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First Horizon National Corp (NYSE:FHN)
Q4 2020 Earnings Call
Jan 22, 2021, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the First Horizon Corp. Fourth Quarter 2020 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Ellen Taylor. Please go ahead.

Ellen A. Taylor -- Head of Investor Relations

Hey, good morning, everybody. Thanks so much for joining us. We know it's been quite a start to the year.

On our call today, our CEO, Bryan Jordan; and CFO, BJ Losch will provide an overview of our results, and then we'll be happy to take some questions. We're also really pleased to have Susan Springfield, our Chief Credit Officer, with us today.

On remarks, we'll reference the earnings presentation which is available at ir.fhnc.com; and I need to remind you that we will make forward-looking statements that are subject to risks, uncertainties, and you should review the factors on Page 2 of our presentation and in our SEC filings that may cause our results to differ from our expectations. Our statements today reflect our views as of today and we aren't obligated to update them.

We also will address our adjusted results in our remarks, which are non-GAAP measures, and please review the GAAP information in our supplement and on Page 3 of our presentation.

And so now, I'm going to give it to Bryan.

Bryan Jordan -- Chief Executive Officer

Thank you, Ellen. Good morning, everyone. Thank you for joining our call.

I guess it would be the understatement of the year to say 2020 was not an unusual year. It was a very unusual year and proved to be one of unprecedented challenges, not only for our industry but for our economy, our society.

I'm extremely pleased, however, with the great work that First Horizon has accomplished in 2020.

We continue to serve our customers, our communities and our associates throughout the pandemic with PPP loans, charitable contributions and by offering our associates increased flexibility and benefits, while demonstrating prudent risk management.

We have made impressive progress on the integration of our MOE despite the pandemic, enhancing our scale and providing opportunities to capitalize on additional growth opportunities in attractive markets.

We also continue to focus on delivering strong shareholder value. Fourth quarter results were solid with continued relative underlying strength in PPNR, given resilient results in our counter-cyclical businesses and continued expense discipline.

Loan demand remained muted, given the current -- continued economic and political uncertainty. However, our lower risk loans to mortgage companies business has provided some nice offset to these headwinds.

At the same time, we continue to make progress on lowering our funding costs in the face of increasing levels of liquidity.

On the expense front, we generated a total of $56 million of annualized merger-related cost saves in the quarter and now have increased our initial target of a net $170 million to $200 million.

Our capital levels remained healthy with the CET1 ratio up nearly 50 basis points from last quarter to 9.67%, and we grew tangible book value per share by 3% to $10.23 at quarter end, reflecting ongoing earnings momentum.

We also believe we are well reserved for future loan losses, given the benefit of the merger accounting and prudent stance on reserves. And our internal stress test results in December highlight our ability to navigate the Feds severely adverse economic scenario with more than adequate capital levels, as well as a lower risk nature of our loan portfolios.

It is important to note that as we entered the year, we are increasingly optimistic about our path to economic recovery as we expect to see the rollout of vaccines accelerate near term, providing benefits in the back half of the year. But we will continue to monitor the landscape carefully.

We remain confident that the strength of our highly attractive franchise and the benefits of our merger of equals position us well to capitalize on tremendous opportunity when the pandemic-related slowdown ends, and we are strongly committed to delivering top quartile returns over the medium-term.

With that, I'll hand it over to BJ. BJ?

William Losch -- Chief Financial Officer

Thanks, Bryan. Good morning, everybody. Before we dive into the results, let's start on Slide 6 and take a look at some notable and other unusual items that we had in the quarter just to level set.

As Bryan mentioned, we're really pleased with the performance this quarter as we delivered GAAP EPS of $0.42, or $0.46 on an adjusted basis, which excludes notable items related to merger integration costs outlined on the left-hand section of this slide.

We also highlight for you on this slide some other items of a nonrecurring nature that you might find helpful as you can consider and review our results and outlook. These items resulted in a net $11 million reduction to our results, as you can see on the right hand of the slide.

Revenue was reduced by approximately $8 million, which included a $5 million reduction in NII, largely tied to the true-up of annualized cost of a promotional credit card offering that we did in late 2019, that resulted from an operational issue and mailing disclosures to customers that weren't eligible for the lower rate. We went ahead and we corrected it, but determined that we should honor those promotional rates to those customers.

In December, we also opportunistically repositioned part of the securities portfolio, which near term resulted in a $3 million loss, which you can see in the other non-interest income line, but it will provide a nice NII benefit going forward.

In December, we announced a one-time bonus to employees making less than $75,000 and we determined that we should allow a COVID-related rollover of some unused vacation time. These two items totaled $8 million in the quarter.

And finally, our other non-interest expense reflects a reduction in regulatory costs, largely FDIC expense, resulting from the close of the quarter and the merger, which lowered other non-interest expense by $5 million.

On the following pages, we've highlighted our adjusted results before the impact of these unusual items, which we believe provides a better view of our underlying earnings momentum.

Moving to Slide 7, for some highlights of our adjusted financials. We saw adjusted PPNR of $335 million, a decrease of $17 million linked quarter, largely driven by that net $11 million reduction on unusual items that we just went over.

While seasonality impacted some of our fee businesses, overall trends were solid despite continued NII headwinds. Adjusting for the unusual items, our revenue, expenses and PPNR were all relatively stable relative to the third quarter.

Provision expense decreased to $1 million on $29 million of net charge-offs, reflecting a $28 million reserve release, given the improving economic outlook.

Solid PPNR and modest provision resulted in tangible book value per share growth of 3% linked quarter and helped drive our ROTCE up over 18% in the quarter as well, even as our capital ratios increased.

Turning to net interest income on Slide 8. We generated NII of $522 million, down $11 million linked quarter, driven by a $13 million reduction in net merger-related and PPP loan benefits, as well as the $8 million reduction from those unusual items.

