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First Horizon Corporation (FHN) Q3 2021 Earnings Call Transcript

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First Horizon Corporation (NYSE: FHN)
Q3 2021 Earnings Call
Oct 20, 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 Corporation Third Quarter 2021 Earnings Release Conference Call. [Operator Instructions].

I would now like to turn the conference over to Ellen Taylor, Head of Investor Relations. Please go ahead.

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Ellen Taylor -- Head of Investor Relations

Thanks, Kay. Good morning, everyone. We really appreciate you joining us on such a busy day. This morning our President and CEO, Bryan Jordan, and our Chief Operating Officer and Interim CFO, Anthony Restel will provide some prepared remarks and then we'll be happy to take your questions. And we're pleased to have Susan Springfield, our Chief Credit Officer, in the room with us today to assist us with that effort.

So I need to remind you that we will make forward-looking statements today that are subject to risk and uncertainties, and we ask you to review the factors that may cause our results to differ from expectations on page 2 of our presentation and in our SEC filings. You can find our earnings materials on our website at ir.fhnc.com.

Additionally, you need to be aware that our comments will refer to adjusted, results which exclude the impact of notable items. These are non-GAAP measures. So it's really important for you to review the GAAP information in our earnings release and on page 3 of our presentation. And last, but not least, you need to understand that our comments reflect our current views and that we aren't obligated to update them.

And with that, I'll hand things over to Bryan.

Bryan Jordan -- President and Chief Executive Officer

Thank you, Ellen. Good morning, everyone, and thank you for joining the call. I'm pleased with the continued progress across our company this quarter and believe that our results demonstrate the benefit of our more diversified model. Our attractive base of specialty businesses and higher growth markets are starting to drive our performance. We delivered EPS of $0.50 a share and a return on tangible common equity of over 18% on an adjusted basis, despite the near-term headwinds that the industry is facing with continued pressure on short-term rates and strong competition given growing levels of excess liquidity and muted loan demand. Given the continued improvement in the macroeconomic environment as markets reopen, I'm increasingly confident that our client-focused value proposition with a broad product set positions us well to be nimble and focus on the key segments where we can differentiate. As a result, there were several bright spots in the quarter that I think are worthy of noting.

Our net interest income was down in the quarter given expected reductions in net merger-related and PPP portfolio benefits. We generated core net interest income growth of 1% with underlying loan growth of 1%, which was driven by a commercial loan growth of 2%. We continue to see momentum in our commercial pipelines and the quarter ended with unfunded commitments up 5% to just over $19 billion. Our team remains strongly focused on serving clients and anticipating their needs to continue to deepen relationships across our expanded footprint.

Our net interest-bearing deposits declined 3 basis points -- our net interest deposit cost declined 3 basis points in the quarter. The team is intensely focused on moving our costs toward peer median, and we think we are well positioned to hit the target sometime next year. It's also important to note that we're well positioned to benefit in a rising rate environment and ended the quarter with interest rate sensitivity profile of a 16% increase in net interest income and a 100-basis point shock across the yield curve.

And while we expected total fees to be down given relatively healthy levels of fixed income and mortgage banking fees last quarter, we also saw a return to more normalized levels in traditional banking fees, which were up 2% in the quarter with particular strength in wealth on strong annuity sales. Credit quality continues to be excellent with improvement in the overall quality of the loan portfolio highlighted by net charge offs of only 2 basis points and a 47% decrease in loan balances on deferral in the quarter. That, coupled with improving macroeconomic environment, drove another robust reserve release with a provision credit of $85 million in the quarter. This was a 26% decrease in the provision benefit this quarter versus last quarter. Given the impact of CECL, as we look ahead, provision expense will likely be a headwind for us and the industry overall.

As our capital levels remain strong with a CET1 ratio of around 10.1%, we increased our capital return by nearly 60% in the quarter, repurchasing 9 million shares of common stock and ended the quarter with a tangible book value per share of $10.88. And despite the difficult decision to delay the systems integration until February of next year, we continue to execute on the objectives of the MOE, with strong progress on integrating systems and aligning products and capabilities, including piloting a new digital platform for treasury services, launching new relationship and banker profitability tools, and completing the first round of banking center consolidations. Given some higher cost tied to integration of our platforms along with higher costs due to markets reopening, much of which is marketing, as well as the seasonality and the idiosyncratic items, our expenses were up 3% in the quarter. However, as Anthony will cover later, we expect expenses to moderate in the fourth quarter. Alongside our integration efforts, we continue to invest in technology and people to drive revenue synergies and expense efficiencies, and thus far we've identified approximately $35 million in revenue synergies tied to the merger. We remain confident in our ability to deliver at least $200 million in net annualized savings by the fourth quarter of next year.

As we begin to look ahead in the next year, I'm increasingly optimistic about the pace of the macroeconomic recovery as the world emerges from the pandemic and that the power of our combined organization will continue to be increasingly evident. I'm very grateful for the dedication and hard work of our associates as they continue to work to deliver value for all of our constituents; clients, communities, and shareholders and help drive the momentum to achieve our long-term performance objectives.

And now, Anthony will run through the financial details. Anthony?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Thanks, Bryan. Good morning to you all. Slide 6 provides the highlights of the quarter, most of which Bryan has already covered. Overall we continue to make solid progress across the combined organization, and we're pleased to see evidence of the power of the MOE starting to emerge.

I'll briefly touch on slide 7 where we outline the notable items in the quarter which reduced our results by $51 million after-tax or $0.09 per share. In addition to merger-related notable items of $44 million, we recorded $23 million of non-cash, pre-tax costs tied to retiring legacy IBERIABANK trust preferred securities in the quarter and expect to record an additional $3 million next quarter. The redemptions will reduce interest expense by about $5 million annually with an expected payback of approximately five years.

Slide 8 provides an overview of our adjusted financials for the quarter. We generated PPNR of $284 million as underlying improvement in core net interest income and traditional banking fees was masked by the impact of expected declines in net merger-related and PPP non net interest income along with lower fixed income and mortgage banking fees. Adjusted expenses of $480 million moved higher largely reflecting idiosyncratic items tied to strategic investments and additional costs we incurred tied to markets reopening. Given continued improvement in the macroenvironment, overall credit quality, and muted loan growth, we posted a credit to provision of $85 million, which was down from $115 million credit last quarter. This reduction drove a $0.04 decline in EPS. But overall, we continue to post healthy returns with an adjusted return on tangible common equity of 18.4% and 14% before the impact of the provision credit. As Bryan mentioned, tangible book value per share came in at $10.88, up 1% as GAAP net income was largely offset by a $0.23 impact tied to the return of capital and a $0.07 decline tied to the mark-to-market on the security portfolio in OCI.

