Q4 2021 First Horizon Corp Earnings Call
Welcome to the first Alright, Sone Corporation fourth quarter 2021 admin relief. My name is one and I will be coordinating your call. Today. If you would like to ask a question. During the presentation. You may do so by pressing star one on your telephone keypad.
I will now hand over to your host Ellen Taylor head of Investor Relations to begin with B cell in go ahead.
Hey, Thanks, Warren 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.
Then we're really excited to have the newest member of the executive team Chief Financial Officer Hudson Celski.
To cover off on our financial and 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.
Today, we will reference our earnings presentation, which is available on our website at IR Dot first horizon Dot com.
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 two 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 them.
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 three of our presentation and last but not least our comments reflect our current views and you should understand that we arent obligated to update them.
And now I'll hand, it over to Brian . Thank you Alan Good morning, everyone and thank you for joining us.
Well I'll start on slide five 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 ryzen <unk> and.
And the continued progress and results that we delivered once again, highlighting the benefit of our business model.
<unk> remains 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, a focus on expenses and improving credit quality resulted in EPS of <unk> 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 seven sets up 85 cents over 2020, driven by the benefit.
Iberia Bank merger.
While pressure on short term rates continued in the competitive landscape amplify our client focused value proposition with a broader product set continued to provide a point of differentiation and generate 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 costs has really paid off.
In the fourth quarter, our interest bearing deposit costs declined six 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 a 100 basis point rate shock across the yield curve.
As expected we continued 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 S. F O D pricing.
Expense control is an area of focus and expenses were down 1%. Despite a $3 million increase tied to special bonuses, we pay to our frontline associates, primarily designed to reward associates, who observe 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 one basis point and a 21% decrease in nonperforming loans.
A stabilizing economic outlook and overall credit quality improvement drove another robust reserve release with provision credit of $65 million in the quarter.
Our capital levels remain strong with a CET one 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.
Repurchase for the year.
This drove a year over year decrease of 4% and 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 'twenty two 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 impact of Covid in variance 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 them chassis.
While she joined our team less than two months ago. She has already added tremendous value.
Confident that her expertise for 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. Thank you Brian Good morning to you all I'm excited to be with you today.
I'd like to start off by saying I am 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 May all along the way I could not have asked for a warmer welcome from our first horizon team.
Thanks, Paul for the incredible Foundation, they have provided me and I'm excited about the future of our company.
Now starting on slide six which.
Which provides the highlights of the quarter some of which Brian has already covered overall our results reflect a solid quarter with improvement in core net interest income and continued strength in credit quality and capital return as.
As we look toward 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 improvement in the economy.
Turning to slide seven.
We outlined the notable items in the quarter, which reduced our results by $41 million after tax or <unk> <unk> per share.
In addition to net merger related and notable items of $35 million, we recorded a $3 million noncash charge on retirement of the remaining legacy Iberia Bank Trust preferred securities.
6 million of deferred compensation costs, resulting from litigation tied to accompany that was fully divested more than 10 years ago.
$10 million tied to derivative valuation adjustments related to prior visa class B share sale.
This was triggered by the fact that visa funded additional escrow balances related to their litigation prior to year end.
Turning to slide eight.
We provide highlights on our adjusted financial and key performance metrics for the quarter.
We generated better than expected <unk> 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 in 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 a 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 3% decline in earnings per share adjusted.
Adjusted TCE was 17, 5% and adjusted ROE TCE 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 24 cent impact tied to return of capital and an 8% decline tied to the mark to market impact on the securities portfolio.
Turning to slide nine.
We are really pleased to report that our fully taxable equivalent NII was up $7 million linked quarter.
A $5 million reduction in net merger accretion and PTP 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 asset.
Which more than offset the impact of spread tightening in the quarter.
During the quarter, we continued to put additional excess cash to work with security purchases of an incremental $700 million at a yield of approximately one 7%.
We ended the quarter with excess cash of $14 1 billion and our securities to interest, earning assets totaled a 11%.
As the rate environment changes, we will continue to reevaluate opportunities to redeploy excess cash and manage our overall asset sensitivity prudently.
Our net interest margin was up one basis point linked quarter and stable on a core basis.
We lowered our interest bearing deposit cost by six basis points, which helped drive a four 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 we're 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 entitled 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 decrease tied to a revenue sharing adjustment, which more than offset the benefit of seasonally higher transaction volumes in the quarter.
Other noninterest 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 Brian mentioned earlier.
Enel costs also reflected lower salaries and benefits, reflecting merger sales and lower <unk> costs, which were partially offset by an increase in FICA taxes from unusually low third quarter levels.