So, stepping back and looking at it on an underlying basis, our core NII improved $8 million before unusual items to $484 million, as the $13 million reduction in deposit funding costs more than offset the impact of a modest 1% decline in average loan and securities portfolio balances linked quarter.

We've continued to focus on lowering our interest-bearing deposit costs, which you can see reduced by an additional 10 basis points in the quarter to 26 basis points, and we continue to push that even lower with a target of about 21 basis points by year-end.

Reported NIM came in at 2.71% in 4Q'20, down from 2.84% in 3Q, largely reflecting a 7-basis point decrease in merger and PPP benefits, as well as a 3-basis point decline from the unusual items.

As you would expect, we also continue to see elevated levels of excess liquidity weigh on the margin with our average excess cash up about $2.6 billion in the quarter, which pressured the margin by 9 basis points as we ended the quarter with approximately $7.6 billion of excess cash.

As we've discussed in the past, this doesn't influence net interest income much, but as we look forward to the year and the impact of incremental government relief, we are likely to see further pressure on the margin near term from those elevated cash balances.

Now, moving on to Slide 9 and a review of our fee income results. Countercyclical fee businesses, particularly fixed income and mortgage banking continued to deliver strong results in the quarter. And this quarter, they were helped by a higher deposit related fee income as well.

Fixed income average daily revenue of $1.5 million was relatively stable from the third quarter to fourth quarter. Fixed income fees themselves decreased $7 million linked quarter, largely reflecting the impact of day count and lower fees and ancillary products, but we continued to produce strong average daily revenues at that $1.5 million level.

Mortgage banking fees also remained fairly strong despite seasonally lower production with fee income of $57 million and further expansion on gain on sale spreads, which were up 7 basis points.

Additionally, we saw service charges rebound to near pre-COVID levels, up $3 million in the quarter, driven by higher cash management fees, and we also saw modest improvements among all other categories.

Both fixed income and mortgage banking were up significantly year-over-year in the fourth quarter, demonstrating the considerable offset to the rate pressures that these businesses provide us to our overall results.

Turning to expenses on Slide 10, we continue to demonstrate our commitment to expense discipline. Our adjusted expense remained relatively stable, even with the net $3 million impact tied to unusual items and incentives and commissions, as well as other non-interest expense.

Total personnel costs were up $4 million in the quarter, including $8 million of cost tied to our one-time employee bonus and vacation accrual. And importantly, we continue to make progress toward our new target of $200 million of merger saves with an incremental $6 million or a total of $14 million in the quarter.

In this slow growth and low-rate environment, we think we are well positioned to continue to manage expenses down to help improve profitability and returns.

Turning to the balance sheet on Slides 11 and 12, we provide a view of our loan growth and our funding profile. And as expected, our average and period-end loans decreased as customer demand remained soft, payoffs remained high and utilization rates have stabilized. However, as a countercyclical business, our loans-to-mortgage companies posted average linked quarter growth of roughly $700 million, reflecting strong volume tied to the low-rate environment.

On the liability side, period-end deposits were up $2.5 billion from last quarter, reflecting an increase in interest-bearing and demand deposits. Active management of our interest-bearing deposit costs drove a decrease of 10 basis points to 26 basis points overall.

We also further improved our funding profile as 4Q'20 borrowings decreased by about $600 million from 3Q. We will continue to evaluate ways to deploy our excess cash balances and seek additional opportunities, as I talked about, to decrease those cost of funds.

Starting with Slide 13. Looking at asset quality, we are very pleased with our overall positioning here. Credit is performing much better than any of us would have imagined at the start of the pandemic.

Net charge-offs improved to 19 basis points, down from unusually high levels in the third quarter, which were driven by the energy portfolio, and non-performing loans decreased 14% to 66 basis points.

As I've said earlier in the quarter, we had $29 million in net charge-offs with $23 million of that energy-related. Therefore, the rest of the portfolio more broadly had only $6 million of net charge-offs, outstanding performance.

As you can see on Slide 14, we decreased our overall allowance for credit losses by $28 million. And as we've done since the adoption of CECL, we utilized Moody's scenarios and then incorporated other economic and portfolio factors to evaluate the reserve.

If you look at Slide 15, we provide an updated view of those portfolios that investors have been most focused on in the wake of the pandemic, and we continue to do very detailed portfolio reviews of industries currently affected by COVID-19 that has resulted in a 24% decrease in those portfolios, subject to a heightened level of monitoring. We now have 7.5% roughly of loans that are subject to that monitoring.

We've provided data in the Appendix as well on the reserve coverage by portfolio in addition to information on deferrals, which improved to less than 1% of total loan balances from -- down from 2.5% last quarter. Again, we feel very comfortable with our risk profile and our reserve levels.

Moving quickly to capital on Page 16. As I mentioned before, tangible book value per share of $10.23 was up 3% on strong earnings, which with addition to a reduction in risk-weighted assets helped drive that 46-basis point improvement in our CET ratio to 9.7%. And very importantly, with tangible book value per share now at $10.23 and growing, the IBERIA merger of equals is now accretive to tangible book value after only six months well ahead of the over two-year earnback we estimated at announcement.

Moving on to Slide 17 and merger integration, there is a lot of great work going on here. We finalized our three-year strategic plan, which is focused on capitalizing on the organic growth opportunities across our new expanded franchise. On the people side, we continue to align teams and cultures, we're seeing good retention, and over the last quarter, we've implemented new sales and credit team structures as well.

Operationally, we've already consolidated our mortgage platforms, we've launched a new and improved wire system, we've completed major upgrades to the online banking systems as well. We also combined procurement and expense systems, continued to streamline corporate real estate with much more to come.

