of communication, outbound calling with our customers, getting folks logging in the micro sites and things like that. So first and foremost it’s getting the integration done.
Beyond that, it is as Susan said, taking the broader product set that we have in the organization and continuing to drive synergies across our equipment finance business or our mortgage business. Mortgage, for example, is something we’ve been out of for roughly 10 years in the First Horizon business, 12 years. So that’s a new tool in the old legacy First Horizon footprint. So capitalizing on those things.
And then thirdly, and maybe most importantly beyond the integration is, how do we take advantage of the huge growth opportunities that we have in these existing markets where we have a relatively small share, the ability to attract bankers and proven ability to attract bankers, and to develop a customized go-to-market approach in very attractive markets. And so we’re very, very focused on how we take all of those and drive a tremendous amount of organic growth and build that momentum for the next several years.
Michael Rose — Raymond James — Analyst
Great. Thanks for taking my questions.
Bryan Jordan — President & Chief Executive Officer
Sure thing.
Operator
Thank you. The next question comes from Steven Alexopoulos from J.P. Morgan. Please, Steven, your line is now open.
Steve Alexopoulos — J.P. Morgan — Analyst
Hey, good morning, everyone.
Bryan Jordan — President & Chief Executive Officer
Hey, Steve.
Hope Dmuchowski — Chief Financial Officer
Good morning.
Steve Alexopoulos — J.P. Morgan — Analyst
I wanted to start — so regarding the outlook for expenses to be up mid-single-digits ex the incentives. Bryan, after almost 10 years of cutting expenses non stop, are you guys now running out of wood to chop there, because in the past, we’ve seen you offset this?
Bryan Jordan — President & Chief Executive Officer
Yeah, I don’t think we’re running out of wood to chop. As Hope said, we will realize a fair amount more of our cost savings this year. But by definition and the way we’re realizing it, we still have some cost savings that will fall to the bottom line and are accretive in 2023. I think we’ve got a combination or a confluence of things. One is, we’re not immune to 7% plus inflation that others see and we think we can moderate a significant amount of the inflation. We think that what we’re looking at is an environment where our costs will go up some across a number of different areas, but that we have opportunities to moderate that over the next couple of years.
So a big focus for us will be, once we get this integration done, and I think the way you think about that integration, we’ve frozen a lot of things for a couple of years other than making some systems investments and improvements, but from a process, thinking about the organization, we will continue to look at that in ’22 and ’23 through our team led by Randy Bryan who’s been leading the integration. So we’ve got a number of things that would fall into that category of additional wood to chop. So we think there are further cost reduction opportunities we can use to offset some of these headwinds that inflation puts on the business.
Steve Alexopoulos — J.P. Morgan — Analyst
Okay.
Hope Dmuchowski — Chief Financial Officer
Steve, what I’ll add to that is, just like every other bank out there, you have the inflationary pressures, but we’ll also be looking at our cost cuts and how we redeploy them to help us build the franchise by investing in technology, people and products.
Steve Alexopoulos — J.P. Morgan — Analyst
Okay. That’s helpful. Then — and Bryan, you mentioned, companies are inward-looking, right, while you’re going through an integrations, particularly the system integration. When do you see the company moving more fully back on offense, right, being more outward-looking? Does that happen in 2Q? And then it’s interesting, the comment better together, compared to other southeast banks, how should we think about this new company from a growth perspective?
Bryan Jordan — President & Chief Executive Officer
Yeah. So I think to be very, very fair to our bankers, I think they’ve done a great job managing an inward focus and an outward focus and doing a good job keeping both balls in the air. We can put down the inward integration focus ball. So yeah, I think in the second quarter, we won’t be juggling that one anymore and we’ll be focused exclusively on sort of that outward go-to-market approach.
I think it’s hard to say, okay, relative to south eastern peers, how will you do, but I firmly believe that given our approach to markets, our product set, and most importantly, our geography and differentiated proposition, I think we can be better than most by executing day-in, day-out on really being differentiated for customers. Sometimes our product people get frustrated when they hear this or when I say this, but nothing we do is unique in the sense that all of our products are commodities. I say our money is no greener and our loan documents are no easier to read. So where we make a difference is in our people and the way we deliver for our customers. I think we truly are differentiated there. You couple that with great geography, I think we can be extraordinarily good in terms of delivering value in the southeast.
