Q4 2020 First Horizon Corp (Tennessee) Earnings Call
Good morning, and welcome to the first Horizon Corp, fourth quarter 2020 earnings call. All participants will be on listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press star two.
Please note this event is being recorded.
I would now like to turn the conference over to Ellen Taylor. Please go ahead.
Hey, good morning, everybody. Thanks, so much for joining us we know it's been quite a start to the year on on.
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 question. We're also really pleased that Susan Springfield, Our chief credit officer with US today are.
Mark.
Well reference the earnings presentation, which is available at IR Dot <unk> dot com and I need to remind you that we will make forward looking statements that are subject to risks and uncertainties and you should review the factors on page two 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 are obligated to update them.
We also will address our adjusted results in our remarks, which are non-GAAP measures and pleased to review the GAAP information in our supplement on page three of our presentation and so now I'm going to give it to Brian. Thank you Alan Good morning, everyone. Thank you for joining our call.
Yes, it would be the understatement of the year to say 2020 was not an unusual year.
Very unusual year and it proved to be one of unprecedented challenges not only for our industry, but for our economy Our society.
Extremely pleased however, with the great work that first horizon has accomplished in 2020.
We continued 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 benefit wow, demonstrating prudent risk management.
We have made impressive progress on the integration of our M O. Despite the pandemic enhancing our scale and providing opportunities to capitalize on additional growth opportunities on attractive markets.
We also continue to focus on delivering strong shareholder value.
Fourth quarter results were solid with continued relative underlying strength and PNR given resilient results in our countercyclical businesses and continued expense discipline.
Loan demand remains muted given current continued economic and political uncertainty.
However, our lower risk loans to mortgage companies business.
It's a nice offset to these headwinds.
At the same time, we continued to make progress on our lower funding 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 remain healthy with a CET one ratio nearly 50 basis points from last quarter to 967% and we grew tangible book value per share by 3% to $10 23 at quarter end, reflecting ongoing earnings momentum.
We also believe we're 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 highlighting our ability to navigate the fed's 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 in this.
Excuse me, 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.
And we are strongly committed to delivering top quartile returns over the medium term.
With that I'll hand, it over to BJ P. J. Thanks, Brian Good morning, everybody.
Before we dive into the results, let's start on slide six and take a look at some notable on other unusual items that we had in the quarter just to level set.
As Brian mentioned, we're really pleased with the performance this quarter as we delivered GAAP EPS of <unk> 40 to.
<unk> 46 on an adjusted basis, which exclude 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.
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 our promotional credit card offering that we did in late 2019 that resulted from an operational issue and mailing disclosures to customers that werent.
Legible for the lower rate. We went ahead and we corrected this but determined that we should honor those promotional rates.
Those customers in December we also Opportunistically reposition reposition 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.
On a nice NII benefit going forward.
In December we announced a one time bonus to employees, making less than $75000 and we determined that we should allow a COVID-19 related rollover of some unused vacation time on 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 noninterest expense by $5 million.
On the following pages, we've highlighted our adjusted results.
For the impact of these unusual items, which we believe provides a better view of our underlying earnings momentum.
Moving to slide seven first some highlights of our adjusted financials. We saw adjusted <unk> 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 well seasonality impacted some of our fee and that fee businesses. Overall trends were solid despite continued headwinds adjusting for the unusual items of revenue expenses and <unk> 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 PPE and are in modest provision resulted in tangible book value per share growth of 3% linked quarter and helped drive our ROTC up over 18% in the quarter as well even as our capital ratio has increased.
Turning to net interest income on slide eight.
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.
Stepping back and looking at it on an underlying basis, our core NII improved $8 million before unusual items to $4 $84 million.
$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.
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 <unk> 'twenty down from $2 84, and three Q, largely reflecting a seven basis point decrease in merger and Triple P benefits as well as the three basis point decline from the unusual items.
As you would expect we also continued 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 nine basis points as we ended the quarter with approximately $7 $6 billion of excess cash.
Cash.
As we've discussed in the past it doesn't influence net interest income much but as we look forward to year on the impact of incremental government relief, we're likely to see further pressure on the margin near term from those elevated cash balances.
Now moving on to slide nine and a review of our fee income results cash.
On a cyclical fee businesses, particularly fixed income and mortgage banking continued to deliver strong results in the quarter.
And this quarter they were helped by 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 app.
Average daily revenues at that one and a half million dollar level.