Moving to slide 9, net interest income was down $5 million linked quarter given the expected decrease tied to lower merger accretion and PPP portfolio balances, core net interest income was up 1% as the benefit of lower deposit cost, day count, commercial loan growth, and higher investment portfolio income was partially offset by continued declines in consumer loan balances and overall loan spread compression, given the continued reductions in LIBOR and the competitive landscape. During the quarter, we ramped up our security purchases to put more excess cash to work and added around $400 million on a spot basis at a yield of around 1.5%. As a result, our securities to interest-earning assets ended the quarter at 11%, up 1%. Our current plan is to put a total of $1 billion of excess cash to work in securities by year-end, and we will continue to reevaluate opportunities to redeploy additional cash as we move forward.

Reported NIM was down 7 basis points linked quarter with core NIM down 8 basis points, driven by a 5 basis point impact tied to higher excess cash. We ended the quarter with excess cash of $14 billion, up from $12.7 billion in the second quarter. Core NIM was also lower given a 2 basis point reduction in interest recoveries on nonaccrual loans, as well as overall spread tightening with new origination spreads down around 15 basis points linked quarter, which collectively translated to about 3 basis points of pressure on the margin. We also generated a 2 basis point benefit to the margin with further improvement in the deposit mix for the DDA and a decline in interest-bearing deposits. I would also note that this quarter we added disclosure to the relationship of core net interest income to risk-weighted assets to help illustrate the impact of NII, excluding the excess cash position. Under this view, you can see that year-over-year, the metric is down about 10 basis points compared to the core margin, which is down about 40 basis points.

And on slide 10, let's cover the puts and takes on fees. Headline fees were down around 7% in the quarter. This reflected anticipated declines in other non-interest income and fixed income and mortgage that were partially offset by growth in brokerage trust and insurance tied to higher annuity sales, as well as higher service charges and fees as an increase in transaction volume and higher leasing income tied to terminations helped to mitigate the impact of a recent change in our NSF pricing structure. Fixed income average daily revenue came in at $1.3 million compared with $1.4 million last quarter. Mortgage banking and title fees were down $4 million given continued spread tightening and our focus on driving more of our originations on balance sheet. While overall originations were down 11% for the quarter, portfolio originations were up 5%. The reduction in our other non-interest income was driven by an $11 million decrease in security gains tied to a legacy IBKC investment in the second quarter.

With regard to service charges, we recently began aligning key features across the legacy institutions approach to service charges, with the goal of simplifying and streamlining the experience for our clients. The new program was launched in late August at First Horizon, with the remainder of the change occurring following the system conversions in February for our IBERIABANK franchise. Over time, we expect the changes to reduce our overall NSF overdraft fees in the range of $9 million to $10 million annually, with changes going into production in August for First Horizon and with the February conversion for the IBERIABANK clients.

Let's turn to slide 11 and review expense trends. Adjusted expenses totaled $480 million, up $15 million in the quarter, largely because of seasonality and some idiosyncratic costs related to strategic investments and additional costs related to markets reopening, which was slightly offset by $1 million tied to incremental merger cost saves. Personnel expense decreased $4 million linked quarter with salaries and benefits stable as a $4 million FICA credit helped mitigate the impact of day count, seasonally higher medical cost, and labor supply constraints. Incentives and commissions remained relatively stable as a $3 million increase from pandemic-related vacation carryover partially offset lower revenue base payouts in fixed income and mortgage. I should note that as we continue to shift more of our mortgage originations on balance sheet, you will see a reduction in mortgage fee income without a corresponding reduction in incentives. Additionally, higher contractor cost tied to investments in new systems, largely in areas like treasury solutions and business banking online, as well as increased advertising spend given our reopening of markets, pushed outside services up $9 million. And finally, other non-interest expense was up $11 million in the quarter driven by higher tax credit related contributions, a $2 million increase in fraud cost, and higher travel and entertainment costs also for markets reopening. We are focused on driving efficiencies and identifying opportunities to redeploy expenses toward areas which provide higher growth for the organization, particularly post the systems conversions in February.

On slides 12 and 13, we cover our balance sheet profile. Excluding PPP balances, which were down $1.8 billion in the quarter, average loans increased 1% in the quarter. And as Bryan mentioned, this reflected commercial growth of 2%. Our pricing strategies in the mortgage warehouse business helped deliver a 7% increase in balances with purchase volume up 3 percentage points linked quarter to 56%. Additionally, we continue to see traction in other specialty businesses with growth in asset-based lending, equipment finance, and franchise finance, somewhat offset by reduction in commercial real estate, given higher levels of refinancing activity from the capital markets. This is being somewhat offset by continued pressure in retail real estate secured refinancings, which drove a 1% decline in consumer loans, but we're reviewing opportunities to increase our recapture of these with refi opportunities. Overall, we are pleased to see the path of the economic recovery and the increased activity levels across our footprint translate to this level of loan growth.

On the liability side, we saw a continued inflow of deposits, driven by a $1.1 billion average increase in DDA, or 4%, which helped to further improve the mix of deposits. And with interest-bearing deposit costs down 3.3 basis points to 17 basis points for the quarter, our total funding costs improved 2 basis points. As Bryan mentioned, we are intensely focused on driving our interest-bearing deposit costs down toward peer median levels.

On slide 14 and 15 we provide information on the asset quality and reserves where we continue to see exceptional low levels of charge-offs in non-performing loans and our allowance coverage of loans is healthy at 1.45% and 1.65%, excluding loans to mortgage companies and the PPP portfolio. Additionally, when you consider the unrecognized discount on acquired loans, our total loss absorption is roughly 2%, which is very strong.

Turning to capital on slide 16. Our CET1 ratio of 10.1%, down from 10.3% in the second quarter tied to the accelerated share repurchases in the quarter, loan growth, and higher unfunded commitments. As Bryan mentioned, we returned $224 million in capital to common shareholders during the quarter, including $142 million, or 9 million shares of common stock repurchases.

Moving on to merger integration on slide 17. While we had to delay the core systems conversions to early next year, we continue to make substantial progress across a number of fronts. During the quarter, we completed a couple of conversion events and completed our wealth and trust and credit card conversions, finalized the mortgage system conversion, and launched a pilot of our new online banking platform for commercial customers. We achieved $96 million in annualized run rate savings against our net target of $200 million. Additionally, we continued making solid traction on revenue synergies and have thus far identified roughly $35 million of annualized revenue synergies that are tied to commercial loans and additional synergies tied to debt capital markets, mortgage, and private client wealth. We are extremely focused on retaining and growing our client base by continuing to enhance or expand our set of products and services.

