Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Trisha Carlson, Investor Relations Manager. You may begin.
Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation in the company's most recent 10-K and 10-Q, including the risk and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited.
We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. Some of the remarks this afternoon contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the investor relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; and Chris Ziluca, Chief Credit Officer.
I will now turn the call over to John Hairston.
Thanks, Trisha, and good afternoon, everyone. Thank you for joining us today. We're certainly pleased to begin 2021 with a brighter horizon than 2020. The previous year was certainly eventful in many ways. We dealt with the pandemic and the resultant broad economic impact, executed a meaningful bulk loan sale. We were an active and meaningful participant in providing support to clients via the PPP program and rendered assistance to impacted markets in a very busy hurricane season. I'm pleased to report fourth quarter 2020 results that were a strong finish to such an unprecedented and challenging year. That strong finish occurred due to the unwavering teamwork, commitment to service, and strength under pressure of our 4,000-member team.
Moving on to the fourth quarter, EPS of $1.17 was notable, with strong PPNR performance and some extra earnings via tax strategies researched and executed by the excellent work of our tax group. These tax strategies, implemented at year-end, netted a small tax credit for the quarter, allowing us to recoup a portion of capital we spent earlier in the year in support of our de-risking strategy. This benefit, which Mike will explain in more detail in a moment, added $0.21 to our fourth quarter's results. Adjusting for a normalized tax rate of around 18%, we would have reported $0.96 per share of the quarter, a solid end to the year. For the quarter, PPNR increased just over $4 million, or 3% linked quarter, as our NIM remained relatively stable, expenses were down, and many fee income lines of business showed improvement.
For the year, PPNR was up just over $3 million, or almost 1%, as we achieved the same level of revenue year over year despite two dramatically different operating environments. Overall, our asset quality metrics improved once again during the fourth quarter as criticized and non-performing loans declined 5% and 20%, respectively, linked quarter. Slide 11 in our deck provides additional details on our sectors under focus. Also, please note on this slide, there are no COVID-related deferrals remaining in these focus segments, and only $13 million in deferrals remain in total. Net charge-offs in the quarter were related to energy, healthcare, and various other commercial and consumer credits. The energy and healthcare-related credits were criticized prior to the pandemic, but due to COVID, were unable to show improvement. During the fourth quarter, we reported a very slight reserve release as net charge-offs exceeded the quarter's provision by $100,000.
We believe maintaining a year-end reserve at such a strong level is appropriate given the continued uncertainty regarding the timing of vaccine deployment and subsequent impact in the economy. Given the strength of the reserve, we expect net charge-offs could begin to exceed provision levels in 2021. Finally, just a couple of balance sheet items before I turn the call over to Mike. Loan growth has been a challenge for the industry this year outside of PPP lending. However, I was pleased to see, as noted on slide nine, that our regions reported net loan growth for the quarter. Unfortunately, the runoff in our amortizing energy and indirect portfolios, the sale of mortgage loans into the secondary market, and the beginning of round one PPP forgiveness contributed to reductions that overshadowed an otherwise decent quarter of core loan production.
We expect this trend in our loan portfolio will continue into the first quarter and be partly offset by loans generated by new PPP lending. On the other side of the balance sheet, deposits have ballooned over the last quarter and the last year, up almost $4 billion from year-end 2019. The growth was mainly related to PPP funding, individual stimulus payments, year-end seasonality, as well as organic account acquisition. The increase in deposits and reduction in loans has added excess liquidity to our balance sheet, with our loan-to-deposit ratio at 78.7% for year-end.
We hope to deploy this excess liquidity in loan growth during 2021, but until we can, we expect this will be a headwind as we begin the new year. The timing of adding and then processing forgiveness for this next round of PPP is challenging to predict, which in part leads to our limits on guidance to the near term. We continue to rebuild our capital in the quarter and ended the year with TCE at 7.64% and Common Equity Tier 1 at 10.7%. TCE, excluding PPP loans, was 7.99%. Again, a solid end to a challenging year. I will now turn the call over to Mike for further comments.