In the fourth quarter, we delivered $14 million of cost savings, providing that annualized benefit of $56 million as we entered 2021. And as we noted earlier, we upsized the targeted annualized cost saves to $200 million, which we expect to achieve by the first half of 2022. And as you can see, we provided an estimated timeline for those cost saves on the right-hand part of this slide.

Slide 18, we've provided an overview of our expectations for both the first quarter and the full year. I think it's really important to note, as Bryan alluded to earlier, that as we enter the year, the macro environment remains highly uncertain with more variability than any of us would like. The progression of the rollout of the vaccine and its efficacy will matter a great deal of course, as will the pace and influence of government reliefs as it ripples across the economy.

However, as the newly combined company, we're committed to enhance transparency as we work to drive shareholder value and our outlook reflects our current view that we will continue to see a prolonged low-rate environment given current Fed posturing, but with an economic recovery beginning in the second half of the year as headwinds from the pandemic hopefully subside.

For our full-year outlook, we provided an annualized baseline that's based on our fourth quarter results; and from that, we expect a low- to- mid-single digit percent decline in NII, given the outlook for muted loan growth and moderating impacts for net accretion relative to that 4Q'20 baseline.

While we anticipate a continued relatively strong environment near term for our mortgage and fixed income businesses, our outlook reflects a low teens decrease in fees from strong 4Q annualized levels and our mortgage origination outlook largely corresponds with the MBA's outlook.

On the expense front, we expect non-interest expense to be down in the low- to- mid-single digit range with results excluding incentives and commissions down low-single digits. As we've noted, our ongoing focus on efficiency and cost saves should result in an expense decline over the next year.

The range in provision expense could be significant and it's going to be largely dependent on the forward outlook, but we expect net charge-off performance to be strong, somewhere in the range of 25 to 35 basis points. And if that occurs, given an ACL -- excluding loans to mortgage companies and PPP of little over 2.1% -- we are very well positioned to see lower provisions as opposed to higher provisions if that outlook does come to fruition.

Finally, we expect Tier CET1 ratio come in around 9.5%, reflecting the expectation for risk weighted assets to be modestly lower and the potential to opportunistically repurchase shares over the course of the year.

We've also provided our outlook for the first quarter in the context of this overall guidance for the year. Hopefully, that's helpful. And as Bryan mentioned, we feel good about the positioning and our ability to perform well given the environment.

And quickly wrapping up on Slide 19. We're well positioned over the long term to capitalize on the opportunities of our more diversified business model and our highly attractive Southern franchise.

Our counter-cyclical businesses are proving out their ability to help mitigate pressure from lower rates. We believe the advantage of merger cost saves is a differentiator and that our approach to risk management should help us mitigate credit losses with the benefit of significant loss absorption.

While the economic environment remains challenging and loan demand soft, gives us the ability to maintain our strong focus on merger integration over the next year. And ultimately, we continue to believe we're well positioned on a relative basis to deliver top quartile returns.

So with that, I'll turn it back to Bryan.

Bryan Jordan -- Chief Executive Officer

Thank you, BJ. Our strong balance sheet, capital and liquidity will serve us well in this difficult environment. We've maintained underwriting standards and built a diversified portfolio focused on profitability.

Despite the economic headwinds, we are positioned to capture merger opportunities with enhanced scale, better efficiency and improved earnings power to create shareholder value. And as BJ said, our outlook for 2021 is constructive.

Thank you to all our associates for their hard work serving our customers, our communities and helping deliver value for our shareholders.

Grant, we'll now open it up for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala -- Bank of America -- Analyst

Hey, guys. Good morning.

Susan Springfield -- Chief Credit Officer

Good morning.

Bryan Jordan -- Chief Executive Officer

Good morning, Ebrahim.

Ebrahim Poonawala -- Bank of America -- Analyst

But a great job on the outlook and guidance, BJ. So, thank you. But just a question around net loan growth. Give us a sense of, one, what you see -- understand the year is going to start out slow, but just talk to us given sort of the combined capability between First Horizon and IBERIA, how you see loan growth trending if the economy continues to reopen?

And then your outlook on the mortgage warehouse business as well, despite the decline forecasted by the NBAA, do you expect to outperform the market?

William Losch -- Chief Financial Officer

Yes, Ebrahim. Thanks for the question. As we look at 2021, we see loan growth, as we talked about, maybe modestly down on an average basis, but there's a lot of moving parts in there.

One is, clearly, on PPP loans, we expected the first round of PPP loans to come off quite substantially by the end of the year; and with them starting in about $4 billion, we expect a couple of billion dollars or more of run-off there.

They'll be replenished by the new PPP loans coming on. But we don't expect at this point to have the same type of balances the second round as we saw in the first. So, that's a little bit of decline.

The second is, broadly speaking, in consumer and commercial lending, loan growth is generally muted across our markets. And so, particularly in the first half of the year, we had lower expectations of demand. Though, we did have in our most recent month our strongest production month that we've seen in the last 12. So, that's encouraging, but it's still muted.

On the flip side though, we do see strength in our asset-based lending business, which has done quite well over the last quarter or so. And the mortgage company business, notwithstanding the MBA outlook, has generated a significant amount of customer relationships over time as you well know, and we are very bullish on the outlook for the outstandings in that business to continue to grow over the course of the year. Seasonality would -- we would expect it's a little bit lower in the first quarter, but then picking up fairly materially in the second through the fourth.

So, we expect loans to mortgage companies to be stronger in the back half of the year than even the levels that we saw in the fourth quarter.

So, that's kind of a little bit of color on how we see the loan growth, and -- but there are definitely pockets of opportunity.

One more thing I would say is, if the economy does open up in the second half of the year, our businesses have been doing an extraordinary amount of work cultivating customers, cultivating relationships, looking for new opportunities, being prepared to take advantage of those such that when demand does come back, we are well positioned. So, we're very, very focused on business momentum.