Steve Alexopoulos — J.P. Morgan — Analyst
Okay, great. Thanks for taking my questions.
Bryan Jordan — President & Chief Executive Officer
No, thank you. Good to talk to you.
Operator
Thank you. The next question comes from Jared Shaw from Wells Fargo Securities. Please, Jared, your line is now open.
Jared Shaw — Wells Fargo Securities — Analyst
Hey, good morning. I guess, when looking at the expectation for earning asset growth, what’s your expectation for funding with a 15% assumed beta on deposits? Do you think that deposits actually really grow in ’22 or are you expecting to utilize a lot of that cash position?
Bryan Jordan — President & Chief Executive Officer
Yeah. Jared, this is Bryan, Hope may have a slightly different view. I think deposits will get drawn down some over the course of the year. I think our perception of the marketplace today is excess liquidity is not unique to our balance sheet, it is endemic across the — I shouldn’t use endemic in a pandemic. It is across the industry. So at the end of the day, we think that there’s sort of a balance between what happens with deposits and what happens with rates, but we think 15% beta, which is not all that different than the lag that people saw or that we saw coming out of the Great Financial Crisis is likely to be a good place to start our modeling. That lag comes out in subsequent years, but we think that there’s an opportunity for a little bit of deposit rate lag in the near-term.
Hope Dmuchowski — Chief Financial Officer
I agree with everything Bryan said. We spent a lot of time on kind of what the right scenario was. And with the excess liquidity in the system, obviously zero beta seems to make sense. However, as we get to a more normalized post-pandemic environment, I think the environment is going to get a lot more competitive. Our peers may start trying to feed off price on a client relationship basis, which will require I think the industry to move forward. Eventually, clients will start asking to make some money on their deposits, especially where they have multiple relationships with a company. So I think it’s less about the liquidity and more about just the competitive landscape probably driving up deposit pricing this year.
Jared Shaw — Wells Fargo Securities — Analyst
Okay, thanks. And then shifting to the allowance in credit, talking about getting closer to the point where you start building allowance from here, we’re still pretty far above the day one level of 110, and then obviously, you have the benefit of the acquisition with the double mark there. Do you think that you actually get to the day one level before building or maybe we don’t assume it gets back to day one with the improving economic backdrop?
Hope Dmuchowski — Chief Financial Officer
Jared, we are — we see probably two more quarters of reserve releases based on what we know today and the outlook for the economy. We may need to start building reserves in the second half of the year. In terms of an outlook for ACL, probably in the 115 to 120 basis points, just a little bit higher than your 110 that you mentioned, but roughly there. Obviously the models are quite complex, but hopefully that answered your question.
Jared Shaw — Wells Fargo Securities — Analyst
Yes.
Bryan Jordan — President & Chief Executive Officer
I’m sorry, Jared, I was going to say CECL creates some interesting dynamics. The day you book a loan under CECL, you effectively book it, let’s say, on a 1% reserve, you book it at 99, you basically book the loan growth and setup a 1% reserve. And so there’s a dynamic in this transition phase here, while we think credit quality is likely to continue to get better and likely could drive some further reserve releases headed towards that day one number. At the same time, loan growth is going to drive some offsetting impact and that’s just simply because of the way CECL mechanically works.
Jared Shaw — Wells Fargo Securities — Analyst
Okay, thanks. And then finally from me, I guess, looking at the securities portfolio, I’ve heard you say you purchased the $700 million at 1.7% yield. Could you just sort of walk us through what caused the decline in yield when you look quarter-over-quarter with the average yields going from 148 to 143 with that growth? Is there a bigger restructuring behind that?
Bryan Jordan — President & Chief Executive Officer
No, there was no restructuring. That portfolio kicks off a tremendous amount of cash flow, so you’re just reinvesting at lower rates.
Jared Shaw — Wells Fargo Securities — Analyst
But you’re not reinvesting at lower rate, lower than 148, if you include that 170 that was purchased?
Hope Dmuchowski — Chief Financial Officer
No, no. That $700 million we added in the quarter about a 1.7% rate.
Bryan Jordan — President & Chief Executive Officer
That’s right, yes.
Susan Springfield — Chief Credit Officer
And the book yield on the cash flows that we got was around 80 basis points.
Jared Shaw — Wells Fargo Securities — Analyst
Okay. So should we expect to see in a stable rate environment or not assuming any rate moves, should we assume that securities yields grows now from here?