Outback servicing remained stable the slight increase was primarily from branding initiatives and advertising related to the upcoming conversion.
Noninterest 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 costs.
On slides 12, and 13, we covered loan and deposit growth.
Our efforts to broaden our reach and market penetration across our footprint helped to 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.
Brian 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 generate 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 continue to drive our balance sheet growth again, this quarter with $1 8 billion increase in average DDA or 7%, which.
Which continued to further improve the deposit mix.
The success and benefit of driving down our interest bearing deposit costs, which were reduced by six basis points to 11 11 basis points for the quarter and also reduced total funding cost by five 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 nonperforming loans.
Our allowance coverage ratio remains healthy at 134% and 148% 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.
Second quarter with a provision credit.
Turning to capital on Slide 15, our CET one.
<unk> of nine 9% remained strong but decreased modestly linked quarter as Brian mentioned, we returned $225 million of capital to common stockholders during the quarter, including a $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 $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. They are largely tied to commercial loans with additional synergies tied to debt capital markets mortgage and private client wealth. We are extremely focused on retaining and growing our client base and leveraging our.
And it set of products and services.
Turning to slide 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 three 7% with real GDP growth of around four 5% and our house price index increase of four 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 isn't a fair amount of volatility and 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 rates sensitivity connected 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 eight 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 noninterest 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 noninterest expense remained relatively stable with lower incentives and commissions, resulting from fee income and the continued benefit of merger saves, which will be offset by the impact of inflationary pressures.
Our full year outlook for net charge offs is in the five to 15 basis point range and while credit.
Quality continues to be strong we expect that 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 CET one ratio to remain in the nine 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 noninterest 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 noninterest 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 calls for charge offs to be stable to up modestly with continued positive credit grade migration and reserve outflows near term on.
On capital as with the full year outlook, we expect our CET one ratio to remain in the nine 5% to 10% range.
Given our recent performance our 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 system conversion, we are well positioned to capture additional revenue synergies as well as continue to pivot expenses and capital investments were 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.
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 Brian .
Thank you.
I'm excited about the results of the combined organization this year and what momentum I'll say 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 the strong interest rate sensitivity that hope described.
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 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, one we can now open it up for questions.
Thank you if you would like to ask a question. Please press the star followed by one on your telephone keypad now if you turn your mind. Please press the star followed by two when preparing to ask a question. Please ensure your phone is on mute locally.
First question.
<unk> <unk> from Bank of America. Please Hey, Brian Your line is now open.
Thank you and good morning.
Hey, good morning, everybody.
Good morning, Brian just on loan growth the mid single digits guidance.
Two things one.
What are you assuming happens to the mortgage warehouse.
<unk> year over year, how much of a drag is dead 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.
Thank you Mark it should outperform.
<unk>, GDP, which would probably lead to much stronger loan growth those things ramp back up can you give us a perspective on what could drive upside risk to that loan growth number.
Yes, it does have I'd be happy to take that Fannie and Freddie projected 20% decline in origination volume in Q1, and a 29% decline in full year 2022. So we are in line with that on our balance as well as compressing spreads. However, we hope to mitigate the decline.
Developing customer specific strategies to increase utilization and using some of our available tools and bulk pricing.
And other credit metrics as we move forward in the business.
And then this is Susan Ebrahim I'll I'll add on in terms of potential upside to on loan growth just looking at the momentum that we had.
In the second half of 2021 third and fourth quarter.
We saw.
So 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% almost 9%.
And C&I Laurie.
Largely C&I, some Cree and some consumer.
And then as mentioned earlier, so I think because you mentioned that when you think about those markets are very vibrant I mean, 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 prop.
But that's the other thing I saw ebrahim as I looked at the new production in the second half of the year.
Third and fourth quarter, we saw.
Increased percentage of new to bank clients.
Also serving existing clients, that's a combination of our existing <unk> and our track record of attracting seasoned <unk> and many of these growth markets and then the specialty businesses that were mentioned previously equipment finance.
It's really done 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 continued to improve.
Hey, Brian two additional thoughts first on mortgage warehouse lending.
Describe we think there are a number of levers there while we would broadly knowledge that refinance activity is likely to drop in overall purchase money activity is going to drop.
They 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.
Think we've done a good job.
Taking the lows out of that business repositioning with our customer base.
As Susan said we.
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.
As we've 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.
And I look at that as a spring loading of the balance sheet that will drive growth, particularly as it relates to Cree, where those projects will fund up over time, So we're pretty optimistic about our ability to do is hope to deliver something in.
In those mid single digits.
Got it and if I may one more Brian just big.
Big picture when you talk to shareholders I think look back any reasonable timeframe 2345 years the stock has underperformed.