Mortgage banking fees also remains fairly strong despite seasonally lower production with fee income of $57 million and further expansion on gain on sales spreads which were up seven 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 on 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 on 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 onetime employee bonus and vacation accrual.
And importantly, we continue to make progress towards our new target of $200 million from merger saves with an incremental $6 million or total of $14 million in the quarter and this low growth and low rate environment. We think we are well positioned to continue to manage expenses.
Now on to help improve profitability and returns.
Turning to the balance sheet on slides 11, and 12, we provide a view of our loan growth on our funding profile.
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 counter cyclical 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 two and a half billion from last quarter, reflecting an increase in interest bearing 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 <unk> 'twenty borrower.
Decreased by about 600 band from <unk>, 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, and 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.
<unk>, which were driven by the energy portfolio and nonperforming loans decreased 14% to 66 basis points.
As I said earlier in the quarter, we had 29 made a net charge offs with $23 million of that energy related.
Therefore, the rest of the portfolio more broadly had only $6 million from 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 C. So we'll utilize 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 in 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 75% roughly of loans that are subject to that monitoring.
We 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 two 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.
With the addition to a reduction in risk weighted assets helped drive that 46 basis point improvement in our CET ratio to 97.
And very importantly, with tangible book value per share now at $10 23 and growing.
On the Iberia merger of equals is now accretive to tangible book value. After only six months well ahead of the over two year earn back we estimated at announcement.
Moving on to slide 17, and merger integration, there's a lot of great work going on here, we've 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 were seeing good return.
And over the last quarter, we've implemented new sales and credit teams 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 main on cost savings, providing debt annualized benefit of $56 million as we entered 2021.
And as we noted earlier, we upsize the targeted annualized cost saves to 200 million, which we expect to achieve by the first half from 2022.
And as you can see we have provided an estimated timeline for those cost saves on the right hand part of this slide.
Slide 18, we.
We've provided an overview of our expectations for both the first quarter on the full year.
I think it's really important to note as Brian alluded to earlier that as we entered 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 relief.
As it ripples across the economy.
However, as a newly combined company, we're committed to enhance transparency as we work to drive shareholder value.
On 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 in annualized base 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 from net accretion relative to that for Q 'twenty 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 <unk> annualized levels.
And our mortgage origination outlook largely corresponds with the Nba'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 and 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 people.
P T.
A little over two 1%, we are very well positioned to see.
Lower provisions as opposed to higher provisions if that outlet does come to fruition.
Finally, we expect to see our CET one ratio come in around nine and a half 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 Brian mentioned, we feel good about the positioning and our ability to perform well given the environment.
So 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 are counter cyclical businesses are proving out their ability to help mitigate pressure from lower rates. We believe the advantage of merger cost saves as 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 Brian. Thank you.
D J R.
Our strong balance sheet capital and liquidity will serve us well excuse me on this difficult environment, we've maintained underwriting standards and build a diversified portfolio a focus on profitability. Despite.
The economic headwinds, we are positioned to capture merger opportunities with enhanced scale better efficiency.
Improved earnings power to create shareholder value and as BJ said our outlook for 2021 is constructed.
Thank you to all our associates for their hard work, serving our customers our communities and helping deliver value for our shareholders.
Grant will now open it up for questions.
We will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone you are using a speakerphone. Please pick up your handset before pressing the keys withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question will come from Ebrahim <unk> with Bank of America. Please go ahead.
Hey, guys good morning.
Good morning, good morning.
But the good job on the outlook and guidance on BJ. So thank you.
Bob.
A question on on net loan growth give us a sense of one.
What do you see understand the yen is going to start out slow, but just talk to us given sort of the combined <unk> bin.
Capabilities between first horizon in IBD.
You see non growth trending as the economy continues to be open and then you had outlook on the mortgage warehouse business as well.
The decline forecasted by Dnb do you expect to outperform the market.
Yeah.
Yeah 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 theres a lot of moving parts in there.
One is clearly on PPP loans.
Expect that the first round of PPP loans to come off quite substantially by the end of the year and with them starting at about $4 billion. We expect a couple of billion dollars or more of of runoff there there'll be replenished by the new PPP loans coming on but we don't expect at this.
<unk>.
Do you have the same type of balance is the second round as we saw on the first so that's a little bit of a 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 have 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 it's still muted on the flip side, we do see strength in.
And our asset based lending business, which has done.