Susan Springfield -- Chief Credit Officer

Ebrahim, just a couple of more detail to add to what BJ said is, as he mentioned, the December, we saw good -- well, strong production, the strongest month we had in 2020. But it was also very broad based. We saw it in our specialty businesses, but we also saw it in our market across, let me say, Louisiana, North Carolina, Florida -- I mean, we saw -- and then we saw in the specialty businesses that BJ highlighted. And the revenue synergies that we're seeing with the referral and asset-based lending equipment, finance, there is a lot of excitement by our bankers adopt those capabilities now that we've merged these two great companies.

So, I feel good about the opportunities and the strong company opportunities for us to either grow with or bring into the company.

Ebrahim Poonawala -- Bank of America -- Analyst

Got it. And ex-PPP and the mortgage warehouse, is there any portfolio where you expect a run-off?

William Losch -- Chief Financial Officer

A run-off as an intentional run-off?

Ebrahim Poonawala -- Bank of America -- Analyst

Yes. No, like, where you see balances declining in any meaningful way?

William Losch -- Chief Financial Officer

Yes. So clearly, as we've talked about earlier, we're highly cautious on the energy portfolio and have been letting that run down. We're not actively running off any other portfolios per se, but pay-offs have been outpacing new originations across many of our markets and in several of our businesses. But like Susan and I just talked about, we just had our strongest month. So, there may be signs that that activity is picking up a little bit. We're still expecting though that doesn't really start to occur until the back half of the year versus the front half.

Ebrahim Poonawala -- Bank of America -- Analyst

Got it. Thanks for taking my questions. I'll requeue.

Operator

Our next question will come from Jared Shaw with Wells Fargo. Please go ahead.

Jared Shaw -- Wells Fargo -- Analyst

Hi, good morning.

Bryan Jordan -- Chief Executive Officer

Good morning.

Susan Springfield -- Chief Credit Officer

Good morning.

Jared Shaw -- Wells Fargo -- Analyst

Maybe I guess, starting with the allowance and the expectation for pretty strong credit performance. I guess, how much are you depending on CECL qualitative overlay to support a higher level of allowance here?

And then connected to that, when you look at the loans that were required that we double count it with both a provision and a mark, are you able to release any of that reserve before those loans either pay off or you realize that accretion from the market?

William Losch -- Chief Financial Officer

Yes. So, I'll start. So, as you know on the CECL reserves, a lot of the quantitative modeling is based on what the scenarios are going to tell you and the weightings around the scenarios. And so, if we start with that and you think through what the Moody's scenarios have done over the course of the year, i.e. continue to improve, those quantitative models are telling us that reserve should come down in a lot of -- and in a lot of places meaningfully come down.

And so, we start with those. But then there are overlays that we put on qualitatively around those areas of perceived risk across the portfolios, because even though those models are telling us that we still think it's a little too early to declare victory on the economy and the recovery, particularly with the uncertainty around the vaccine rollout and so on. And so, there has been a fair amount of qualitative overlay that we have put on those quantitative models so far.

So, that's why our reserve coverage ended relatively stable to the third quarter, but I would tell you that if our outlook holds again on net charge-offs in the $25 million to $35 million range, and we've got an ACL in the $210 million [Phonetic] range, it's -- we're going to have a lot of reserve release coming in 2021 if those kind of metrics start to play out. So that would be my expectation as our provision comes down pretty meaningfully.

Jared Shaw -- Wells Fargo -- Analyst

Okay, thanks. And then I guess shifting to capital management, in your comments around the buybacks. I guess, one, could you be in the market now if you wanted to be, or do we need to wait for reauthorization or any other type of authorization?

And then, I guess, second to that, would there be other uses of capital? There's certainly an expectation that M&A picks up over the coming year. Now that you had the success with IBKC, would you be interested in potentially being back in the market?

Bryan Jordan -- Chief Executive Officer

Hey, Jared, this is Bryan. Good morning. The -- we have a current authorization which would allow us to get back in the market. And as you would expect, we talk constantly with our Board about capital and capital levels. So, we have the ability to repurchase shares.

I would emphasize our first and foremost goal is to reinvest capital organically in the business. And we're -- as we said, expecting fairly muted loan growth in the first part of the year. But when that picks up, we want to put capital to work in the business. And so that will be primary objective number one.

We will look at inorganic opportunities, but I would suggest that given all that we have on our plate to complete the integration of the MOE of IBERIABANK and First Horizon, it's unlikely that we're going to get interested or engaged in any M&A activity.

We want to put these two organizations together to do that well. And then, so that we can operate these businesses in such a way that we deliver on the revenue synergies that we've talked about, we'll deliver on the cost synergies as upsized[Phonetic], and we think we've got a powerful franchise that we can grow organically.

I'll go back to one of the key points that we've made a number of times, most prominently in November of 2019. The footprint that we have put together is expected to grow at a pace faster than the U.S. as a whole. And I would suggest, given some of the post-COVID impact, that pace will actually pick up some just based on the relocation of people and some of the demographic changes.

So, we're pretty optimistic about the footprint we have and we think we can create a lot of value with that. So I would say, if I had to summarize that, it'd be focus on putting capital to work in the business organically, and to the extent that in the near term we can't do that, we'll look for opportunities to repatriate it to our shareholders.

Jared Shaw -- Wells Fargo -- Analyst

Great. Thanks for the insights.

Bryan Jordan -- Chief Executive Officer

You're welcome. Thank you.

Operator

Our next question will come from Jennifer Demba with Truist Securities. Please go ahead.

Jennifer Demba -- Truist Securities -- Analyst

Thank you. Good morning. You said that the Company finalized its three-year strategic plan recently. I was just wondering if you could go over some of the nuances that investors may be more interested in right now.