Thanks, John. Good afternoon, everyone. Earnings for the quarter were $104 million or $1.17 per share, with $0.21 related to zero tax expense for the quarter. More on that shortly. For the year, we reported a net loss of $45 million or $0.54 per share. Our year-end tax strategies allowed us to benefit from a tax net operating loss carryback provision available in the CARES Act. As noted on slide seven, we were able to realize $22 million of benefit by carrying the tax NOL back to years with a 35% tax rate. The NOL was due in part to the loss we took on the energy loan sale, as well as tax lease investments and other various strategies employed to accelerate deductions and defer revenue. We anticipate returning to a more normalized effective tax rate in the first quarter of 2021.
Loans for the company declined $450 million from September 30th, in part due to $318 million in forgiven PPP loans. We expect the level of PPP forgiveness to grow significantly in the first quarter and could be as high as $1 billion or so. As noted on slide eight of our deck, the first round of PPP lending contributed between $0.15 and $0.17 in quarterly earnings during 2020. As you can see on the same table on slide eight, the new or extended round of PPP lending will allow us to partly offset the loans forgiven in the first round, keeping the impact to EPS flat. We currently expect to originate between $750 million and $1 billion in new PPP funding in the first quarter. John mentioned our loan loss provision in his earlier comments. I'd like to expand on that a bit.
Looking at slide 13 and our guidance for the first quarter, we do expect to step down our provision to a range between $10 million and $15 million or so next quarter, and actually could come in lower. Factors that play into that include levels of non-PPP loan growth, vaccine rollout, and macroeconomic forecasts. We also think it's likely that net charge-offs will exceed our provision in future quarters. As a reminder, our year-end ACL was strong at 2.42% of loans excluding PPP. Turning to our NIM, and consistent with our guidance last quarter of a stable NIM, our NIM was down only one basis point quarter-over-quarter. However, we did have another buildup of liquidity on our balance sheet, driven in part by EOP deposit inflows of nearly $700 million and over $300 million of PPP forgiveness.
The result was a pronounced shift in our earning asset mix, with securities up over $300 million and short-term investments up over $550 million. This dynamic compressed the NIM around six basis points. However, we were able to offset most of that compression by continuing to focus on lowering our cost of deposits. As you can see on slide 18, our cost of deposits was 17 basis points in December, down another three basis points from September. We expect to continue that focus of pushing down our cost of deposits, with that trend continuing into the first quarter and beyond. Slide 18 includes the drivers for our fourth quarter NIM and guidance for what we expect in the first quarter.
The most impactful NIM driver in the first quarter will continue to be the level of excess liquidity on the balance sheet and the resulting impact on our earning asset mix. That excess liquidity, should it remain at current levels, could compress the NIM as much as 10 basis points. With similar levels of PPP forgiveness and new loans, the net impact of all PPP activity could offset, we believe. Certainly, the timing of forgiveness and new activity could impact our numbers. We will also continue to be proactive in reducing deposit costs and expect to end the first quarter with a cost of deposits around 13 basis points. Switching now to fees and expenses. Fees were down slightly linked quarter as the growth in areas such as service charges and card fees was offset by declines in secondary mortgage and specialty income.
Refi activity slowed in the quarter, and we expect that to continue as we move into 2021. Specialty income, which includes areas like BOLI and derivative sales, can be volatile quarter to quarter and will likely be down in the first quarter. Given these factors, we expect overall fees to be down in the first quarter. For the quarter, expenses were down $2.7 million as declines in personnel expense related to recent cost initiatives were partly offset by higher non-recurring expenses related to a very active hurricane season and recent financial center closures. To date, we have reduced FTE by 210 compared to June 30th via staff attrition and other initiatives. We closed 12 financial centers in October and announced the closure of an additional eight this quarter.
Ongoing branch rationalization reviews are underway, and we will announce additional closures as they occur. As noted last quarter, we also closed our two trust offices in the Northeast. As recently as yesterday, we have continued implementing cost saving measures by offering an early retirement package to select employees across the company. We recognize that usually on our January call, we typically provide guidance for the year. With almost daily changes in the pandemic environment and the impacts to our regional economies, we determined it best to continue with quarterly guidance for now. With that, I'll turn the call back over to John.