Our 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 or do you think 2022 will be the year. When we actually finally see some of these the volatile the first horizon James actually work for shareholders.
Yes.
It's a good question and I think an important when we have I think in 2022, a number of things that I think will be a catalyst for not only 22, but I think we'll start to prove out.
Even further in 'twenty three.
First one of the things that sort of been an overhang that impacted us.
Into the transition as our credit performance from the Great financial crisis, and I think through this cycle.
Our credit team led by Susan along with our loan bankers led by Anthony and Anthony we're selling David Popwell prove that we've got very strong credit quality and the balance sheet too I think we've proven that that repositioning the balance sheet as work. We've also been dealing with the pandemic.
Integrating two large organizations in that period of time.
And we feel very strongly that that.
<unk> organization.
Barry Bank first Roz and 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 sale, having strong share great bankers and the ability to deliver a differentiated level of service with a strong balance sheet.
While 2022 will have a bit of a 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 2002.
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 'twenty three and beyond.
Got it thanks, Brian .
Thank you.
Thank you. Our next question comes from Brian <unk> from Hovde Group. Please Brad Your line is now open.
Good morning, everybody.
Morning, Brett.
Wanted to first ask on the fee income guidance for <unk> relative to 'twenty two 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 wanted to make sure that that was sort of how you were thinking about fee income and then.
In terms of <unk> is that would you describe the fixed income business is the primary driver of that decrease and maybe talk about what youre expecting for average ADR for the quarter.
Okay.
Yeah.
So fee income is seasonal in our business.
Two ways, one mortgage activity tends to be lower in the first part of the year and the number of business days also in the fixed income business also impacts it.
As we look at our average daily revenue across the year first quarter included we think it could 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.
And the system the steepness of the yield curve.
And so I would expect something that looks more like for the full year or something that looks more like what we saw in the fourth quarter, but certainly there is seasonality in a number of these businesses and so first quarter can be a little bit softer.
Will build as we get into the second quarter and beyond.
Our view is as we get back to the stronger seasons.
Okay.
Great and then on the expense guide and just the integration.
And the expense savings this year.
Is my understanding.
The bulk of the expense savings comes more in <unk>.
<unk> and <unk>, 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.
So I'll take that we will not have much in Q wallet conversion in February and our associates that are leaving are after conversion, leaving in March we expect to see the majority come through in Q2, and Q3, but as I mentioned in my prepared remarks that will be offset by our increasing inflationary.
<unk> 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.
As it relates to that hope is the inflationary pressures that everyone is seeing is that not changed your outlook from an expense perspective meaningfully.
I got to define how you define meaningfully we have changed our guidance for.
2022 from prior we said, we thought quarter, Yes, Q2, and Q3 with decrease in Q1 and now we're saying we expect it to be flattish throughout the year. So that is a change to our prior guidance.
Okay fair enough thanks for the color.
Thank you. Thank you.
Question comes from Christopher <unk> from Janney Montgomery Scott. Please <unk>. Your line is now open.
Hey, Thanks, Good morning, just to get a little more granular on the capital markets business volume and how do you think that the clients with all of our cash and liquidity that does that help the business as you get through the first quarter I understand the seasonality that you just mentioned such as that liquidity.
A lot different than what exists in the last time, the fed tightened does that help the business as this year plays out.
Yeah, we think it does Chris.
<unk>.
The fixed income business is impacted.
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 sidelines, we think it will be helped.
Wow.
<unk>.
To be saying I'm optimistic that we will see 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.
We're right in line with our expectations and we think that as long as it remains in the curve liquidities in the system, we think that that can be.
Very very good business for us.
Okay, great. Thank you for that and then just a follow up as it pertains to some of the new bells and whistles that youre going to get for the lending teams. Once the systems conversions done is it proper to kind of expect maybe two quarters in the past lines, where you can kind of judge some of the new progress on new loans I'm, just kind of curious what's a fair expectation there.
In terms of.
Asking about volumes.
Volumes in new business generation, just some of those.
Organic indicators as you have the systems conversion is behind you.
Yes.
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 us over 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 in an <unk>.
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.
The.
Sort of the receiving of the omicron variant and hopefully.
Lesser impactful waves as we go forward.
But I think well, while we get through this integration I think that momentum will build.
Hi, This is Susan I agree with Brian when I, when we talked earlier about the revenue synergies and we talked a couple of quarters.
I'm seeing very strong referrals and you refer to them as new bells, and whistles with new products new.
New specialty lines.
Referrals into equipment finance asset based lending franchise finance and reverse referrals from specialty teams into our markets is building as well and banks.