On slide 18, we provided our fourth quarter outlook. We expect NII to be down at the high end of the low-single-digit range with average interest-earning assets and loans down modestly given the outlook for reduced merger accretion and PPP benefits and continued low rates. We expect to continue to see modest loan growth, excluding PPP, and that we will see benefits as we continue to lower deposit costs. At period end, we had a total of $2 billion in PPP loans, including $600 million related to Round 1 and total PPP fees of $45 million. We expect the vast majority of the Round 1 portfolio to be forgiven by the end of the year and that the Round 2 will largely be forgiven by the third quarter of next year.

Regarding non-interest income, we expect fee income to be down in the high and the mid-to-high single-digit range with additional decreases tied to our NSF pricing changes and seasonally lower mortgage and wealth fees, as well as further moderation in fixed income. We expect non-interest expense to decrease in the low-single-digit range with higher third quarter levels, which included investments, seasonality cost tied to markets reopening, and some idiosyncratic items. And our outlook calls for charge-offs to be in the range of 5 to 15 basis points and that it's reasonable to see continued reserve outflows near term. Finally, we expect our CET1 ratio to remain in the 9.5% to 10% range. As Bryan mentioned, we feel good about our positioning and our ability to perform well given the current economic environment.

Finally, slide 19 includes our short- and long-term objectives. We believe our more diversified model and highly attractive franchise will continue to deliver revenue synergies and loan growth. Our MOE objectives to complete the systems integration and to identify other expenses to redeploy to higher-growth and higher-return opportunities will allow us to continue to support the dynamic digital needs of our clients and associates and drive continuous improvement in productivity and efficiency beyond the integration. And as we continue to actively manage capital, our balance sheet, and credit quality performance position us well to continue to deliver attractive results near term and into the future.

And with that, I'll give the call back to Bryan.

Bryan Jordan -- President and Chief Executive Officer

Thank you, Anthony. I'm excited about the momentum in the results of the combined organization and what we've achieved this quarter. The power of our attractive franchise, with the benefit of a more diversified business model in higher growth markets, is evident in our results. The progress we have made toward our merger integration objectives continues to deliver revenue synergies, provide our clients with improved products and technology. As the macroeconomic environment continues to improve, our capital structure and risk management infrastructure positions us to deliver higher growth and top-quartile returns into the future.

I am grateful again to our associates for their dedication toward building and strengthening client relationships and supporting our communities, and I am confident in our ability to become a top-performing regional bank and to drive enhanced shareholder value.

With that, Kay, we'll now open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Casey Haire with Jefferies. Please go ahead.

Casey Haire -- Jefferies LLC -- Analyst

Yeah, thanks. Good morning, everyone. Just, Anthony, point of clarification on the NII guide, the high-end of the low-single digits, does that mean 3% or 1%?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

3%, Casey.

Casey Haire -- Jefferies LLC -- Analyst

Okay. Very good. Okay. And on the expense side, the reopening costs continue to tick up and are kind of chewing into the cost saves. I know there wasn't a lot of progress there this quarter. But just curious, as you look forward, are the reopening costs kind of fully in there or is there more potential headwind there that could mute the cost saves that you have remaining.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

No. I think the reopening costs largely are kind of in the numbers now.

Casey Haire -- Jefferies LLC -- Analyst

Okay, very good. Okay. And then just lastly on the fee side, the NSF fee policy change and the fixed income you mentioned as potential drags. Can you give us some color on where ADRs you expect to trend this quarter and then where can the service charges line run rate in the fourth quarter?

Bryan Jordan -- President and Chief Executive Officer

Yeah, Casey, this is Bryan. The fixed income business is inherently unpredictable. We still feel good about the environment. There's still a tremendous amount of excess liquidity across the financial system and bond activity continues to be good. Our forecast for the year is $1.5 million average daily revenue. We expect that we'll fall in that range for the full year. So that implies a little lower level in the fourth quarter. But we still expect to be in that $1.5 million in average daily revenue.

The NSF fees, we have made some changes to, one, reflect our desire to be more customer friendly, which has some impact on it; and then the fact that the liquidity is so strong, it has driven down NSF, OD, service charge fees, etc., in this environment. The changes we made on an annual basis amount to about $8 million on an annual basis. So on a quarterly basis, it'll be rather insignificant, but we think it'll be better for customer acquisition, retention, and growth over the long term.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

And then, Casey, want to just add just since I know this somewhat turns into modeling for you. That number that Bryan mentioned on the annual impact is not an equivalent number every quarter, right. So just recognize that typically early in the year, a lot of our consumer customers benefit from tax refunds, etc., which kind of keep the number deflated in the early part of the year and then typically it accelerates through the year. So just know that it's not a flat number every quarter.

Casey Haire -- Jefferies LLC -- Analyst

Okay, great. And just one more. The deposit growth obviously continues to be very strong. You've got the cash position increased again this quarter. What is the -- do you expect that to continue the liquidity strength? And then what is a normalized cash position for you guys?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. I do think the cash, unfortunately, probably continues to build. Just recognize, as we continue through the PPP forgiveness process that we end up receiving cash from that as we kind of go through that exercise. So we do have cash. Will likely continue to be very strong for us. What I'll tell you is we probably have, I don't know, Bryan, maybe $10 billion to $12 billion of excess cash relative to what we would typically hold in a kind of more normalized type environment.

Bryan Jordan -- President and Chief Executive Officer

Yeah.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

And I'll remind you, although it's painful and we always spend a lot of time talking about what we're going to do to use the cash or dispose of the cash. Just recognize that cash is coming in at something lower than what we earn on the cash. And so although it's painful, just recognize that we're earning 15 basis points and in a lot of cases, yes, it is inflating the balance sheet, but when you look at the growth during the quarter, we're really not paying anything for that. So although I don't like it because it creates a lot of noise for us, I don't mind the concept of picking up a lot of nickels along the way to generate some income.

Bryan Jordan -- President and Chief Executive Officer

The other thing it does, too, Anthony is it adds deposit lag when the Fed starts increasing rates. It's a tremendous amount of liquidity and I think across the board for the industry you'll see more deposit lag than it's been historically modeled simply because of that level of liquidity.

Casey Haire -- Jefferies LLC -- Analyst

Thanks very much.

Bryan Jordan -- President and Chief Executive Officer

Thanks, Casey.

Operator

The next question is from Brady Gailey of KBW. Please go ahead.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hey, thanks. Good morning, guys.