Bryan Jordan — President & Chief Executive Officer
Given the inherent steepness that’s crept into the yield curve, if that remains, you would expect that it would grow over time, yes.
Jared Shaw — Wells Fargo Securities — Analyst
Okay. Yeah, I guess, I’m just looking at the growth in average balances with the decline in interest income from that and just trying to reconcile it with the purchase at 170 yield.
Hope Dmuchowski — Chief Financial Officer
So remember that you’re looking at declining accretion benefit.
Jared Shaw — Wells Fargo Securities — Analyst
Okay. Thank you.
Hope Dmuchowski — Chief Financial Officer
Versus — okay, yeah.
Operator
Thank you. Our next question comes from Brady Gailey from KBW. Please, Brady, your line is now open.
Brady Gailey — Keefe, Bruyette & Woods — Analyst
Yeah. Thank you. Good morning, guys.
Bryan Jordan — President & Chief Executive Officer
Hey, Brady.
Brady Gailey — Keefe, Bruyette & Woods — Analyst
In addition to your asset sensitivity, it seems like First Horizon has a pretty big lever just because 19% of your average earning assets are in cash, your bond book is still only about 11% of average earning assets. So it feels like you could easily be throwing more cash into the bond book. We have seen the long end of the curve increase pretty nicely here. I know it’s still pretty low, but how do you think about materially increasing the size of the bond book going forward?
Hope Dmuchowski — Chief Financial Officer
Brady, this is Hope. And as I’m in my seventh week here and I’ve only been to one [Indecipherable], I’ll tell you we are spending a lot of time talking about this. I know we’ve got a lot pressure externally on that. So we are looking at it especially in a rising rate environment. We need to look at how we position our balance sheet to protect against the downside as well as what the right amount of cash we have. I expect that in 2022 and 2023, we will see cash leave as the competitive landscape increases and we’re not willing to price up for non-relationship deposits. So it’s a short way of saying as a new CFO, stay tuned to next quarter, I’ll have a little bit more information for you on that.
Bryan, I don’t know if you want to add anything?
Bryan Jordan — President & Chief Executive Officer
No, I think that’s right. I think the big driver in the near-term is sort of opportunistic investment because we recognize we have a fair amount of excess cash, similar to what we did in the fourth quarter, third and fourth quarter. And as you pointed out, as rates move away from zero, we’ve got to add more fixed rate assets to protect against the downside, and the bond portfolio is a place to do that. So my guess is, as we look at this balance sheet, we’ll have opportunities to put some of that cash to work at higher yielding points and create some incremental earnings, sort of to your thesis, Brady, that we have a bit of a lever there in addition to a floating rate loan portfolio.
Brady Gailey — Keefe, Bruyette & Woods — Analyst
All right. Then my second question is really on the buyback. If you look last year in 2021, First Horizon repurchased 4% to 5% of the company, which was pretty notable. So it feels like growth is going to be better this year. I know you kind of prioritize growth over buybacks as you look at capital, but how should we think about the buyback? I mean, the stock is still cheap. Do you think that First Horizon will still be notably active in the buyback this year?
Bryan Jordan — President & Chief Executive Officer
We do think that the stock is cheap, and as you said, we do prioritize organic growth over repurchase activity. And while we think that the strength of the balance sheet will continue to grow through organic growth and there will be opportunities to deploy it there, as Hope alluded, we’re comfortable in that 9.5% to 10% CET1 range, we’re at the high end of that range now. So I think that provides us the opportunity at the right spots to take advantage of what we think are attractive levels to buy our stock. So yeah, it will continue to be one of the levers we use from time to time to get excess capital out of the organization, and we’ll balance it between organic growth and getting our capital ratios right for the economic environment.
Brady Gailey — Keefe, Bruyette & Woods — Analyst
All right, great. Thanks guys.
Bryan Jordan — President & Chief Executive Officer
Thank you.
Operator
Thank you. [Operator Instructions] We currently have no further questions. I will hand over back to Bryan for any final remarks.
Bryan Jordan — President & Chief Executive Officer
All right. Thank you, Juan. I appreciate your help this morning. Thank you all for joining our call. We appreciate you taking time to visit with us this morning, I know it’s an otherwise busy day. Thank you for your interest in the company. If you have any further questions or need additional information, please reach out to any of us. We’ll be happy to try to get it for you. Hope everybody has a great day.
Operator
[Operator Closing Remarks]