Bryan Jordan -- Chief Executive Officer

Well, yeah, Jennifer, good morning. This is Bryan. I'll start and then BJ or Susan pick up. I think the biggest nuance that I would focus on really goes back to Jared's question which is, this is a strategy that deals with operating the business that we have and then capitalizing on the strength of the footprint that we have.

We have built it at a very granular level. We involved the entire leadership team and really the expanded leadership team, we've built it from the market levels up and we spent a lot of time thinking about markets, we thought about our lines of businesses and our specialty businesses. Then, when we pull it all together, we think that the key things that we need to execute on are: one, investing in talent and people and making sure that we position ourselves to take advantage of the demographic opportunities that we have; control costs in such a way that we fund that.

And then the other big theme is to continually think about how we reallocate our infrastructure costs to improve our products and our services. Then, you will see, as we get through this integration, that we're doing a lot of work between now and the final integration of the two companies, sometime later this year to improve products and services and close any gaps and those that we have. So we're continually evolving the business, but really focused on the blocking and tackling of taking advantage of the growth opportunities we see in this footprint.

Jennifer Demba -- Truist Securities -- Analyst

Thanks a lot.

Bryan Jordan -- Chief Executive Officer

You're welcome. Thank you.

Operator

Our next question will come from Ken Zerbe and he's with Morgan Stanley. Please go ahead.

Ken Zerbe -- Morgan Stanley -- Analyst

Thanks, good morning.

Bryan Jordan -- Chief Executive Officer

Hey, Ken.

Susan Springfield -- Chief Credit Officer

Good morning.

Ken Zerbe -- Morgan Stanley -- Analyst

I was actually hoping to actually talk about the $200 million of cost saves or the revised $200 million. How much of that falls to the bottom line versus being reinvested? And I guess the reason I ask that is because it looks like your new guidance is pretty much consistent with kind of what reached our expectations, which implies a lot of it gets reinvested, but I would love your thoughts. Thank you.

Bryan Jordan -- Chief Executive Officer

Well, Ken, this is Bryan. I expect that what you'll see is, is that, that that those cost savings will drop to the bottom line. The guidance or the outlook slide that's there, exist for 2021 and most of those cost savings will come in later in 2021 and really apply to 2022. So our expectation is, is that they drop to the bottom line, just like the original $170 million commitment that we laid out.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Great. And then just a quick one. Obviously, a lot of notable items, totally get it given the acquisition or the merger. When you think about the notable items, which do kind of distort your core underlying results, like at what point do those items start to phase out in terms of the quarters? Thanks.

William Losch -- Chief Financial Officer

Yeah, I think, Ken, my expectation is that toward the end of the year, the difference between reported and adjusted is going to be very modest. Yeah, there will still be some notable items or merger-related charges that might slip into the first half of 2022, but my expectation would be that they're largely gone by the end of this year.

Ken Zerbe -- Morgan Stanley -- Analyst

All right, thank you very much.

Operator

Our next question will come from Steven Alexopoulos with JPMorgan. Please go ahead.

Bryan Jordan -- Chief Executive Officer

Steve, you there?

Operator

Steven, your line may be muted on your end.

Ellen A. Taylor -- Head of Investor Relations

Yeah. Grant, let's go and take the next question.

Operator

Okay. One moment. The next question will come from Brock Vandervliet with UBS. Please go ahead.

Brock Vandervliet -- UBS -- Analyst

Hey, good morning, everybody.

William Losch -- Chief Financial Officer

Hey, Brock.

Susan Springfield -- Chief Credit Officer

Good morning.

Bryan Jordan -- Chief Executive Officer

Good morning.

Brock Vandervliet -- UBS -- Analyst

I appreciated the color on the reserve. Obviously, the potential for reserve recapture is pretty full here. How do you or how should we think about the appropriate level of reserves on the backside of this? I think that's one thing analysts struggle with this is, is it -- how low does it prudently go?

William Losch -- Chief Financial Officer

Yeah. So, Ken, it's -- I've spend a lot of time --

Bryan Jordan -- Chief Executive Officer

Brock.

William Losch -- Chief Financial Officer

Brock. Thank you. I've spent a lot of time thinking about this, so as Susan. If you just use day one CECL as maybe a baseline for a pre-COVID environment, I think our reserve level with day one CECL on a combined basis would have been about 1% in aggregate, and we're well above that right now, if you look at end of first quarter, which may be, still has a little bit of pandemic in there, there is -- it's maybe a 120 basis points, right? So I think over time, we tend back toward those.

I've heard commentary from other banks and if we get back to pre-COVID levels that by the end of this year, I'm not sure that we're totally back there by the end of this year, but if you just do math on our metrics, going back to pre-COVID levels would imply a couple of hundred million dollars of reserve release, which is pretty massive. It happened in one year. So I think we're all still trying to get used to CECL and understand the variability in the outlooks, but bottom line is I think there is a lot more bias toward us releasing reserves, a lot more than there is having to even hold it, much less increase it this year.

Brock Vandervliet -- UBS -- Analyst

Got it. Okay. And just shifting over to funding, you've been working down your CD book, drop in that rate as well, similar trend with the borrowings. How much flex do you have in those two categories to either lower balances or lower the rate?

William Losch -- Chief Financial Officer

Yeah. So, I'll start with the borrowings first. So, the borrowings, we were still carrying essentially two holdco debt maturities. One of which, we obviously retired in the fourth quarter, so that drove a lot of our borrowings down. So I expect us to stay probably relatively stable, maybe down a little bit as we try to optimize it. On time deposits, they've been relatively low because we just haven't seen a lot of mix shift toward those even as the rate environment was more favorable to doing those. So largely where we see CD balances today are in our small virtual bank and maybe scattered across some of our markets.