Quite well over the last quarter or so and on our 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 its a little bit lower in the first quarter, but then picking up fairly materially in the second through the fourth so we expect our loans to mortgage companies to be stronger in the back half of the year.
And then 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, but there are definitely pockets of opportunity one more thing I would say is if if the economy does open up in the second half of the year our businesses have been doing.
On extraordinary amount of work cultivating customers' cultivating relationships looking for new opportunities being prepared to.
To take advantage of those such that when demand does come back.
We're well positioned so we're very very focused on business momentum.
Andrew.
Just a couple of more I guess D.
Details to add to what BJ said.
Mentioned in December we saw good well.
Strong production the strongest month, we had in 2020, but it was also very broad base, we saw on in our specialty businesses, but we also saw it in our market across on.
Tennessee and Louisiana.
North Carolina, Florida, I mean, we saw and then we saw on the specialty businesses that BJ highlighted and the revenue synergies that we're seeing the referrals.
And asset based lending equipment finance Theres, a lot of excitement to our bankers about those capabilities now that we've largely two great company.
I feel good about.
The opportunity.
And then Theres strong company opportunity interest.
Cryo with or bring into the company.
Got it.
Ex PPP in the mortgage warehouse is that any portfolio, where you expect runoff.
Of run off that's an intentional runoff.
They use your balance.
Balance is declining and made many meaningful way.
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 payoffs have been outpacing new originations across.
But many of our markets and in several of our businesses, but like season and I just talked about we just had our strongest months so.
There may be signs that debt activities picking up a little bit.
We're still expecting that that doesn't really start to occur until the back half of the years first the front half.
Got it thanks for taking my questions. Thank you.
Our next question will come from Jared Shaw with Wells Fargo. Please go ahead.
Hi, good morning, good morning.
Yeah, maybe I guess, starting with the allowance.
The expectation for pretty strong credit performance I guess, how much are you depending on seasonal qualitative overlay.
Just to support higher levels of allowance here and then.
On the connected to that when you look at the the loans that were acquired with <unk>.
Counted with both our provision on a mark are you able to release any of that reserve before those loans either paying off do you realize that accretion from the mark.
Yes so.
So I'll.
I'll start.
So as you know on the.
On the C. So.
Reserves a lot of the quantitative modeling is based on what the scenarios are going to tell you on the weightings around the scenarios and so if we start with that and you think through what the Moody's scenarios have have done over the course of the year.
We continue to improve those quantitative models are telling us.
Debt reserve should come down in a lot of and then a lot of places meaningfully come down and so we start with those but then there is their overlays that we put on quantitative 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 to the third quarter, but I would tell you that if our outlook holds again on on net charge offs and the 25 to 35 range and we've got an ACL in the 210 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.
That would be my expectation as our provision comes down pretty meaningfully.
Okay.
And then I guess shifting to capital management.
On 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 a reauthorization or any other type of authorization and then I guess.
To that would there be other uses of capital and you know, there's there's certainly an expectation that M&A picks up.
Over the coming year.
The key to success with IV Casey would you be interested in potentially being back in the market.
Hey, Jared this is Bryan good morning.
We have a current authorization, which which would allow us to get back in the market.
As you would expect we talk constantly with our board about capital and capital levels.
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.
<unk> 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 we'll look at inorganic opportunities, but I would suggest that given all that we have on our plate.
To complete the integration of the Moh of various bank 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 show that we can operate these these.
Mrs in such a way that we deliver on the revenue synergies that we've talked about we will deliver on the cost synergies as Upsized 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-19 impact that pace will actually pick up some.
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 percentage would 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 will look for opportunities to repatriate it to our shareholders.
Great. Thanks.
Insights.
You're welcome thank you.
Our next question will come from Jennifer Zimbabwe Securities. Please go ahead.
Thank you good morning.
Got it.
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.
Well Jennifer good morning, this is Brian.
I'll start and then.
BJ Susan pick up I think the biggest nuance that I would focus on really goes back to <unk> question, which is this is a strategy that debt.
Deals with operating the business that we have.
On capitalizing on the strength of the footprint that we have we have built it at a very granular level, we involve the entire leadership team.
And really the expanded leadership team, we built it from the market levels up and we spent a lot of time thinking about markets, we thought about our lines of businesses in our specialty businesses.
Then.
When we pull it all together.
The key things that we need to execute on our one investing in talent and people and making sure that we position ourselves to take advantage of the demographic opportunities that we have a control costs in such a way that we fund that and then the other big theme is to.