Bryan Jordan -- President and Chief Executive Officer

Good morning, Brady.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

So if I look at loan growth for the quarter, ex PPP and ex the warehouse, I think loan growth was about 3% linked quarter annualized. And I was just wondering if you had any thoughts on doing an amount of loan growth better than that. I mean we've seen -- especially this quarter we've seen some of your peers really start to inflect. Synovus, for example, grew 10% linked quarter annualized this quarter, I know Pinnacle was even over that. So some of your peers are putting up notably higher loan growth as we're coming out of COVID. So just wondering if you guys could comment on the idea of better loan growth beyond just the 4% level you saw this quarter.

Bryan Jordan -- President and Chief Executive Officer

Yeah. I'll start, Brady, and then I'll ask Susan to add any color she likes. She's very, very close to this. This is an interesting environment and the demand for loan growth is not extraordinarily high even with the recovery. We see the markets being very, very competitive, and if I had to characterize the markets, I'd say that they're becoming very competitive on price, on structure, and on term. And we're being selective. One of the things that we have emphasized and we highlighted in our comments a couple of different ways this morning is we want to protect the integrity of the balance sheet and one protect credit quality. So we're being very thoughtful about price structure and term with a eye toward long-term credit quality.

That said, we see real opportunity in our customer base. We're seeing real strong momentum across our franchise. Our pipelines have continued to strengthen. We have highlighted on this call that our commitments were up about 5% quarter over quarter, which is in my view spring-loading the balance sheet for future growth. And so I'm optimistic about our ability to grow loans and to protect credit quality. We don't get fixated on setting a number that we've got to go out and hit. We focus on, one, acquiring good bankers, having our bankers focus on their customers in the communities and picking up the opportunities and being competitive that exists in the marketplace.

I'm not close enough to other's results to have a sense of what drove their growth, but I'm encouraged about our ability to grow loans in a quality fashion. Susan, anything you want to add to that.

Susan Springfield -- Chief Credit Officer

Sure. We are seeing good momentum in pipelines. Also, as was mentioned earlier, the revenue synergies from the combined organization are really, really starting to show up with referrals and asset-based lending, equipment finance, both of those areas had good increases quarter over quarter. And if you look at pipeline, there's additional pipeline for revenue synergy.

In addition to those specialty businesses, we're seeing strengths in our markets which, as you know, are very, very good strong growth markets. So Texas, Georgia, North Carolina, Florida, Middle Tennessee, etc. We're in some of the best markets in the Southeast and Texas. In addition to that market -- those good markets, we've had good success continuing to hire both relationship managers and market leaders in some of those markets that are very, very important to us from a high-growth perspective.

In addition to new-to-bank type relationships that we're getting both from existing bankers as well as some of these folks that we're bringing over, these strong producers, we're also selectively taking higher hold limits with our existing clients as a result of our larger balance sheet. So we're very optimistic about the future. But as Bryan said, we will remain prudent and be selective.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

All right. And then my second question is on just deploying the cash into the bond book over time. And I hear you, you're going to do another $1 billion by the end of the year. But as Anthony said, you have $10 billion to $12 billion of excess cash which sounds like it's not going anywhere anytime soon. The long end of the curve is starting to rise here. As we look into 2022 here, should we think about more cash being pushed into the bond book over time kind of similar to what you'll do in the back half of this year?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. Brady, so just a point of clarification, right. So we announced putting a $1 billion in the last quarterly conference call. We've got about $400 million or so of that done in the third quarter. So we've got a little bit -- $600 million, I'll call, a tailpiece that we expect to get done by the end of the year. Look, the good news is rates are moving up, but I'll tell you, I think we're going to kind of roll through the end of the year and then reevaluate kind of where we think we are relative to where the economy is at and what makes sense for us, right. So, as you know, right, the expectation for an increase in federal funds continues to creep forward, and so I think we're going to -- as opposed to telling you what we're definitely going to do now, what I would tell you is we're going to evaluate it relative to what makes the most sense for us. But I think it's probably prudent here to wait and see what kind of evolves over the next two to three months before we make that call. So it's a good question for the January conference call.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah, that's fair. All right. Thanks, guys.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Thanks. Brady.

Operator

The next question is from Steven Alexopoulos of J.P. Morgan. Please go ahead.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Good morning, everyone.

Bryan Jordan -- President and Chief Executive Officer

Morning, Steve.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Good morning.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

I want to start -- so, Bryan, the 5% increase in commitments you're calling out, was that from existing customers or new customers? And then when you say that competition's high on price structure and term, is that from pure regional banks, larger banks, maybe give some color there, too.

Bryan Jordan -- President and Chief Executive Officer

The last part is, yes, it's across the board. The competition starts with smaller institutions all the way up through some of the bigger players, and it's really trying to show growth in a period where loan demand is not as strong as you might expect, and it's reasonably intuitive I suppose given the amount of excess liquidity that sits in the system. Now we talk about the excess liquidity on our balance sheet. That's customers' money. So that means that they don't need to borrow as much.

The 5% commitments is a combination of things. A lot of it is construction lending. One of the variables that we and everybody else is dealing with I suppose is in just the sheer amount of payoffs. Our commercial real estate business, for example, had very strong originations in the second and the third quarter, but payoffs were actually greater. There's an end to that, and so when we book a new loan in commercial real estate, that loan will fund up [Phonetic] that flows into those numbers. So it's a mixture of existing customers. It's a mixture of new customers.

We've got a very nice blend. We're seeing good momentum across the franchise in our higher-growth markets and some of our more stable markets. One of the ones that's done extremely well over the last several quarters is Alabama, for example. We're seeing great growth opportunities there in acquiring new customer relationships.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Okay. That's actually very helpful. I wanted to shift gears and follow up on the $8 million annual impact from the NSF pricing change, which is actually fairly minimal. How much revenue would you have ultimately given up if you just eliminated the $15 transfer fee also?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

I'll tell you what, let us see if we can -- don't have that right in front of us. Let us see if we can dig that up during the call. If we can get it, we'll come back before we get off.

Bryan Jordan -- President and Chief Executive Officer

Yeah.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Okay.

Bryan Jordan -- President and Chief Executive Officer

It'll be more than $8 million.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

More than $8 million. Okay, it'd be helpful to see that number. And then, Bryan, just final big picture question. So looking at the list of items on slide 17 regarding the merger and integration, there's still quite a bit of wood to chop, right, particularly with the system conversion being delayed a bit. When do you see the company moving more fully back on offense, right, let's focus on retaining staff, more focus on recruiting staff? Is this a mid-'22 event and is that the point where we'll start to see the growth that this new company is capable of delivering? Thanks.