Okay. Thank you, Mike, and operator, if you would please, let's open the call for questions.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. Our first question today will come from Michael Rose with Raymond James.
Hey, good afternoon, everyone.
Hey, Michael.
Hey, good afternoon. Maybe we could just start with the margin. Understand the commentary around the quarter. Appreciate the color around the deposit costs potentially falling to about 13 bps. Should we think about the impacts of PPP as the first quarter being kind of the low watermark and then hopefully you get some loan growth as we move through the year, and you can do some earning asset mix shift, and you can actually grow the core margin from here? Is that the right way we should be thinking about it?
Hi, Michael. This is Mike. Yeah, I think that's right for the most part. As we mentioned in our comments, you can see in the deck that really the biggest driver of any compression in the first quarter is the excess liquidity that we have on the balance sheet that really kind of built up again toward the end of the fourth quarter. To the extent that we are able to ramp up levels of organic growth, that is loan growth ex PPP, then certainly that'll be very helpful in kind of paring down that level of liquidity. Lots of puts and takes there certainly as you think about the entire year. I think your thesis is largely right.
Okay. Any plans with the securities book at this point? Looking to add at all?
Yeah, I think that again, with the level of excess liquidity, it really is kind of walking a bit of a balance between keeping money at the Fed earning 10 basis points and pushing that into the bond portfolio right now earning anywhere from 125- 135 basis points, but then tying up that money with a much longer duration asset on the balance sheet. We're going to do a little bit of both. We're going to monitor, obviously, what goes on with our balance sheet every single day. What happens with the level of PPP forgiveness as well as the new PPP activity. Again, will kind of play into that equation, I think, for the most part.
Okay. That's helpful. Maybe just one follow-up question. You guys have done a lot of work to de-risk the balance sheet, including the energy loan portfolio sale. The reserves are really stout. You kept them basically flat this quarter, where we've seen some others have some greater release. What's holding you guys back? Is it just uncertainty in your markets? Is it general caution? How should we think about the potential for reserve release as we move through the year? Thanks.
I'll start off, and then John can certainly add color about our regional economies and kind of what's going on there. Really, our narrative really has been to the third and fourth quarter that what we planned to do was to kind of match off our provision with charge-offs and get to the end of the year with the reserve that we spent so much hard work building, inclusive of the energy loan sale, kind of intact at year-end. Certainly, you can see from the guidance that we're giving for the first quarter, we certainly can see a scenario and probably, I think it's probably more likely than not, that we'll have charge-offs exceed our levels of provision. We also guided to a provision level of $10 million-$15 million, with, again, some room for that to be even lower.
I think we're going to kind of begin that process of paring back that big reserve, but we're going to be very measured with certainly a keen eye toward what's going on with our levels of criticized loans, NPLs, and certainly what's going on in our regional economies.
The only thing, this is John. The only thing I would add to that, Michael, is I think Mike's answer was exactly spot on. The only addition would be the vaccine deployment protocol has been a little less than I think we would have all liked to have seen given the expectations that were announced in the fourth quarter. In the fourth quarter, we talked about what degree of deployment would we think cause us to adopt a mix of Moody's scenarios that would be a little bit more optimistic than the ones that we did. The vaccine deployment pace just hasn't matched up with what we had hoped for. We might be a little conservative. If we're flawed, it's being overly conservative. At this point in time, we'd like to see another quarter of vaccine deployment actually happen.
See if that increases the 2x or 3x across our footprint that we anticipate, then matches what the new administration is suggesting that they would consider acceptable. At that point in time, I think we'd talk again. I would echo Mike's comments that the likelihood of provision being under net charge-offs in the future is highly likely.
Maybe if I just ask the question another way. If I take first quarter, ex the day one CECL reserve build, is there any reason with a de-risked portfolio that you couldn't get back to that point, assuming the data gets better and the economy continues to improve, et cetera?