Really think about how we reallocate our infrastructure cost to improve our products and on.
Our services then you will see as we get through this integration.
But we're doing a lot of work between now and the final integration of the two companies sometime later this year.
Two to improve products and services and close any gaps in those that we have so we're continually evolving the business, but really focused on the blocking and tackling and have taken advantage of the growth opportunities we see in this footprint.
Thanks, a lot.
Welcome.
<unk>.
Our next question will come from Ken Zerbe with Morgan Stanley.
Please go ahead. Thanks.
Good morning, Dan.
I was actually hoping.
As to actually talk about the $200 million of cost saves on the revised $200 million.
How much of that falls to the bottom line versus being reinvested and I guess, the reason I assets because it looks like your new guidance is pretty much consistent with kind of what at least our expectations were which implies a lot of it gets reinvested.
She would love your thoughts thank you.
Well, Jim This is Brian I expect that what Youll see is that those cost savings will drop to the bottom line.
The guidance or the outlook slide that there exists 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 dropped to the bottom line just like the original $170 million commitment that we've laid out.
Alright, 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 to store your core underlying results like at what point do those items start to phase out in.
In terms of the quarters. Thanks.
Yes, I think cash.
My expectation is that towards the end of the year the difference between.
Reported and adjusted is is going to be very modest yes, there will still be some notable items are merger related charges that might.
Slipping.
The first half of 2022, but my expectation would be that they're largely gone by the end of this year.
Alright, Thank you very much.
Our next question will come from Steven Alexopoulos from Jpmorgan. Please go ahead.
So have you there.
Steven Your line may be muted on your end.
Yeah.
Let's go on and take the next question.
Okay.
The next question will come from Brock Vandervliet with UBS. Please go ahead.
Hey, good morning, everybody Hey, Brian.
I appreciated the color on the on the reserve.
The obviously the potential for reserve recapture is.
Pretty full here.
How do you how should we think about.
The appropriate level of reserves.
On the on the back side of on the back side of this.
That's one thing analysts struggle with us.
Is it.
How low does it does it prudently.
Yeah.
So Ken.
Yes.
Spent a lot of time and product Brock. Thank you.
I've spent a lot of time thinking about this so as season.
If if you just use.
Day, one fetal as maybe a baseline for a a pre COVID-19 environment I think our reserve level.
With day, one fees, so on a combined basis would've been about 1%.
In aggregate and we.
We're well above that right now if you look at.
And the first quarter, which may be still has a little bit of pandemic in there, it's maybe 120 basis points right. So.
I think over time, we tend back towards those.
I've heard commentary from other banks and yes, if we get back to pre Covid levels, you know that by the end of <unk>.
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.
On.
Our metrics.
No.
Going back to pre Covid levels would imply a couple of hundred million dollars of of reserve release, which is which is pretty massive it happened in one and in one year. So I.
I think we're all still trying to get get used to see fill and understand.
The ability and the outlooks, but.
Bottom line is I think theres, a lot more biased towards us releasing reserves a lot more.
Then there is having to even hold.
Hold it much less increase it this year.
Got it okay.
And just shifting over to funding you've been working down your CD.
Book drop in net rate as well.
Similar to <unk>.
Trend was the borrowings and how much how much flex do you have in those two categories, either lower balances or lower the rate.
Yes so.
I'll start with the borrowings first so the borrowings.
We're still carrying essentially to holdco debt maturities.
One of which we.
We obviously retired in the fourth quarter, so that drove a lot of our borrowings down.
I expect us to say, 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 towards those even as.
The rate environment was.
Was more favorable to doing that so.
Largely where we see CD balances today are in our small virtual bank.
And may be scattered across some of our markets. So yes, there's some opportunity each day to continuing to moved 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.
What we're seeing in our various markets. So I think theres, a little bit more opportunity to affect change in our interest rate on deposits around our money market and savings accounts on consumer and commercial.
Got it okay. Thank you for the color.
Sure.
Thank you.
Next question will come from Brady Gailey with <unk>. Please go ahead.
Yes, Thanks, Good morning, guys, Hey, Brady.
Hi.
So I think in the past you guys have talked about a low double digit Roe.
As a guideline you just printed on 18% number.
So pretty far above that kit 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.
Yes, we did.
Printed the update on 18%.
Just kidding just kidding.
Yeah, I think when we're talking about.
A low double digit.
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 'twenty, one even 2022 and what I expect our company to do or what we expect our company to do.
We definitely believe it will generate those top top tier returns and so.