Bryan Jordan -- President and Chief Executive Officer

Yeah. So first on the deferral of the integration event. We passed the Columbus Day weekend, and like everybody else, we hoped that we would have it done then. As I reflect back on the decision that we were making in the midst of Ida and being forced to drop customer notifications, etc., on the Monday following out and hitting New Orleans on Sunday, I feel good about that decision. I think seeing the devastation there, the difficulty and recovery in the market, and the impact on our associates and our ability to train and deploy technology, etc., and then the impact on our customers, I think that was a good move.

We will get that integration completed in February. I have a high degree of confidence, and we'll make good use of the time. We've talked about the impact on one-times, we've talked about the impact on delay in cost savings. I would say that you will start to see the significant benefits of the integration starting in the last part of the first quarter and clearly picking up on the cost-saving side in the second quarter of 2022.

I think as we sort of alluded to in a number of different ways, we're starting to see the benefit of the revenue side of it. Today, we've mentioned the $35 million in revenue, and we've talked about the acquisition of customers in the franchise. So I would tell you that our markets, that our bankers are very much front-footed. They're looking to bring talented bankers onto the platform. Susan mentioned that we've hired a new President, for example, in Dallas who's come onto our platform and into the organization. We're hiring bankers. So I think we're very much front-footed, and I think you will see that momentum start to build over next couple of quarters and into '22.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Okay. Great. Thanks for taking my questions.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Hey, Steve. Hey, Steve, following up on your question, right, if you look at the kind of run rate where we are if you adjust for that $8 million number, we're around $40 million, $45 million in remaining NSF fees on an annual basis. Now, keep in mind that's relative to transaction volumes and all today. So that could all change, but that would be the current kind of run rate.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Okay, perfect. Thanks a lot.

Bryan Jordan -- President and Chief Executive Officer

Yeah.

Operator

The next question is from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Hey, thanks. Good morning.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Morning, Jon.

Bryan Jordan -- President and Chief Executive Officer

Morning, Jon.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Just one clarification on the earlier expense question. Anthony, I think you're saying that Q4 expenses probably drop back down to the levels we saw in Q1 and Q2. Is that fair?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. The expenses will pull back.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay. And some of the other items that's what you're talking about that will come out. Is that right?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. Like we had some items that don't reach the definition of kind of, I'll call it, a one-time but from our view we don't expect them to repeat. And so those will certainly roll down a little bit. And then, clearly, as we expect to see some moderation within that fee income, there are several incentive kind of structures tied to those fees, and so that'll also roll down.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

That's what gives us the confidence that we'll see the decline in the expenses in the fourth quarter.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay, good.

Bryan Jordan -- President and Chief Executive Officer

Jon, this is Bryan. We hadn't been spending much on marketing. We increased our marketing spend in the quarter. that's one of the things that we called out. I mentioned that we're piloting a new treasury services platform. We haven't taken out the old treasury services platform on either side, but we're now depreciating the new one as well. So there's a little bit of redundancy that has sort of gotten built up. That's what drove a lot of the surge in the third quarter.

I would hang my hat on the fact that we have demonstrated in the past that we have the ability to control and take costs out of the organization and that we're focused on that, and I'm confident and I think I said in my opening comments, at least $200 million in cost savings. I feel good about our ability to reduce the cost of doing business, and I would look at this as just sort of a one-time aberrational trend. And as Anthony said, you'll start to see expenses coming down later this year.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay. Yeah, you've been great on expenses. Maybe for Susan and/or Bryan. Thoughts on where the reserve could go longer term. It still seems a little bit elevated relative to your credit quality, and I just want to square that, Bryan, with some of your prepared comments saying that provision expense is likely to be a headwind for you and for the industry. Help us figure out exactly what you mean on that? Thanks.

Bryan Jordan -- President and Chief Executive Officer

Yeah.

Susan Springfield -- Chief Credit Officer

Yeah, I'll start. Jon, assuming that the economy continues to emerge from COVID, which obviously it is doing that now, and absent any other events, we believe that we could see coverage get back down to kind of a CECL day one coverage in the 115 basis points range or so. So that's kind of what we're thinking.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah. My comments about the headwind, we highlighted we had a reserve release I think was $110 million, and while $85 million is great this quarter, it's less than it was last quarter. And reserve releases will continue down. Inherent in CECL, every dollar of loan growth requires that you're actually booking reserves. So to the extent we brought it down $85 million for the loan growth we booked, we ended up at a 1.65% ex PPP, etc., we're setting up reserve. We're just sort of acknowledging that reserve releases over time will diminish and that as we get into a point where we get to this 115 basis points CECL day one area pandemic area that those reserves under CECL bill, when you book a loan, you essentially book the life loan losses, so you front end the credit cost on it. It's just going to be a headwind for us and the industry is all we're trying to highlight.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay, all right. So more of a longer-term comment is what you're saying there. Okay, thank you.

Bryan Jordan -- President and Chief Executive Officer

Yeah. Thank you.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Thank you.

Operator

The next question is from Michael Rose of Raymond James. Please go ahead.

Michael Rose -- Raymond James & Associates, Inc. -- Analyst

Hey, good morning, and thanks for taking my questions. I just wanted to go back to the fixed income business. As we get into a rising rate environment, I think if I look back to the way the business performed last cycle, there was some pressure on ADR as you guys did the Coastal Securities during that period as well, which helped to soften the decline. But can you just remind us how in a rising rate environment, the ADRs would trend assuming we get there sometime later next year into 2023? Thanks.

Bryan Jordan -- President and Chief Executive Officer

Yeah. Thanks, Michael. This is Bryan. The fixed income business is going to be affected by really the shape of the yield curve more in this cycle I think than rising rates. A couple of thoughts on our expectations. One, we still have a reasonably steep yield curve and the longer term of the curve -- the longer end of the curve has been moving up. And with the significant liquidity that exists in the financial system and the continued level of prepayments, it's actually been good for the bond business even a rising rate environment.

So our expectation is that the Fed will continue to reduce purchases or start to reduce purchase, they sort of telegraphed that they're going to do it later this year, start to reduce purchases under the quantitative easing program that will diminish over the course of the first half of 2022. That will steepen the yield curve a bit. The long-term expectations will come up, but we think there's a tremendous amount of liquidity, and that will drive a significant fixed income revenue. If you get a significant move in the short portion of the curve that would be less attractive for the business, but we've got a significant offset and the extreme interest sensitive -- I'd say very strong interest rate sensitivity that we have to rising short-term rates where the vast majority of our balance sheet is.