So yeah, there is some opportunity to continue to move time deposits down as they mature. But I think most of our emphasis and the great work that our bankers have done have been around dialog with our commercial clients and then making sure that our base rates on the consumer side are competitive, but in line with what we're seeing in our various markets. So I think there is a little bit more opportunity to effect change in our interest-bearing deposits around our money market and savings accounts on consumer and commercial.

Brock Vandervliet -- UBS -- Analyst

Got it. Okay, thank you for the color.

William Losch -- Chief Financial Officer

Sure.

Bryan Jordan -- Chief Executive Officer

Thank you.

Operator

Next question will come from Brady Gailey with KBW. Please go ahead.

Brady Gailey -- KBW -- Analyst

Yeah, thanks. Good morning, guys.

Bryan Jordan -- Chief Executive Officer

Hey, Brady.

Susan Springfield -- Chief Credit Officer

Hi.

Brady Gailey -- KBW -- Analyst

So I think in the past you guys have talked about a low double-digit ROE as a guideline. You just printed an 18% number, so pretty far above that. Can you just remind us what were you referring to when you were talking about the low-double digit ROE? And is there potentially an update to that number?

William Losch -- Chief Financial Officer

Yeah. We just printed the update 18%. Just kidding. Yeah, I think when we were talking about the low-double digits, it clearly had an expectation of much higher than $1 million of provision. I'd say that, that was certainly helpful. But I think we, on a relative basis, we continue to believe that we can generate top-tier returns on tangible equity. And I think as I've looked at consensus estimates for '21, even 2022 and what I expect our Company to do or what we expect our Company to do, we definitely believe that we'll generate those top-tier returns. And so, will it be 18% over time? No, it won't be that high. Could it be like that for a while if provisioning is low? Yeah, and the mid-teens range could be a good expectation. But it's all going to depend on what the provision looks like over the next several quarters.

Brady Gailey -- KBW -- Analyst

All right. That's helpful. And then I wanted to revisit the buyback. I mean you're already over the 9.5% target on common equity Tier 1. You talked about risk-weighted assets going down this year. You're going to be profitable this year, so that's going to push that ratio even higher. It seems that you have a stock that's still pretty cheap [Indecipherable] of tangible. I mean it seems like the opportunity to engage in the buyback is real. Do you realistically expect to get out there and be aggressive with the buyback this year?

Bryan Jordan -- Chief Executive Officer

Brady, this is Bryan. I'm not going to buy it on aggressive because that's a term of [Indecipherable] both the science. Look, I think you're right. I think we would show in our outlook that our capital ratios could continue to build if we didn't reinvest or repatriate capital to our shareholders. And so we will take the opportunity when we can to repurchase some shares. We tend to believe much like you do that we think it's an attractive valuation and we think it's a good long-term use of the capital. So we will use it. We will continue to dialogue with our Board. I think it's really important to say as you think about capital in terms of being aggressive or not, there's still a fair number of questions in terms of the pandemic that have to be resolved and we've laid out sort of our expectation.

One of the keys is that we see a pickup in the rollout of vaccinations. I would say, to date, it's been woefully inadequate and it's got to pick up for us to see a much stronger back half of the year. I believe we can do that as more vaccines become available. And corollary to that is, is what happens with these more virulent strains and do they -- or more -- at least more transmissible strains of COVID and do they result in more slow down, shutdown, stay-at-home orders on a national basis.

So, in terms of how we think about it, we're still cautiously optimistic about 2021, but we're going to let this thing unfold a little bit before we start to bring capital ratios down real rapidly, and we'll look at opportunities to buy the stock over 2021.

Brady Gailey -- KBW -- Analyst

Okay. And then finally for me, an easy one. I mean, BJ, the tax rate was all over the place last year, which I get, given the volatility and profitability. But I think in the past, you've talked about an effective tax rate around 23%. Is that the right way to think about it from here?

William Losch -- Chief Financial Officer

Yes, I think so. I would think in the 23% to 24% range, somewhere right in there.

Brady Gailey -- KBW -- Analyst

Great. Thanks, guys.

William Losch -- Chief Financial Officer

Sure.

Bryan Jordan -- Chief Executive Officer

Thank you.

Operator

Our next question will come from Michael Rose with Raymond James. Please go ahead.

Michael Rose -- Raymond James -- Analyst

Hey. Good morning, everyone.

Susan Springfield -- Chief Credit Officer

Good morning, Mike.

Michael Rose -- Raymond James -- Analyst

Hey, just wanted to dig into the fee income outlook a little bit. You mentioned strengthened fixed income and mortgage. Obviously, there's some seasonality components. Can you just maybe walk us through some of the expectations for those businesses and how that might kind of reconcile to the guidance a little bit more specifically? Thanks.

William Losch -- Chief Financial Officer

Sure. So, I'll start with mortgage. I said in my earlier comments that we don't have a view that's much different or more well-informed than the Mortgage Bankers Association would have. So, I think that shows some modest growth in purchase origination volume and meaningful decline in refinances. So, in aggregate, I think, year-over-year originations down in the 20%, 25% range is what the MBA would be talking about.

In terms of fixed income, we still see quite an opportunity in fixed income with the longer end of the curve continuing to inch up and yield curve steepening, still a lot of volatility and uncertainty in the marketplace. We are still seeing strong volumes in fixed income. As a matter of fact, in the fourth quarter, 80% of the days had over $1 million of revenue in the quarter, 80%; and we expect that to continue over the next few quarters, so. So, we expect fixed income to stay pretty strong relative to fourth quarter levels. That helped?

