Earnings Call Transcript
FIRST HORIZON CORP (FHN)
Earnings Call Transcript - FHN Q4 2020
Operator, Operator
Good morning, and welcome to the First Horizon Corp. Fourth Quarter 2020 Earnings Call. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ellen Taylor. Please go ahead.
Ellen Taylor, Executive
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.
Bryan Jordan, CEO
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 it proved to be one of unprecedented challenges, not only for our industry but for our economy and society. I'm 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 benefits, while demonstrating prudent risk management. We've 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 remains muted given 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 savings in the quarter, and now have increased our initial target of a net $170 million to $200 million. Our capital levels remain 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.
BJ Losch, CFO
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, $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 non-recurring nature that you might find helpful as you can sit here 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 side 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 costs of a promotional credit card offering that we did in late 2019, resulting from an operational issue and mailing disclosures to customers that weren't eligible for the lower rate. We went ahead and we corrected this, 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'll 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.
Bryan Jordan, CEO
Thank you, BJ. Our strong balance sheet, capital and liquidity will serve us well in this difficult environment. We have maintained underwriting standards and built a diversified portfolio focused on profitability. Despite the economic headwinds, we're 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 shareholders. Grant, we will now open it up for questions.
Operator, Operator
We will now begin the question-and-answer session. Our first question will come from Ebrahim Poonawala with Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
Good morning, everyone. Great job on the outlook and guidance, BJ. I have a question about net loan growth. Could you give us an idea of how you anticipate loan growth will trend, especially considering the slow start to the year and the combined capabilities within such horizon in IBERIA? Additionally, what is your outlook on the mortgage warehouse business, and do you expect to outperform the market despite the decline projected by the NBAA?
BJ Losch, CFO
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 expect that 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 billion dollars or more of runoff there. There'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 the 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 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 NBA 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, 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, 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, Executive
Ebrahim, I wanted to add a few more details to what BJ said. In December, we experienced strong production, marking our best month of 2020. This success was widespread, evident in our specialty areas as well as in markets across Tennessee, Louisiana, North Carolina, and Florida. We also noticed positive developments in the specialty sectors that BJ pointed out. The revenue synergies from referrals, asset-based lending, and equipment finance have generated a lot of enthusiasm among our bankers now that we've merged these two exceptional companies. I feel optimistic about the strong opportunities available for us to grow or acquire within the company.
Ebrahim Poonawala, Analyst
Got it. And ex-PPP and the mortgage warehouse, is there any portfolio where you expect a runoff?
BJ Losch, CFO
Runoff as an intentional runoff?
Ebrahim Poonawala, Analyst
No, where you see balances declining in any meaningful way.
BJ Losch, CFO
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 many of our markets and in several of our businesses. So 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 that doesn't really start to occur until the back half of the year as the front half.
Ebrahim Poonawala, Analyst
Got it. Thanks for taking my questions.
Operator, Operator
Our next question will come from Jared Shaw with Wells Fargo. Please go ahead.
Jared Shaw, Analyst
Hi, good morning.
BJ Losch, CFO
Good morning.
Susan Springfield, Executive
Good morning.
Jared Shaw, Analyst
Maybe I guess, starting with the allowance and the expectation for pretty strong credit performance. How much are you depending on a 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 were double-counted 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 mark?
BJ Losch, CFO
Yes. So I'll start. As you know, on the CECL reserves, a lot of the quantitative modeling is based on what the scenarios are going to tell you in 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 then a lot of places meaningfully come down. And so we start with those, but then there's the 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 reserves 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 to 35 range, and we've got an ACL in the 2.10 range, 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 is our provision comes down pretty meaningfully.
Jared Shaw, Analyst
Okay. Thanks. And 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 a 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 have the success with IBKC, would you be interested in potentially being back in the market?
Bryan Jordan, CEO
Jared, this is Bryan. Good morning. 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 the primary objective, number one. 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 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 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 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 percentage, it would be focused 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, Analyst
Thanks for the insights.
Bryan Jordan, CEO
You're welcome. Thank you.
Operator, Operator
Our next question will come from Jennifer Demba with Truist Securities. Please go ahead.
Jennifer Demba, 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, CEO
Well, yes, 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 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 alliance 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, is to continually think about how we reallocate our infrastructure costs to improve our products and our services. And you will see as we get through this integration that we're doing a lot of work between now and in the final integration of the two companies sometime later this year, 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 of taking advantage of the growth opportunities we see in this footprint.