Yeah, that's a big question, Michael, and it's a good one. The way we've kind of thought about that and kind of talked about that is somewhere much further down the road. We could end up at a place maybe just north of where we began, once CECL was sort of implemented.
Very helpful. Thanks for taking my questions.
Okay. You bet. Thanks, Michael.
Our next question will come from Jennifer Demba with Truist Securities.
Thank you. Good evening.
Hi, Jennifer.
Just curious if you could give us some color on what you're seeing in your hotel and restaurant book right now, in terms of trends and underlying revenue trends for those borrowers. Thanks.
Okay, thanks for the question. Chris, you want to talk about asset quality in the hotel or hospitality book? If it's a redirect, I'll handle it.
Sure. Yeah. As it relates to our hospitality book, obviously there's been a lot of movement over the past quarter or several quarters with the changes in rules around occupancy levels in the various jurisdictions. That's definitely had an influence. Overall, the hotel portfolio itself has held up pretty well. We've spent an inordinate amount of time really just kind of wrapping our arms around it, working with the customers, and putting in place the structured solutions. As you can see, the largest portion of structured solutions in the sectors under focus is in the hotel portfolio. The idea that try to bridge through 2021, and get to a better place. From a performance standpoint, in the hotel portfolio in general, off of the bottoms that they were experiencing in the late spring timeframe, they've come back quite a bit.
Certainly as it relates to our portion of the hotel portfolio, not hotels necessarily in general in the markets. Each market is a little bit different. We keep reminding people that although we do have a bit of a concentration to a degree in the New Orleans market, we do also have hotel exposure more spread out. In those other markets, they've come back a bit more, not necessarily to kind of pre-COVID levels, but overall, they've come back. The rest of the hospitality sector, restaurant for instance, limited service, fast food restaurants, a lot less worry. There's definitely higher costs to operate and things like that. In general, they're performing adequately, and well in some situations.
On the full service restaurant side of things, I think some of the bigger format restaurants are more challenged to kind of operate and fill the space just based on the rules and guidelines, as well as just attracting the larger groups that would normally go and visit those restaurants. In some of the more smaller restaurants, the ones that also have the ability to be able to do outside dining, and things like that, they've been able to kind of manage it through small menu choices, just controlling costs. They're managing through it. Overall, what I would say is, and you can see in the AQ metrics, although they're elevated relative to the overall bank in hotel and restaurant, I think they're performing better than we would've expected given what we started with back in the March, April timeframe.
I'll leave it, and then John, you can add to it. I know you have some thoughts.
Yeah. Jennifer, in case you had another follow-up, I'll wait, and then I'll give you some more color if it's helpful.
Oh, no, that's great. Thank you.
Okay. The only thing I would add is on page 11 of the deck, there's I think something from an investor perspective is appreciated transparency that shows the criticized NPL and even the pass watch as well as the structured solution breakout across the sectors in focus. One of those is hotel, and then you see the overall breakdown of hospitality. That's intended to show what really has been surprisingly modest degradation quarter-over-quarter through what typically is a slow period anyway in the economy in those areas. We're probably, as the quarters have gone by, have continued to become a little bit more optimistic over time. I think in terms of markets, Texas and Florida, I don't want to say they're back to normal, but they're closer to normal pre-pandemic levels than they are the summertime. They are the early summer.
Those areas have recovered really terrific, and I'm not limiting that to just hospitality. The Mississippi and Alabama footprint would be a notch slower, but also in good recovery and posting more attractive numbers. I don't think any of those four states would be doing that if it weren't for the fact that restrictions have been significantly eased. The occupancy percent and the ability for those merchants to operate has been less impeded than it was prior to now in a more deeper shutdown mode. Louisiana, particularly South Louisiana is slower than that, and really, I think dominates some of the criticized percentage that you see there. Similar to the answer to the last question around the reserve, we'd like to see another quarter of vaccine deployment and see some success. The state of Louisiana is actually doing a pretty good job in deployment.