So we don't expect a significant spike in short-term rates. We do expect that the Fed will start moving up either late next year or early '23. But the bond business will continue to be good because you've got a relatively steep curve.

Michael Rose -- Raymond James & Associates, Inc. -- Analyst

That's great color. And back a couple years ago during that cycle, the guidance for ADRs was kind of in the 1 to 1.5 a day range. Any reason to think that it would be different this go around just broad strokes?

Bryan Jordan -- President and Chief Executive Officer

I'll tell you what, you might talk to Anthony into putting that range out there, again. B.J. and I missed that one for so many quarters that we had to say we were wrong. And I think as I looked into '22, I don't think that something in that, call it, 1.1 to 1.3 range is a is a bad range, but I don't know what I don't know about interest rates. And it's a business that we trade every single day, we deliver bonds to our customers, we buy bonds from our customers, and the shape of the yield curve will impact it. So while we can have an expectation today, we don't know what rates really look like. We just have to position for them.

Michael Rose -- Raymond James & Associates, Inc. -- Analyst

Very helpful. Thanks for taking my questions.

Bryan Jordan -- President and Chief Executive Officer

You're welcome. Thank you.

Operator

The next question is from Ken Zerbe of Morgan Stanley. Please go ahead.

Ken Zerbe -- Morgan Stanley & Co. LLC -- Analyst

All right. Great, thanks. Just in terms of the expenses, and thinking of that $200 million of cost savings related to the deal, is there going to be a meaningful step down in expenses when the system conversion happens in February of next year? I mean would we notice it from our end? Thanks.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. Ken, it's Anthony. I think you're going to see just because the conversions kind of toward the tail-end of February that the more likely scenario is you'll really see the significant move in the second quarter.

Ken Zerbe -- Morgan Stanley & Co. LLC -- Analyst

Got it. And, sorry, would second quarter be like absolute dollars lower or just lack of growth? I'm just trying to gage the magnitude of what we're talking about.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

No, no, we should see a significant step down as we kind of move between the second and third quarters.

Ken Zerbe -- Morgan Stanley & Co. LLC -- Analyst

Got it. Okay.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Not just that we're not growing, the expenses should start to decline.

Ken Zerbe -- Morgan Stanley & Co. LLC -- Analyst

I see. All right, perfect. And then just a clarification question. In the guidance slide, you mentioned that you expect modest loan growth ex PPP in fourth quarter. I know this quarter you had I think it was like up 1% ex PPP on a core basis. When you say modest, are you talking sort of a similar 1% or what number are you sort of thinking of there? Thanks.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yes. So I think we're looking at total loans, ex PPP, something around that 1%-ish. It'll be up. So that's a good range to kind of think about.

Ken Zerbe -- Morgan Stanley & Co. LLC -- Analyst

All right, great. Thank you.

Operator

The next question is from Jennifer Demba of Truist. Please go ahead.

Jennifer Demba -- Truist Securities, Inc. -- Analyst

Thank you. Good morning.

Bryan Jordan -- President and Chief Executive Officer

Good morning, Jennifer.

Jennifer Demba -- Truist Securities, Inc. -- Analyst

Bryan, question for you on M&A. We've seen a lot of deals this year. I'm wondering where you think First Horizon stands after the merger-integration next year and what are your thoughts on future M&A for First Horizon.

Bryan Jordan -- President and Chief Executive Officer

Yeah. There have been quite a few number of transactions. I don't know how the world changes, but as we sit here today, my expectation is that we've got so many tremendous growth opportunities and places to deploy capital across our franchise post this integration, that merger and acquisition is not really a priority for us. There are a couple of dimensions that go into that. I think when we get this integration, while we will have eliminated the vast majority of any technology deficits that have existed, we still believe that the goal posts continue to move on technology. And we have a number of things that we think we'll continue to invest in feature, functionality that will be better for our customers and add to our growth rate. We feel strongly about our ability to capitalize on being in 15 of the top 20 MSAs in the south and really the opportunity to leverage the relatively small or new presence that we have in many of those markets.

And finally, the other thing that's a practical consideration is we're in round numbers an $89 billion, $90 billion balance sheet. You don't just sort of stumble across a $100 billion threshold. So in our view, we want to focus on organic growth, growing our customer base, and taking advantage of these markets, and we think that coming out of this integration, we'll be uniquely positioned to demonstrate the power of this franchise. So that's a long way of saying M&A is not a priority and in our view is not the next logical step. We don't believe you can win a spending game when it comes to technology. Scale matters, but it's not the only thing that matters, and we want to execute and demonstrate the power of this footprint and this franchise.

Jennifer Demba -- Truist Securities, Inc. -- Analyst

Thank you.

Bryan Jordan -- President and Chief Executive Officer

You're welcome. Thank you.

Operator

The next question is from Jared Shaw of Wells Fargo. Please go ahead.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Hey, good morning. Thanks for taking the questions. I guess a couple. One, follow-up on the ACL. When you talk about the approaching that day one level of 115 basis points, is that something you think -- should we be thinking that by the end of '22 we could get there, or is that something that with the improving economy, we could get there faster than that?

Susan Springfield -- Chief Credit Officer

As you mentioned, there are a number of factors. I guess if the economy continues to improve and there's not another variant or something else that hits, it's possible it could be mid-year next year, and as Bryan said earlier, some of it depends on other things that we can't predict at this point.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Okay. And then you taking that extra time for the systems conversion, has that allowed you to find any incremental opportunities to emphasize or expand technology and digital offerings that weren't initially considered?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. So we have not really significantly changed our scope of what we plan to deliver for the conversion. We've taken the extra time really to run through additional mocks and dress rehearsals will be in play just to make sure that the client experience is what we want. Certainly, around the edges there's been a few, I'll call it, client experience opportunities, which we enhance, but for the most part we haven't really changed the scope of what we intended to do from a conversion perspective.

Bryan Jordan -- President and Chief Executive Officer

And coupled with the declining Delta variant, the time gives us more opportunity to do training on systems and get our people better prepared than they might otherwise have been.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Okay. And just finally for me. How were spreads on the new loan production this quarter? And do you think that we're at a bottom yet on incremental loan yield?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. Look, spreads came in about 15 basis points lower quarter over quarter. I always like to say there's a limit to how low they can go. So I think as we think about the core NII, right, we see some stability within that kind of number. But I'll call it, and we have modeled in, in terms of going forward, our expectations for some continued level of spread compression. The wildcard really is a competitive environment where that might drive us. So I think the guidance we've given is pretty clear in terms of we feel good that we're kind of reaching a trough at least in our view on that core number. But, like Bryan said, the competitive environment continues to evolve. And so just recognize that that is out there as well.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Great, thank you.