Jennifer Demba, Analyst
Thanks a lot.
Bryan Jordan, CEO
You're welcome. Thank you.
Operator, Operator
Our next question will come from Ken Zerbe with Morgan Stanley. Please go ahead.
Ken Zerbe, Analyst
Thanks. Good morning. I was actually hoping to actually talk about the $200 million of cost savings, the revised $200 million. How much of that falls to the bottom line versus being reinvested? And I guess the reason I ask that, 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. But I would love to hear your thoughts. Thank you.
Bryan Jordan, CEO
Well, again, this is Bryan. I expect what you'll see is that those cost savings will drop to the bottom line. The guidance or the outlook slide that's there exists for 2021. And most of those cost savings will come in later in 2021, and really apply at 2022. So, our expectation is that they drop to the bottom line, just like the original $170 million commitment that we laid out.
Ken Zerbe, 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.
BJ Losch, CFO
Yes, I think, Ken, my expectation is that towards the end of the year, the difference between reported and adjusted is going to be very modest. 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, Analyst
All right, thank you very much.
Operator, Operator
Our next question will come from Steven Alexopoulos with JP Morgan. Please go ahead.
Bryan Jordan, CEO
Steve, you’re there?
Operator, Operator
Steven your line may be muted on your end.
Susan Springfield, Executive
Grant, let's go and take the next question.
Operator, Operator
Okay. One moment. Next question will come from Brock Vandervliet with UBS. Please go ahead.
Brock Vandervliet, Analyst
Good morning, everybody.
Bryan Jordan, CEO
Hey, Brock.
Brock Vandervliet, 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 is, is it – how low does it prudently go?
BJ Losch, CFO
Yes. So, Ken, I’ve spent a lot of time in…
Bryan Jordan, CEO
Brock.
BJ Losch, CFO
Sorry 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 a percent in aggregate, and we're well above that right now. If you look at the end of the first quarter, which maybe 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 saying, 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 $100 million of reserve release, which is pretty massive to happen 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's a lot more bias towards us releasing reserves a lot more than there is having to even hold it much less increase this year.
Brock Vandervliet, Analyst
Got it. Okay. And just shifting over to funding. You've been working down your CD book and dropping that rate as well as a similar trend with the borrowings. How much flex do you have in those two categories to either lower balances or lower rates?
BJ Losch, CFO
Yes. So I'll start with the borrowings first. So the borrowings, we were still carrying essentially to HoldCo debts maturities. One of which we obviously retired in the fourth quarter. So that drove a lot of our borrowings down. So I expect those 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 hadn't seen a lot of mix shift towards 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, yes, there's 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 dialogue 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's a little bit more opportunity to affect change in our interest-bearing deposits around our money market, and savings accounts on consumer and commercial.
Brock Vandervliet, Analyst
Got it. Okay. Thank you for the color.
BJ Losch, CFO
Sure.
Bryan Jordan, CEO
Thank you.
Operator, Operator
Next question will come from Brady Gailey with KBW. Please go ahead.
Brady Gailey, Analyst
Yes, thanks. Good morning, guys. 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 you were referring to when you were talking about the low double-digit ROE? And is there potentially an update to that number?
BJ Losch, CFO
Yes. We just printed the update 18%. Just kidding. Just kidding. Yes, I think when we were talking about the low double digit, it clearly had an expectation of much higher than $1 million of revision. So that was certainly helpful. But I think, on a relative basis, we continue to believe that we can generate top tier returns on tangible equity. And I think as I 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 will 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? Yes, in 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, Analyst
That's helpful. I wanted to revisit the buyback since you're already above the 9.5% target on common equity tier one. You mentioned that risk-weighted assets are decreasing this year and you expect to be profitable, which will raise that ratio even further. Additionally, your stock remains relatively inexpensive at one four of tangible. It seems there is a real opportunity for a buyback. Do you expect to be aggressive with the buyback this year?
Bryan Jordan, CEO
Yes. Brady, this is Bryan. I'm not going to bite on aggressive because that's a term of art as opposed to science. Look, I think you're right. I think we would show in our outlook that 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 has to be resolved. And we've laid out sort of our expectation. One of the keys is, 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 the corollary to that is, is what happens with these more virulent strains and do they are more at least more transmissible strains of COVID. And do they result in more slowdown, shut down, 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, Analyst
Okay. And then finally for me, an easy one. I mean BJ its tax rate was all over the place last year, which I get given the volatility or probability. 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?
BJ Losch, CFO
Yes, I think so. I would think in the 23 to 24 range somewhere right in there.