If you extrapolate their deployment pace to how many vaccines are necessary, they're doing quite well relative to other states in the southeastern quarter. If that can be improved, then I think we perhaps would see restrictions eased again in South Louisiana, which would be very helpful to the book. All of that's too early to tell. There's a lot of ifs and maybes in there, but we're more optimistic than we were before. We're maintaining the reserve because we want to see another quarter and clear up the crystal ball a little bit in terms of revenue opportunity in those sectors.
Thanks.
Our next question will come from Brett Rabatin with Hovde Group.
Hi, good afternoon, everyone.
Hey, Brett.
Wanted to just go back to the reserve topic for a second and just make sure I understood. You made the comment about COVID and just the rollout of the vaccine maybe wasn't quite as fast as you were hoping, and that may have had some impact on your decision around the provision in the fourth quarter. Can you talk about maybe any of the qualitative factor changes you might have made in the fourth quarter versus Q3, and then how you think about that in 2021?
Sure, Brett. This is Mike. I'll start there. I think the biggest change was probably in the macroeconomic assumptions. We use Moody's like most banks our size do. We did move to a little bit more conservative mix of the scenarios in the fourth quarter. On slide 13, what we used in the fourth quarter is kind of listed out. Just real quick, that was 65% baseline, 25% S2, and 10% S3. To go back to the third quarter, we were weighted, again, 50% baseline, 25% S1, and then 25% S2. We did get, I think, a little bit more conservative in the fourth quarter, and certainly that helped inform, I think, where we ended up with our total reserve.
Again, as I mentioned a little bit earlier, our narrative has been pretty steady through the second half of the year in terms of wanting to match off charge-offs with provision for the third and fourth quarter so that we could end the year basically where we started at the end of the second quarter. That's where we are. Again, as we move into 2021, we absolutely can see that our charge-offs will likely exceed our provision, and we'll begin the process of bringing that provision down and related reserve.
Okay. That's a good cover there. Then I guess the other thing, I know people are kind of looking at the balance sheet and obviously excess liquidity, and you've got challenges replacing the PPP portfolio as that runs down. Maybe too early and hard to give firm guidance on it, but I guess one of the things that investors are going to want to see eventually is the portfolio growing and seeing year-over-year improvement. How do you think about that, and what loan segments get you there, and what does the pipeline look like at this point?
Well, I'll start off with just a comment about PPP, then John can then color around how we think we can grow the loan book going forward. On slide nine, middle of the page, there's the guidance that we've given for the first quarter, including some pretty specific guidance around both PPP forgiveness. We're looking at estimating that number up to about $1 billion in the first quarter. We think that that could largely be offset actually by new PPP activity, the estimate that we give is between $750 million and $1 billion. Certainly with the other portals open now, I think we've gotten off to a pretty good start in that regard. That work has just begun and will continue.
Mike, I would just add, this is John. With the understandable volatility of PPP, I'll just stay away from that and just focus on core. There are a number of puts and takes, just looking at the first quarter, and slide nine of the deck shares a fair amount of detail there. There's about a little less than a $200 million runoff cooked in per quarter with the amortization of the indirect book, which will be around for a while yet. Then the mortgage activity induced reduction in the mortgage portfolio and the home equity products, both lines and loans. That's a couple of hundred million dollars out the back door due to the refi activity and the indirect amortization. That's what we have to cover just to swim straight. We did cover some of that with better productivity in fourth quarter.
First quarter is seasonally one of our lower production times just because of the nature of where we are and the types of business that we have. We gave guidance to that reduction in the general vicinity as, I think we said up to $250 million, and that's on page nine of the deck. We're not ready until we get past the quarter to see all the impact of PPP and other items, to talk about the rest of the year. Certainly, we would think that the productivity improvements we saw in regions would begin to carry the day and become a more positive story as the year goes on. Frankly, a lot of that is tied to sentiment, and the sentiment goes up with vaccine deployment and the elimination of some of the restrictions that impact our marketplace. While 2021 looks bright.
Quarter one loan growth won't be a great story, unless PPP actually covers more than we think of the runoff. We're optimistic a little bit more so through the rest of the year.