Bankers the 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 and specialty.
Post conversion.
Great. Thank you both for that color I appreciate it.
Thank you Chris.
Thank you. The next question comes from Michael Rose from Raymond James Please Mike Your line is now open.
Hey, good morning, Thanks for taking my question just back to the fixed income.
Business you mentioned, if the curve remains speed, but what if we do get a couple rate hikes in the curve does flatten out or is that.
The guidance that you've given previously for <unk> was somewhere in the one to one two.
In that scenario or any other scenarios could you see downward pressure on ADR guide. Thanks.
Yes.
You get a much flatter yield curve or you get in edinburg inverted yield curve it will be less attractive for that business without a doubt.
We don't expect that but.
That is a possibility.
Okay.
That's helpful and then Brian as we think about that.
This coming year, obviously, there's been a lot of work.
<unk> 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.
Yes, yes.
First and foremost it is it is working with our customers and our communities to get through this integration theres been a tremendous amount of effort into the planning the testing the <unk> testing and the re read testing 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 is 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 ryzen business 12 years or 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.
Then to develop.
Our customer.
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.
Great. Thanks for taking my questions.
Sure thing.
Thank you. The next question comes from Steven Alexopoulos from Jpmorgan, Steven Your line is now open.
Hey, good morning, everyone.
Hey, Steve Good morning.
I wanted to start so regarding the outlook for expenses to be up mid single digit XD and <unk>.
Incentives.
Right after almost 10 years of cutting expenses nonstop.
Guys now running out of wood to chop there.
Past, we've seen you offset this.
Yes, I don't think were running out of wood to chop.
<unk> 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 some cost savings that will fall to the bottom line or accretive in 2023.
I think.
<unk> got a combination of confluence of things.
One is we're not immune to seven plus percent inflation that others see and we think we can moderate our significant amount of the inflation, we think that that what we're looking at is an environment, where our costs will go up some.
Across a number of different areas, but we have opportunities to moderate there over the next couple of years. So.
A big focus for us will be once we get this integration done.
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 and 22% and 23 through our.
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 award. The jobs. So we think there are further cost reduction opportunities, we can use to offset some of these.
Headwinds that inflation puts all new business.
Okay, Steve I'll add to that is just like every other bank out there do you have the inflation inflationary pressures and we will also be looking at our cost cuts and how we redeploy them to help us build the franchise and investing in technology people and products.
Okay.
That's helpful. Then.
And Brian you mentioned companies are inward looking rate, while youre going through an integration, particularly the system integration.
When do you see the company moving more fully back on offense for IP and more outward looking does that happen in <unk> and then.
We kind of have better together compared to other southeast banks, how should we think about this new company from a growth perspective.
Yeah.
So I think to be.
<unk> <unk>.
Very very fair to our bankers I think they've done a great job managing an inward focus in and out were focused on doing a good job keeping both balls in the air.
We can put down the inward integration focused 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 the outward go to market approach.
I think.
I think it's hard to say, okay relative to south eastern peers, how will you do but firmly believe that that given our approach to market our product set.
And most importantly, our geography.
And differentiated proposition.
We can we can be better.
Then the most.
By executing day in day out on really being differentiator for customers.
Sometimes our product people get frustrated when when they hear this but when I say this but nothing we do is is unique in the sense that all of our products are commodities I'll say, our money's no greener in our loan documents are no easier to read so where are we make a difference is our people and the way we deliver for.
For our customers and 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 south east.
Okay.
Okay, great. Thanks for taking my questions.
Thank you good to talk to you.
Thank you. The next question comes from Jared <unk> from Wells Fargo Securities.
Your line is now open.
Hey, good morning.
Yes, I guess when looking at the expectation for earning asset growth whats your expectation for funding.
The 15% assumed beta on deposits do you do you think that deposits actually really grow in 'twenty, two or are you expecting to utilize a lot of that cash position.
Yes Jared.
This is Brian 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 as excess liquidity is not unique to our balance sheet as it is endemic across the <unk>.
Shouldn't use endemic in a pandemic that is across the.
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 with rates, but we think <unk>.
15% beta which is not all that different than the lag that people saw 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 is an opportunity for a little bit of deposit rate lag in the near term.
I agree with everything Brian said, we spent a lot of time on kind of what the right scenario was note 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 and people are peers might even start time of the off price on a client relationship basis, which will require I think the industry can move forward. Eventually clients will start asking you to make some money on their deposits, especially where they have multiple relationships with the company. So I think it's less about the liquidity and more about just the competitive landscape probably driving.
Deposit pricing this year.
Okay. Thanks, and then.
Shifting to the allowance and credit.