Michael Rose -- Raymond James -- Analyst

Yes, it does. And maybe it's a little bit too early to discuss quantitatively, but where are the biggest areas you see for kind of revenue synergies at this point? I remember with the Capital Bank deal, you guys had laid out some revenue synergies. I don't know if you did the same thing this time. But it would seem like putting these two franchise together, the opportunity could be fairly significant. So, maybe you can just discuss that broadly. Thanks.

William Losch -- Chief Financial Officer

Sure, absolutely. Yes, we are -- we continue to track our revenue synergies. We started, as of June -- excuse me, July 1st. And so, there's still fairly modest given the muted growth opportunity that we're seeing. But it's in the $8 million annualized revenue range at this point, and that's early in an uncertain environment.

So, we think that's going to be well ahead of the 30 plus million dollars that we saw in Capital Bank, obviously. And so, as activity picks up, we're well positioned to capture a lot of revenue synergy. And over time as we get a little bit more of that, I'm sure that we'll share that with you and show you a little bit more color on where that's coming from.

Bryan Jordan -- Chief Executive Officer

There is that -- Michael, this is Bryan, areas that we're really seeing great opportunities or products like wealth management and the overlay to the former Iberia portion of the franchise, opportunities like mortgage origination with the overlay to the former First Horizon portion of the franchise. Our asset-based lending business, our equipment finance business we're entertaining, is we're actually closing deals in all of those areas, just to name a few.

So, all of our specialty areas -- international is one where we're having a great deal of conversation. So, we really see revenue synergy opportunities over a broad swatch of the product set, and our bankers are excited about it. There's been a lot of time on it and they're making an awful lot of referrals; and BJ quoted sort of a revenue number, annualized. We think the pipeline is probably that big or bigger at this point. And as I said, setting back into the early December timeframe, the words I've used were something like we'll probably blow away the $30 million of revenue synergies that we saw out of Capital Bank. We just think that it's a huge opportunity for us.

Operator

Our next question will come from John Pancari with Evercore ISI. Please go ahead.

John Pancari -- Evercore ISI -- Analyst

Good morning.

Bryan Jordan -- Chief Executive Officer

Good morning, John.

Susan Springfield -- Chief Credit Officer

Good morning, John.

John Pancari -- Evercore ISI -- Analyst

Just firstly, if you can elaborate a little bit more on what drove the upsizing of the cost saves. I believe you commented on that in an earlier presentation in the quarter, but I just wanted a little bit of the color behind that. And then secondly, does the -- does that upsizing consider incremental rationalization of your real estate, both on the corporate real estate side as well as branches just given the added impact or influence of the pandemic on top of the merger itself? Thanks.

William Losch -- Chief Financial Officer

Sure, John, it's BJ. So, as we kind of alluded to, from the beginning, we were very confident in our net $170 million when we announced it. As we started to look deeper, we continued to see more opportunities. And then, of course, the pandemic has accelerated changes in customer behavior, which has allowed us to further look at physical branch distribution, opportunities for consolidation as well as what you said, the real estate side.

And so, as we started to quantify those, we got more and more confident in exceeding the $170 million, which is why we upsized it.

We do believe though that they'll come more toward a post integration world, which we're currently still targeting for the end of this year in terms of the large systems integration. But that will involve a lot of real estate related things as we take out more costs.

John Pancari -- Evercore ISI -- Analyst

Got it. Thanks, BJ. And then separately, just back to the buybacks just for a quick clarification. Is there anything on the regulatory front that is keeping you from stepping in the share on buybacks?

Bryan Jordan -- Chief Executive Officer

Not that we're aware of, no.

John Pancari -- Evercore ISI -- Analyst

Okay, got it. All right. That's it from me. Thanks.

Bryan Jordan -- Chief Executive Officer

All right.

Operator

Our next question will come from Steven Alexopoulos with JPMorgan. Please go ahead.

Steven Alexopoulos -- JPMorgan -- Analyst

Hi, everyone. Can you hear me now?

Bryan Jordan -- Chief Executive Officer

Hey, Steve. Yes.

Susan Springfield -- Chief Credit Officer

Good morning.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. So, first on expenses, so on Huntington's call this morning, they talked about stepping up the pace of investment in near term to better position for an eventual recovery. And you guys are guiding down expenses in 2021 with cost saves a factor. But can you comment on the pace of investment going on behind the scenes, is it pretty steady or are you guys also increasing the pace?

Bryan Jordan -- Chief Executive Officer

Yes, this is Bryan, Steve. We're -- I would say, we look to increase the pace in 2021. I didn't listen obviously to Huntington's call this morning. But we see a lot of opportunities to hire and attract people to the franchise and we're actively doing that. I would say it's a bit of a gradual acceleration as the economy seems to be getting a little bit more front-footed.

And we truly do believe we can reduce costs, reallocate costs. And so Michael Brown, who is running our regional banking franchise, for example, is spending a lot of time looking at how we take opportunities to reduce costs in one area and investment in other areas and fund our own growth that way.

So, we should see our pace of investment pick up. I'd say that's true across regional banking. I'd say that's true across our specialty businesses. We see opportunities to improve the areas like our equipment finance and asset-based lending businesses, where we need to be able to support the broader franchise, are examples.

William Losch -- Chief Financial Officer

Hey, Steve. I'd also add that the branch acquisition of the SunTrust branch has also accelerated a lot of investment that we wanted to make, which obviously helps our broader business, particularly around mobile and digital banking and online banking. And so, we got that in, we put in a new wire system that significantly upgraded things for our commercial customers.

We're broadening and expanding our use of the nCino platform that's going to streamline a lot of our commercial lending business and we've made some investments already and continue to do so in our treasury management and cash management.

So, while there is a heavy, heavy lift in systems integration and just getting the two organizations knit together on the back end, there are a lot of places where we're strategically putting investment for the long term, and even with that continue to take net cost out of the organization, which we think is very positive.