Okay. Great. Appreciate the color.
Sure. Thank you.
Our next question comes from Kevin Fitzsimmons with D.A. Davidson.
Hey, good evening, everyone.
Just have an add-on question on the margin. I just want to make sure I'm looking at this right. When I look at page eight, you discuss, lay out PPP.
Okay.
Effect on the margin, then on slide 18, you talk about the outlook for the margin and related PPP. When you're talking about forgiveness net of funding, you're baking in the PPP, the acceleration of the fees, right? The origination fees. I see the tailwinds just talk about the impact of new PPP loans. Is what's netted in here somewhere the fees as well?
It is. Kevin, this is Mike, and that's correct. The fees are netted in. Again, on slide nine, we kind of give the guidance in a little bit more detail than usual around the level of new activity or funding, and then also the level of forgiveness. We really think that there's a good chance that those could match off pretty closely. If that actually happens in terms of averages, then the overall impact of PPP quarter-to-quarter should net out to something close to insignificant. If that occurs in that manner, then really the biggest driver then in compression in the first quarter of 2021, we think will be how quickly we'll be able to offload the excess liquidity that again, kind of built up toward the end of the year.
Like this quarter was basically the impact of the greater excess liquidity offset by the fees coming in from forgiveness, essentially, with some other factors as well.
Yeah, that's largely correct.
Okay.
That's correct. Our ability to continue pushing down deposit costs, which again, will continue in the first quarter and kind of beyond, as we mentioned.
Now all this, we've been talking about the percentage net interest margin. If we talk about dollars of net interest income and throw all these different things out there in terms of looking at how you feel about first quarter and the shift in terms of what's happening in the balance sheet, how do you all feel about NII? Are you comfortable saying?
Yeah, I'll give you a few thoughts related to that. I think first and foremost, we absolutely see some pretty good growth in average earning assets in the first quarter. One of the things that impacted the level of liquidity toward the end of the year was a pretty good level of deposit inflows. Deposits were up EOP December to September, nearly $700 million. That will certainly help impact the averages, not only in the bond portfolio, but also in our level of short-term investments. We'll grow the base of earning assets, we think pretty nicely in the first quarter. Probably the wild card as much as anything else is going to be the level of organic loan growth or not. I know we guided to that number being ex PPP as much as $250.
If we're able to overperform and have that number lower, then I think that speaks a little bit better to our ability to really grow NII in the first quarter. Again, there's lots of unknowns, and the level of PPP net activity could swing the numbers, depending on where that comes in.
Okay, thanks, Mike. Just on the subject of expenses, you lay out a lot of great detail on the initiatives, and I'm just wondering, a lot of it are things you've done to date or done in the past quarter, and I'm wondering, is there any kind of broader deep dive going on? I know you mentioned the ongoing branch rationalization, but any other, not so much a named program per se, but is there more to come, I guess, is what I'm asking on that front?
Yeah, I think there is. Certainly, we had the news that we shared inside the company yesterday and then with investors and analysts this afternoon about the early retirement program that we're launching. That's something that depending on what the take rate is, could move the needle certainly on the expense side. To answer your question directly, no. Our work is not done in terms of containing costs and our cost initiatives. We'll talk a little bit more about those as we implement them along the way. Certainly we'll be very proactive in disclosing the actual kind of results, if you will, from the early retirement program.
Okay. Thanks, Mike.
Okay. You bet.
Our next question comes from Ebrahim Poonawala with Bank of America.
Hey, guys.
Hey, Ebrahim.
I just want to first follow up and sorry to do this, Mike, around the NII outlook. I noticed the end of period deposit growth versus average. Should we assume that your earning asset growth in first quarter should be of similar magnitude, like $600 million-$700 million of growth or more in 1Q versus 4Q? What I'm trying to get to is trying to figure out whether we see NII moving higher or lower, in the first quarter relative to 4Q levels. If you could address that.
Our level of average earning asset growth, fourth quarter compared to third, was just under $500 million. Currently I can see us at that level and probably a little bit better in the first quarter. Again, the direct question about the level of NII is really, as I mentioned, dependent upon really what happens to the net PPP activity, as well as the organic loan growth. I think those two factors are probably the biggest drivers around how much of an increase we actually have in NII in the first quarter.