Operator

The next question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala -- BofA Securities, Inc. -- Analyst

Good morning.

Susan Springfield -- Chief Credit Officer

Good morning.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Morning.

Ebrahim Poonawala -- BofA Securities, Inc. -- Analyst

I guess just first quest question was a follow-up, Bryan, and you've touched on this on some of the responses. But I think when you talk to longer-term holders, I think there's some frustration around just when do we see the power of the franchise. And is it fair from the outside -- I think Anthony talked about by the end of 1Q '22 everything starts coming together. Should we look at 2022 in terms of ROTCE loan growth, revenue growth as a year where you should be outperforming your peers and kind of delivering on all the great things we've expected post the deal?

Bryan Jordan -- President and Chief Executive Officer

Yeah. So Ebrahim, this is Bryan. I think 2022 you will start to see the power of the franchise. I think you're actually seeing it's masked a little bit by some of the transition and some of the fee-oriented businesses. But the loan growth, pipelines, and what we're seeing across the franchise, we're starting to see emerging signs of it, and we feel very strongly that by this time next year you will see the strength of our ability to grow this franchise given our expectations for the macroeconomic environment, the interest rate environment for 2022.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. And then one other thing, Ebrahim, just to point out, I mean I realize everybody probably knows us, but as we head into all the various conversions that we're doing, whether it's card [Phonetic] conversion, whether we're putting people on TM products, right, we do go into some, I'll call it, some close-out periods where we're not selling legacy IBERIABANK clients into a new product to then have them onboard them and then have to convert them, right.

So just recognize that there are some natural things that limit our ability to do some sales as we kind of move up to the conversion point. And so all of those, I'll call it, safety nets kind of come off relative to the client experience in terms of making sure we don't have to move them twice. And so I think you'll -- with all of that stuff kind of out of the way, I think you'll start to see some of the incremental kind of push, not only on the loan sales but really across the other fee categories and the cross-selling efforts that we know we're going to be pretty strong.

Ebrahim Poonawala -- BofA Securities, Inc. -- Analyst

That's helpful. And just a separate question, and apologize if you addressed this. I think in September you announced a partnership with Wipro on the virtual bank cloud infrastructure. I don't think that's the same provider for the bank. Just give us a sense of what's the play with virtual bank. Is there a bigger sort of strategic sort of plan in terms of breaking it out at some point and what virtual does on both lending and deposit side?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. So look, we're -- so you've kind of hit, Ebrahim, on a couple different things. And I'll tell you we're very excited about the virtual bank. We were the first bank actually to convert off of a legacy system onto that kind of new fintech core in the cloud environment, and we continue to build out that. The reception to the kind of the product and the offering has been really good. We haven't quite unveiled to the masses yet our, I'll call it, the strategy that we're really going to employ. You should expect that we'll continue to build that product functionality capabilities within the virtual bank, and that we'll have a distinct marketing effort and kind of how we're going to brand it and drive it going forward. You'll see that in the next, call it, three to six months when it'll become more apparent to you.

But for the near term, right, our intent is to grow it to where it can support itself and kind of really help us drive not only revenue but learning and experiences in terms of seeing what takeaways we can bring back to the bigger, larger bank. It'll be part of First Horizon for the foreseeable future. So there's no intent right now to do something different other than grow it, learn from it, make profit from it, and then longer term we'll see what happens.

Ebrahim Poonawala -- BofA Securities, Inc. -- Analyst

Got it. And just, Anthony, you spent a lot of time during the last year around the integration looking at fintech vendors. As you come out of the conversion, talk to us about the top one, two, three things that the bank needs to do from a system and technology upgrade perspective that I'm assuming will be a multi-year process, and Bryan, if you want to jump in.

Bryan Jordan -- President and Chief Executive Officer

Yeah.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Yeah. Look, I'll tell you that I think the biggest thing as we kind of move -- so Bryan talked about really that we've really closed most of the technology deficits and gaps that we wanted to get close as we were kind of leading up to it. So I would say, as a starting spot, I think that we're in a pretty good position technology-wise related to, call it, peers. We still have some work to do around the edges on a few things that we need to do some upgrades on.

But I think what really matters to us as we move forward is really about leaning in on those things that can drive significant improvement in either our efficiencies or our delivery. So the credit process is one that really kind of stands out. And so, obviously, we've installed nCino and then with that whether it's front-end side of that or back-end side of what we're going to do there, I think is it can be pretty powerful. So expect we'll hear more about how we're kind of taking and going further with that whole nCino upgrade to really drive a complete improvement.

The second thing is the treasury management platform. We've had -- both companies have made a strategic priority to invest and recognize growth in the TM space. That should continue. We've started on that journey. We've made significant investment. I will tell you that I'm very proud and I think the TM system that we'll have will put us in a kind of top echelon of available TM systems once we're kind of through all of our pilots and all. And so you should expect to hear us to continue to really lean into that with more investment, more development and then, of course, with that, you should expect to get some nice growth out of that.

So those are probably the two big that kind of land relative to the, I'll call it, driving revenue and that you would see. On the back side, we've put in some new performance management type tools to help our regional presidents and bankers fully understand the profitability and depth of their books, which should help us not only improve overall profitability just from clarity, but really point out cross-sell opportunities, etc. So those -- I had to put three kind of items on that table. I'll tell you those are probably the big three that are going to have the most impact for next year.

Bryan Jordan -- President and Chief Executive Officer

I would add, Ebrahim, I think Anthony and Randy Bryan have done a fantastic job building the core for us to focus on driving our technology and improving technology over the long term. One of the things I'm really excited about with Anthony putting on a new hat later this year to run our regional banking franchise is him and his process, technology orientation being much closer to the customer and understanding customer needs and competitive landscape, we've got a great push capability. I think Anthony leading our regional bank and work working with our bankers will create more pull for technology. So I think we'll be better in the end as a result of the infrastructure that's being built and having somebody with Anthony's vision to help us get better with that in customer-facing sense all the time.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

And then, Ebrahim, I apologize you asked me about Wipro. I just want to tell you that we use Wipro for a number of things, integration of systems, but a big healthy dose of helping us testing of what we're doing to make sure we're getting it right before we deploy stuff. They've been a fabulous partner for us. And so I just want to give you some context. So they'll be around helping us on a lot of different things through the upcoming years, but they've been a fabulous partner for us.

Ebrahim Poonawala -- BofA Securities, Inc. -- Analyst

Got it. Thanks for taking my questions.