Talking about getting closer to the point, where you start building allowance from here, we're still so pretty far above the day one level of 110, and then obviously you have the benefit of the acquisition with the with the double Mark there.
Do you think that you actually get to the day, one level before building or.
Maybe we don't don't assume it gets back to day, one with the <unk>.
Improving economic backdrop.
We are we think probably continue probably two more quarters of reserve releases based on what we know today.
Outlook for the economy.
They 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.
A little bit higher than your one Tim as you mentioned.
But roughly there obviously the models.
Are quite complex.
Hopefully that answers your question.
Go ahead.
I am sorry, Jared I was going to say it will create some some interesting dynamics. The day you book alone under say, so you're effectively book it assume a 1% reserve you book It at 99.
Basically book, the loan growth and set up a 1% reserve.
So there's a dynamic in this transition phase here.
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 same time loan growth is going to drive some offsetting impact and that just simply because of the way C. So mechanically work.
Okay. Thanks, and then.
Finally for me I guess looking at the Securities portfolio.
I've heard you say you purchase a $700 million at 1.7% yield.
Can you just sort of walk us through what caused the decline in yield when you look quarter over quarter with the with the.
Average yields going from $1 48 to $1 43 with that growth is there a bigger restructuring behind that.
No there was no restructuring.
That portfolio kicks off a tremendous amount of cash flow. So you're just reinvesting at lower rates.
But youre not reinvesting at lower rates lower than $1 48.
Hello.
So that $1 70 that was purchased no none.
$700 million.
Added in the quarter was that a one 7% that's right.
And the book yield on the cash flows that we got was 80 around 80 basis points.
Okay.
So should we expect to see.
Stable rate environment, but we're not assuming any rate moves should we assume that securities yields grows now from here.
Given the inherent steepness has crept into the yield curve that remains you would expect that it would grow over time, yes.
Okay.
Okay, I guess I am just looking at the growth in average balances, but the decline in interest income from that I'm, just trying to reconcile it with the.
With the purchase of 170 yield.
So remember that Youre looking at <unk>.
Declining accretion benefit.
Okay.
Thank you versus okay yeah.
Thank you. Our next question comes from Brady Gailey from Gabe BW. Please Brady your line is now open.
Yes. Thank you good morning, guys.
Hey, Brian .
In addition to your asset sensitivity. So it seems like Chris Horizon is a pretty big lever.
Because you know 19% of your average earning assets are in cash.
Your bond book is still only about 11%.
Average, earning assets, but it feels like.
You could easily be growing more cash into the bond book.
We have seen the long into the curve.
The 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.
Brady this is hoping as I'm in my seventh week here and I'm always enter one alcohol I'll tell you we are spending a lot of time talking about them.
We've got a lot of pressure externally on that but we are looking at 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 as we have I expect that in 2022, and 2023 won't be cash leave as the competitive landscape increases and were not willing.
To price up or up non relationship deposits.
Yes, the short way of saying that the new CFO stay tuned next quarter I'll have more information for you on that.
Brian do you want to add.
I think that's right I think the big driver in the near term as 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 fourth quarter and as you pointed out as rates move away from zero now we've got to add more fixed rate assets to protect against the downside.
And the bond portfolio as a place to do that so my guess is as we as we look at this balance sheet will have opportunities to put some of that cash to work in 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.
The loan portfolio.
Alright.
And then my second question is really on the buyback. If you look last year in 2021, your first horizon repurchase 4% to 5% of the company, which was pretty notable so it feels like growth is going to be better. This year and I know you kind of prioritize growth over buybacks as you look at capital.
How should we think about the buyback I mean, the stock is still achieved do you think that your first horizon will still be.
Notably active in the buyback this year.
Yeah, we do think that the stock is cheap and as you said, we do prioritize organic growth over over repurchase activity.
While we think that the strength of the balance sheet. We will continue to we will continue to grow through organic growth and there'll be opportunities to deploy it there.
Hope alluded, we're comfortable in that 9.5% to 10% CET one range. We're at the high end of that range now. So I think that provides us the opportunity at the right spot 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 get excess capital out of the organization and we will balance it between organic growth and getting our capital ratios right for the economic environment.
Alright, great. Thanks, guys.
Thank you.
Thank you as a reminder to ask any further questions. Please press the star followed by one on your telephone keypad now.
We got running their questions I will hand over back to Brian for any final remarks.
Alright, Thank you all and 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 our interest in the company. If you have any further questions or need additional information. Please reach out to any of us will be happy to try to get it for you I hope everybody has a great.
Pat.
This.
Today's call. Thank you so much for joining you may now disconnect your lines.
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