Ebrahim, this is John. Another factor that is impossible at this point in time to gauge is the impact of stimulus.
Yep.
If there is indeed a stimulus package in Q1, and if that includes the incoming administration's assertions they'd like to see a $1,400 per taxpayer event, that's a few hundred million dollars that arrives in an ACH file. If that were to happen in second week of February, it's a different impact than if it's the last week of March. We're not trying to be coy, there are just some really big variables that at this point in time are impossible to assess. I think all in all, the way Mike answered it is about as best as we can with those degree of variables. That's not something unique to us.
Right.
If you carry a fairly big consumer portfolio, which we are, then stimulus dollars can be impactful. That was part of the excess liquidity that we had in the first round of stimulus.
No. Thanks for adding that, John. Just in terms of the remaining PPP fees, I see the $16.7 million PPNR impact that you called out for the first quarter. What's the total PPP fees that were outstanding at the end of the year, or tied to the previous first program?
Can you repeat the question again, Ebrahim? I was actually looking at.
What's the total outstanding PPP fees that were remaining outstanding at the end of the year?
Okay, our total PPP fees from the first round, on a gross basis, were about $75 million, and then $68 million or so on a net basis. We still have somewhere in the $16 million-$17 million range or so that will amortize between the first quarter and then whatever the remaining duration is of the loans from the first round.
It starts over again with the.
Yeah.
Incoming tranche.
At that point, it begins to really kind of become commingled.
Understood. Just in terms of the second round of PPP, John, are the recipients for the second round going to be a significant overlap to those who were helped out in the first quarter? I'm just trying to understand the level of visibility that you have in terms of funding in the second round. Is it the same borrower base that's going to be funded with round two?
It's a good question. The visibility we have now is what's happened so far. We had a pretty big team of people that worked very hard. We had 57 people in the shop over the holiday weekend, Saturday, Sunday and Monday, working the queue that was already building up. In looking at that queue, the transactions that were first in the queue were largely second draws from previous PPP recipients. I think as the weeks gone on, it's become more distributed towards first timers. I think it's a little early to claim what that mix is going to be because it's changing. Also, typically the smaller borrowers come in a little later. So far the number of new to bank clients that are in that pipeline is a good bit larger than we had last time.
Again, it's pretty early to tell. That size and the timing of that PPP draw is also one of the big variables we have to grapple with. Last time when the PPP funding occurred, the bulk of those deposits sat on the balance sheet for a period of time until business could reopen and begin expending them. We would anticipate that runoff is faster this time because largely businesses are open, but just maybe not at the same capacity they were pre-pandemic. We have estimates of what that would be that sort of underlie the estimates that Mike gave you for the quarter, but they're just that, estimates. I think reality will help us shape it up as we get to the end of the quarter.
Got it. Thanks. Take my questions.
Sure. You bet.
Our next question comes from Catherine Mealor with KBW.
Thanks. Good evening.
Hey, Catherine.
Wanted to follow up on asset quality going back to slide 11. Your classified loan or criticized loans as a percentage of your COVID at-risk categories, only 4% have just remained really low. Just wanted to get your thoughts on your expectations for how you think the flow of criticized loans will be kind of directionally throughout the year. Do you think there's an expectation that these will continue to increase as we move through the year before we peak? Or do you think this could be the peak given what we're seeing with your efforts around structured solutions and the stimulus and PPP and all those variables? Thanks.
Chris, do you want to start that one?
Yeah, sure. I hate to evade the question, but it really is kind of hard to call that. I guess what I would say is that we certainly put a lot of effort in the second half of 2020 to put those structured solutions in place for, mostly focused, obviously, on anybody, but certainly mostly focused on the hotel and restaurant portfolios. You can just see by the numbers there. I think that what we've done should help them for a reasonable period of time through 2021. A lot of it will be as a result of just general challenges that maybe some of the customers that didn't ask for a structured solution, we have to kind of reopen that discussion with them.