Bryan Jordan -- Chief Executive Officer

Steve, this is Bryan again. BJ makes a really good point here and that our integration timeline is more dictated by the investments that we want to make. We're closing gaps in products and offering. So, if you looked at an allocation of the hours we have to get the integration completed, I don't know, probably 75% or more of it is is in making investments and products rolling out and new online, banking online platform, things like that, which we think will give the combined customer base a better experience. And so, we're really looking at how we invest in the technology and infrastructure to make us a better organization.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. That's helpful. In terms of long-term targets, I might be in the minority, but I do miss the bonefish slide. With that said, following up on Brady's question, if you put all the pieces of the new company together, right, if we just ignore what's going to happen with provision because who knows over the next few quarters; what do you see as a long-term target for return on tangible common equity over time?

William Losch -- Chief Financial Officer

Yes. Thank you for bringing up the bonefish. I still like it.

Bryan Jordan -- Chief Executive Officer

Ellen is not writing this down.

William Losch -- Chief Financial Officer

Yes, Steve, we said for a long time, over time, that a mid-teens return on tangible common equity should be achievable for us. And ironically, we're above that right now and could be depending on provisions for the next few quarters, but a mid-teens area over the medium-term seems like the right place for us given our diversified business model, our efficiency opportunity and our conservative credit profile that allows us to run capital at this 9%, 9.5% range and optimize our use of the balance sheet that way. So, I still think that mid-teens is what we can deliver.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. That's very helpful. And if I could ask one last question. To follow up on Bryan's comments on M&A, right. I know the Iberia deal just closed. The last thing on your mind is another deal. With that said, I just wanted to think big picture for a minute. Bryan, before the Iberia deal, you always talked about regional banks needing to be sort of $75 billion of assets or larger to be competitive. You ended the year at $84 billion. At this size, do you now have the franchise you need to be competitive long-term? Or from this new vantagepoint, do you think you need to be even larger to be competitive? Thanks.

Bryan Jordan -- Chief Executive Officer

Yes. Thanks, Steve. Look, I think in a phrase, it is 'yes, I think so.' I think, you know, it would be hard to argue that you can win a scale game, the industrial logic behind the MOE of BB&T and SunTrust and now Truist is scaled, and they were both $200 billion plus organization. So, there is some argument for greater scale. But when I look at the combined organization that we have, I think we've got the capabilities and the product offerings and ability to invest in, and infrastructure, products and services that we can be very, very competitive and that we can be very differentiated in the way that service shows up to our customers and our communities.

You can always look for or make arguments for why more scale would help. But at the end of the day, you have to be able to operate the franchise as a differentiated entity and not as just a bigger commodity in the marketplace. And so, we think this gives us the scale to invest. We think it allows us to continue to operate a model that puts decision making very close to the customers. It puts it in the places that people know their markets, they know their customers and know who to do business with and who not to do business with. And all of that I think does make us a differentiated entity that can outperform peers in providing services and delivering returns.

Steven Alexopoulos -- JPMorgan -- Analyst

Terrific. Thanks for all the color.

Bryan Jordan -- Chief Executive Officer

You're welcome. Thank you.

Operator

Our next question will come from Chris Marinac with Janney. Please go ahead.

Chris Marinac -- Janney -- Analyst

Hey, thanks. Bryan, as you make the full systems conversion these next couple of quarters, are you working toward a -- the old core of First Horizon with a bunch of digital APIs to run this platform? Or do you envision creating your own new core kind of using the best-in-class technology?

Bryan Jordan -- Chief Executive Officer

Yes, Chris, we're moving forward. We're moving essentially to when it relates to the big loan and deposit systems to the core of First Horizon. BJ mentioned, one, as an example, where we're going to leverage the technology that IBERIABANK was using with nCino. And in some cases, we're putting in place completely upgraded systems, like a wire system; our online banking systems will be updated. So, but broadly speaking, we're not blazing any trails as it relates to new generation cores. We're working on proven and operating technology that one or both organizations has had in place and/or where we can upgrade as you said with using APIs, the front-end capabilities.

Chris Marinac -- Janney -- Analyst

Great. So, it really is different than you would have done a merger five years ago from a system standpoint?

Bryan Jordan -- Chief Executive Officer

Yes, I think it's not a whole lot dissimilar than what you would do. You go from one set of -- you go from two sets of systems and we went through a thoughtful analysis. I think our team did a really good job of looking what IBERIA was using and what First Horizon was using, and we -- shows the best of both organizations in terms of our ability to meet customer needs and deliver products and services, and that's where we're headed.

Chris Marinac -- Janney -- Analyst

Got it. Great. Thanks very much for all the information this morning.

Bryan Jordan -- Chief Executive Officer

Thank you.

Operator

This will conclude our question-and-answer session. I'd like to turn the conference back over to Bryan Jordan for only closing remarks.

Bryan Jordan -- Chief Executive Officer

Thank you, Grant. Thank you all for joining our call this morning. We're excited about our outlook for First Horizon and our ability to create shareholder value and help strengthen our customers and communities.

Please let us know if you need any follow-up information. Please stay safe and have a great weekend. Thank you all for joining us.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Ellen A. Taylor -- Head of Investor Relations

Bryan Jordan -- Chief Executive Officer

William Losch -- Chief Financial Officer

Susan Springfield -- Chief Credit Officer

Ebrahim Poonawala -- Bank of America -- Analyst

Jared Shaw -- Wells Fargo -- Analyst

Jennifer Demba -- Truist Securities -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Brock Vandervliet -- UBS -- Analyst

Brady Gailey -- KBW -- Analyst

Michael Rose -- Raymond James -- Analyst

John Pancari -- Evercore ISI -- Analyst

Steven Alexopoulos -- JPMorgan -- Analyst

Chris Marinac -- Janney -- Analyst

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