Will it be 18.
Overtime no it won't be that high could it be like that for a while if provisioning is low yeah, yeah in the mid teens range could be.
Good expectation, but.
It's all going to depend on what what the provision looks like over the next several quarters.
Alright, that's helpful and then I wanted to revisit the buyback.
You're already over the nine 5% target on common equity tier one you talked about risk weighted assets going down this year.
You know youre going to be profitable. This year, so that's going to push that ratio even higher.
Stock, that's still pretty cheap at one <unk> tangible I mean, it seems like the opportunity to engage on the buyback is real.
Do you realistically expect to get out there and be aggressive with the buyback this year.
Brady this is Bryan.
I'm not going to bite on aggressive because that's a term of art disposed of science.
I think youre right I think we would show in our outlook that our capital ratios could continue to build it if we didn't reinvest or or repatriate capital to our shareholders and so we will take the opportunity to win when we.
Can to repurchase some shares we tend to believe much like you do that we think it's at an attractive valuation and we think it's a good long term use of the capital. So we.
We will use it we will continue to.
The dialogue with our board.
I think it's 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 has 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 and.
Adequate and it's got to it's got to pick up for us to see a much stronger back half.
Of the year I believe we can do that is more vaccines become available and.
<unk>.
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 do they resulted in more slowdown or shutdown and stay at home orders on a national basis.
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 ratio is down a real rapidly and we will look at opportunities to buy the stock over 'twenty and 'twenty one.
Okay, and then finally from me on.
Easy you want on the D. J the tax rate was all over the place last year, which I guess given the.
The volatility of profitability, but I think in the past you've talked about on effective tax rate around 23% is that the right way to think about it from here.
Yes, I think so its 22.
And that 23 to 24 range.
On my right in there.
Great. Thanks, guys sure. Thank you.
Our next question will come from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, everyone.
Alright.
Hey, just wanted to dig into the fee income outlook, a little bit you mentioned strength in.
Fixed income and mortgage obviously there is 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.
Sure So I'll start with mortgage.
I said in my earlier comments that.
We don't have a view that that's much different or more well informed on the mortgage bankers Association would have is so you know.
I think that.
Shows some modest growth in purchase origination volume and <unk>.
Meaningful decline in.
In.
Refinances. So in aggregate I think you know year over year originations down in the 20% to 25% range is what the.
The MDA would would be talking about.
In terms of fixed income, we still see quite an opportunity in fixed income.
With with the longer end of the curve continuing to inch up and the yield curve steepening still a lot of volatility and uncertainty in the marketplace, we still seeing strong volumes and fixed income. It's a matter of fact in the fourth quarter, 80% of the days.
<unk> 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.
Quarter levels.
That helped.
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.
Revenue synergies at this point I remember with the capital Bank deal you guys had laid out some some revenue synergies I don't know if you do the same thing this time, but it would seem like.
Putting these two franchises together the opportunity could be.
Fairly significant.
So maybe you can just discuss that broadly.
Sure.
Absolutely. So yes, we continue to.
Two.
Trac on revenue synergies we started.
As of June excuse me July 1st.
And so there is still fairly modest given the.
Muted growth opportunity that we're seeing but it's an $8 million annualized revenue range.
This point and that's that's early.
On a and then uncertain environment. So we think that's going to be.
Well ahead of the 30 plus million dollars that we saw on capital Bank, obviously and so.
As activity picks up.
We are well positioned to capture a lot of a lot of revenue synergy and overtime as we 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.
There is the margin was Brian areas that where we're really seeing great opportunities or.
It's 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 are entertaining.
Closing deals and 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 swath of the products.
And our bankers are excited about it they are spending a lot of time on it and they're making an awful lot of referrals from D. J quoted a sort of a revenue number annualized we think the pipelines probably that bigger bigger at this point and as I said.
On a setting back in the early December timeframe.
The words I used were something like will probably blow away the $30 million of revenue synergies that we saw a lot of capital back. We just think that that's a huge opportunity for us.
Our next question will come from John <unk> with Evercore ISI.
Yeah.
Good morning.
Good morning, John.
I just wanted to see if you can.
Elaborate a little bit more on on what drove the upsizing of the cost saves I believe you are.
Commented on that on an earlier presentation in the quarter, but just want a little bit of the color behind that and.
And then secondly does the does that upsizing consider inc.
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.
Sure John It's D J.
So as we as.