Brady Gailey, Analyst
Great. Thanks, guys.
BJ Losch, CFO
Sure.
Bryan Jordan, CEO
Thank you.
Operator, Operator
Our next question will come from Michael Rose with Raymond James. Please go ahead.
Michael Rose, Analyst
Hey, good morning, everyone. Hey, I just wanted to dig into fee income outlook a little bit. You mentioned strengthening 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 reconcile to the guidance a little bit more specifically? Thanks.
BJ Losch, CFO
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 a 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've still seen strong volumes in fixed income. It's a matter of fact, in the fourth quarter, 80% of the days had over a million dollars of revenue in the quarter, 80%. And we expect that to continue over the next few quarters. So we expect fixed income to stay pretty strong relative to fourth quarter levels. That helps.
Michael Rose, 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 the 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 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? Thanks.
BJ Losch, CFO
Sure, absolutely. So, yes, we continue to track our revenue synergies. We started as of July 1st, and so they're still fairly modest given the muted growth opportunities that we're seeing. But it's in the $8 million annualized revenue range at this point. And that’s a relief 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, CEO
Michael this is Bryan. Areas that we're really seeing great opportunities are 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, and 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 swath of the product set, and our bankers are excited about it, they're spending a lot of time on it, and they're making an awful lot of referrals. And BJ quoted a sort of a revenue number annualized. We think the pipeline's probably that bigger or bigger at this point. And as I said, setting back in the early December timeframe, the words that I used are something like will probably blow away the $30 million of revenue synergies that we saw a lot of in Capital Bank, we just think that it's a huge opportunity for us.
Operator, Operator
Our next question will come from John Pancari with Evercore ISI. Please go ahead.
John Pancari, Analyst
Good morning.
Bryan Jordan, CEO
Good morning, John.
Susan Springfield, Executive
Good morning.
John Pancari, Analyst
Especially if you can elaborate a little bit more on what drove the upsizing of the cost saves? I believe you commented on that at an earlier presentation in the quarter. But just one little bit of the color behind that. And then secondly, 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.
BJ Losch, CFO
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, excuse me, in exceeding the $170 million, which is why we upsized it. We do believe, though, that they will come more towards 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'll involve a lot of real estate-related things as we take out more costs.
John Pancari, 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 just yet on buybacks?
Bryan Jordan, CEO
Not that we're aware of. No.
John Pancari, Analyst
Okay, got it. All right, that's it for me. Thanks.
Bryan Jordan, CEO
All right.
Operator, Operator
Our next question will come from Steven Alexopoulos with JP Morgan. Please go ahead.
Steven Alexopoulos, Analyst
Hi, everyone. Can you hear me now?
Bryan Jordan, CEO
Hi, Steve.
Steven Alexopoulos, Analyst
Hello. Okay. So first on expenses. So on Huntington's call this morning, they talked about stepping up the pace of investment in the near-term to better position for an eventual recovery. And you guys are guiding down expenses in 2021 with cost savings 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, CEO
This is Bryan, Steve. 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's 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 invest in other areas and find 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 their areas like our equipment finance, and our asset-based lending businesses where we need to be able to support the broader franchise are examples.
BJ Losch, CFO
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 Encino 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's a heavy, heavy lift on 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 costs out of the organization which we think is very positive.
Bryan Jordan, CEO
So 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 or 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 making investments in products rolling out and online banking, online platforms, 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, Analyst
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, 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?
BJ Losch, CFO
Yes. Thank you for bringing up the bonefish. I still like it. Steve, we've 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, Analyst
Okay, that's very helpful. And if I can ask one last question. Just to follow up on Bryan'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. 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 vantage point do you think you need to be even larger to be competitive? Thanks.
Bryan Jordan, CEO
Yes. Thanks, Steve. Look, I think in a phrase is, yes, I think so. I think it would be hard to argue that you can win a scale game that industrial logic behind the MOE or BB&T and SunTrust and now Truist is scale, and they were both $200 billion plus organizations. So, there's some arguments for greater scale. But when I look at the combined organization that we have, I think we've got the capabilities in the product offerings and the ability to invest in an infrastructure of 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 a 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 where 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, Analyst
Perfect. Thanks for all the color.
Bryan Jordan, CEO
You're welcome. Thank you.
Operator, Operator
This will conclude our question-and-answer session. I'd like to turn the conference back over to Bryan Jordan for any closing remarks.
Bryan Jordan, CEO
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
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.