Operator

The next question is from Christopher Marinac of Janney Montgomery Scott. Please go ahead.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Thanks. Susan, wanted to ask about the modestly lower unfunded commitment reserve when the C&I commitments went off, is that purely related to credit trends that you outlined earlier, and would we see that reserve slip further?

Susan Springfield -- Chief Credit Officer

Yeah. I mean, we just -- when you look at just the economic environment as well as our own asset quality, those were the main drivers, both for unfunded commitment and funded.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Okay. So it's the same trend, even though the commitments have gone up.

Susan Springfield -- Chief Credit Officer

Yeah.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Okay. And then, Anthony, back to the service charge commentary, have you seen visibility on behavior changes that lead to transaction volumes, or is it more just seasonal activity that you were citing earlier?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

What I'll tell you, Chris, and I'm sure you can appreciate this, right, customer behavior dynamics have shifted post-COVID, and so certainly that has an impact to us. And then there's just a tremendous amount of liquidity, right. If you think about our excess cash, it all sits in not only our commercial customers but a lot of our consumers have more. So overall NSF fees, right, in terms of a historical pattern, they probably break from any historical kind of precedent, and so it's probably too early for me to tell you exactly where things are going to go.

The number I gave you was kind of the current run rate adjusted for that. So I'm trying to give you the best info I've got. But I'll be the first to tell you that transaction volumes are starting to reemerge. I think we said transaction volumes were up about 10%. And so we kind of have to see where things go. It's a different world, and so it's a little bit hard to look at historical numbers to give you a real sense that that's going to be the trend going forward.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

No, I understand, and I appreciate the background. Thanks very much.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Thank you.

Bryan Jordan -- President and Chief Executive Officer

Thanks, Chris.

Operator

The next question is from Brett Rabatin of Hovde Group. Please go ahead.

Brett Rabatin -- Hovde Group LLC -- Analyst

Hey, good morning.

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Morning.

Brett Rabatin -- Hovde Group LLC -- Analyst

Morning. wanted to make sure I understood the guidance around NII in the fourth quarter, the high-single digit or high end of the low single digit decrease which assumes lower accretion and PPP with relatively stable core NII. Can you maybe break that apart a little bit in terms of the core NII versus the linked quarter change in accretion and PPP?

Susan Springfield -- Chief Credit Officer

Brett, our core NII was up about $4 million linked quarter. So when you say break it this quarter-

Brett Rabatin -- Hovde Group LLC -- Analyst

Well, for the fourth quarter.

Susan Springfield -- Chief Credit Officer

Right. So I'd say, I think we believe that the core NII and margin have relatively bottomed this quarter, but we're going to continue to see some headwinds from merger accretion come in. So-

Bryan Jordan -- President and Chief Executive Officer

And lower PPP.

Susan Springfield -- Chief Credit Officer

And lower PPP. So, overall, we think of low-single digits as being 1% to 3%/. So we're saying it's going to be down that level. But we could see continued probably modest performance in core.

Brett Rabatin -- Hovde Group LLC -- Analyst

Okay. And then you were talking earlier, I'm curious about the CFO position and if you think you might make some announcements this year or if that might drag out into '22.

Bryan Jordan -- President and Chief Executive Officer

Yeah. So, first, I would say, I really appreciate what Anthony's doing. He's wearing a number of hats and doing a fantastic job with that. So I'm grateful for what he's doing. I think we're making good progress. Anthony and really our entire leadership team have been engaged. We've seen a number of good internal and external candidates, and we think that we are making very good progress. And if I had to guess this year or next, I think we will get to a conclusion this year.

Brett Rabatin -- Hovde Group LLC -- Analyst

Okay. And then maybe one last one. In your prepared comments, you were talking about the revenue synergies $35 million. Want to make sure I was clear would that be fee income or would that be more product sets on the lending side for the Iberia franchise?

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

It's a little bit of both, right. So we've had some expansion of, I'll call it, credit to -- with using the larger balance sheet to kind of provide larger credit to some of our existing clients. Also, our leasing products effectively show up as kind of loan balances as well. At the same time, right, we've been able to cross-sell some wealth and we've captured some international fees as well as some debt capital market fees. So it's really a combination. If you ask me to kind of weigh it in my head, I'd tell you the predominance would show up as loan balances in that number that I gave.

Bryan Jordan -- President and Chief Executive Officer

It's pretty impressive to me, Brett, when I look at where the synergies are coming from. We've got something like $10 million to $15 million of the incremental synergy revenue is coming just from referrals between our equipment finance, equipment leasing business, and the old First Horizon franchise and then referrals in the ABL business from the old IBERIABANK franchise. And those are opportunities that we wouldn't otherwise have gotten. We've got the other benefits of larger balance sheet. But just the product synergies, the mortgage product I think will be a huge one as we go forward. Private client, wealth management is starting to build in a significant way. I'm very optimistic about our ability. And we talk a lot about the product set, but I think the bigger franchise and footprint that we can spread this combined product set around will drive I think a lot of revenue as we go forward.

Susan Springfield -- Chief Credit Officer

The other thing I would add, too, is just there's a lot of excitement about our relationship managers at both legacy banks because of the expanded product set being able to now offer as an example, the equipment leasing, equipment finance when we might have had to refer that outside the company. So there's a lot of excitement around that, and we are seeing pipeline growth as a result of that expanded offering from both companies coming together.

Brett Rabatin -- Hovde Group LLC -- Analyst

Okay. That's great color. Appreciate that.

Bryan Jordan -- President and Chief Executive Officer

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bryan Jordan for closing remarks.

Bryan Jordan -- President and Chief Executive Officer

Thank you, Kay. Thank you all for joining us this morning. We appreciate your time and your interest. Please feel free to reach out to any of us if you have any further questions or need additional color or information. Thank you, again, and I hope you have a great day and a great afternoon as well. Thanks.

Operator

[Operator Closing Remarks]

Duration: 70 minutes

Call participants:

Ellen Taylor -- Head of Investor Relations

Bryan Jordan -- President and Chief Executive Officer

Anthony Restel -- Chief Operating Officer and Interim Chief Financial Officer

Susan Springfield -- Chief Credit Officer

Casey Haire -- Jefferies LLC -- Analyst

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Michael Rose -- Raymond James & Associates, Inc. -- Analyst

Ken Zerbe -- Morgan Stanley & Co. LLC -- Analyst

Jennifer Demba -- Truist Securities, Inc. -- Analyst

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Ebrahim Poonawala -- BofA Securities, Inc. -- Analyst

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Brett Rabatin -- Hovde Group LLC -- Analyst

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