As we kind of alluded to from the beginning we were very confident on our net $1 70, when we announced it.
As we started to look deeper.
We continue 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 on.
Opportunities for consolidation as well as what you said the real estate side.
And so.
As we started to quantify those.
Got more and more confident.
Excuse me.
And exceeding the 170, which is why we why we upsized. It we do believe though that.
They'll come more towards.
A post integration.
World, which we're currently 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 as we take out more costs.
Got it thanks P J.
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 just yet on buybacks.
Not that we're aware of no.
Okay got it alright thats it from me Thanks, Alright.
Our next question will come from Steven Alexopoulos with Jpmorgan. Please go ahead.
Hi, everyone can you hear me now.
Hello, Okay. So.
So first on expenses so on Huntington's call. This morning, they talked about stepping up the pace of investment near term to better positioned for an eventual recovery.
Our guidance down expenses in 2021 with cost saves of factor, but can you comment on the pace of investment going on behind the scenes is it pretty steady or are you guys are also increasing the pace.
Yeah. This is Brian it's Dave.
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 but we see a lot of opportunities to hire and attract people to the franchise.
We're actively doing that I would say, it's a bit of a gradual sell like the acceleration is 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 <unk>.
Sample.
Is spending a lot of time looking on 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 and I'd say, that's true across our specialty business.
We see opportunities to improve their areas like our equipment financing asset based lending businesses, where we need to be able to support the broader franchise are examples.
Steve I'd also I'd also add debt.
The branch acquisition.
Suntrust branches also accelerated a lot of investment that we wanted to make which obviously helps our broader.
A broader business, particularly around mobile and digital banking and online banking and so we got that and we put in a new wire system.
Debt significantly upgraded.
Things for our commercial customers.
We're we're broadening and expanding our use of the Encino platform, that's kind of streamline a lot of our commercial lending business end to end.
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 on <unk>.
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.
Anthony This is Brian again, Vijay makes a really good point here.
And that.
Our integration timeline is more dictated by the investments that we want to make her closing gaps in <unk> and <unk>.
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 per cent or more of it is making investments in product rolling out on you.
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 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.
Yes.
Thank you for bringing up the bonefish.
I still like it.
Ellen is not writing this down.
[laughter] D. We've said for a long time over time that amid.
Mid teens return on tangible common equity.
Should be achievable for us and ironically, we're above that.
Right now and it 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 our diversified business model, our efficiency opportunity and our conservative credit profile that allows us to run.
On capital at this 99 and a half.
Percent range and optimize our use of the balance sheet that way so.
I still think that mid teens is what.
What we can deliver okay. That's.
That's very helpful. If I can ask one last question.
Follow up on Brian's comments on M&A right I know the Iberia deal just closed so the last thing on your mind is another deal with that said I just wanted to think big picture for a minute Brian before the Iberia deal you always talk 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 from this new vantage point do you think you need to be even larger to be competitive.
Yes. Thanks D.
Look I think at a phrase is yes, I think so.
I think.
It would be hard to argue that you can win a scale game the.
The industrial logic behind the MAA of BB&T and Suntrust and now through US is scale and they were both $200 billion plus organization. So there are some arguments for greater scale, but but when I look at the combined organization that we have.
I think we've got the capabilities and the product offerings and the ability to invest in it infrastructure and 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 of 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.
Model that puts decision, making very close to the customers.
Puts it in the places that people know their markets. They know their customers, they 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 peer.
Here's an.
And providing services and delivering returns.
Terrific. Thanks for all the color Youre.
Youre welcome. Thank you.
Our next question will come from Chris Meramec with Janney. Please go ahead.
Hey, Thanks, Brian as you make the full systems conversion. These next couple of quarters are you working towards a E D.
The old core of first horizon with a bunch of digital IP is to run this platform or do you envision creating your own new core kind of using the best in class technology.
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 Encino and in some cases where from.
Putting into place completely upgraded systems like our wire system or 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 improving and operating.
Allergy that one or both organizations as it has in place and or we can upgrade as you said would use an API is the front end capabilities.
Great. So it really is different than you would have done a merger.
Five years ago, when the system standpoint.
Yeah, I think it's not a whole lot more 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 an.
We chose the best of both organizations in terms of our ability to meet customer needs.
Deliver products and services and that's where we're headed.
Got it great. Thanks, very much for all the information this morning.
Thank you.
This will conclude our question and answer session I would like to turn the conference back over to Bryan Jordan for any closing remarks.
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.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.