The good news is that Section 4013 of the CARES Act allows for continued support for working with customers without the concerns that previously would existed for TDRs, at least until the pandemic is declared behind us. Not to say that we wouldn't work with those customers, but our approach has always been to enhance our position while also working with those customers. So I think we feel good that the hospitality book is stabilized to a large degree. Again, things can happen that you just haven't really anticipated. Then the rest of the portfolios, as you can see with retail being probably another sector that has a larger percentage.
Again, it really just is a matter of the economy getting back a little bit, people feeling comfortable spending money, opening of restrictions to allow people to go out and visit some of the locations and stores and purchase. It's hard to say that we're at the peak and that we're going to come off of it, because I do believe that we're going to have some inflows and outflows. Right now, I don't really see a dramatic movement in either direction. We'll have some ins and outs.
Yeah, this is John. I think it's hard to tell right now, but I think it'd be fair to say retail and healthcare both improved markedly in terms of criticized ratios quarter to quarter. Hospitality didn't. I think the reason hospitality didn't is loaded heavily to restaurants. That is heavily focused in New Orleans, where we still have the most restrictions in terms of occupancy levels. That's why I've said a couple of times on the call, the vaccine deployment pace matters a lot. The second impact that could be extremely positive is how the structure of the coming stimulus package is actually delivered. If it's done prudently and those industries which have been the most harmed by the effects of the pandemic economy, if they are beneficiaries of funding sources that would help, then I think we'll see greater benefit.
Unfortunately, we're not writing the legislation nor do we get a vote, unfortunately. Hopefully, that'll be considered.
Is there any kind of trigger specifically that would, with your underwriting, that would push a loan to go under criticized or classified? We've heard different things from different companies. Some are putting entire portfolios of at-risk asset classes on criticized just to watch it. United Community said today that if there's a credit that can't make amortizing P&I payments off of current operations, then it's downgraded immediately to criticized. Any kind of color like that you can give to help us know what may trigger that movement?
Yeah. We generally stick, for the most part, towards financial metrics that drive classifying a loan in the various categories of pass, watch, and then criticized or classified. To the extent that there are overriding factors around guarantor support and things like that, those have a way of enhancing our view of the risk rating or maybe detracting from that view of the risk rating. We do have a pretty structured approach towards evaluating our credits and putting them into the various categories, and we feel pretty good about where they are right now from a classification perspective. I think what we're also doing is this category of sectors under focus to the extent that a loan is not already in watch or criticized.
We have a whole shadow watch process, which basically looks at sectors and essentially overlays our watch and portfolio management process, which is enhanced for watch and worse rated credits and includes those sector under focus credits that aren't already in watch. Even though we don't formally classify them as watch, we have a whole enhanced watch process, which I think helps us to have a much more robust view of credits that might be on the margin, but still a pass.
Great. That's very helpful. Thank you.
You're welcome.
Our next question comes from Brad Milsaps with Piper Sandler.
Hey, good evening.
Hey, Brad.
You guys have addressed most everything. Did want to follow up on Kevin Fitzsimmons' question regarding expenses. Mike, as you think through your list of initiatives, can you maybe describe it maybe versus what you've done thus far, what inning you're in terms of thinking through the other number of things that you might have to work through in 2021? Just trying to get a sense of the magnitude of what else could be coming down the pipe in terms of expense levers that you might have.
Sure. I'd be glad to, Brad. Certainly at the same time, without creating some kind of expectation. I'd say we're probably in the third or fourth inning, somewhere around that, in terms of the things that we have in mind to do that maybe we haven't yet executed on. Certainly, there's more to come. We mentioned that we certainly are going to continue to do branch rationalization studies. We continue to work on things like attrition. The early retirement program is something that, let's see in terms of what the take rate for that is and what the impact. At that point, we go from there in terms of the other things that I think we'll be looking at.
Great. That's helpful. Just one housekeeping thing. The table that you guys include on slide eight as it relates to the quarterly impact of PPP. Are the PPNR numbers in that table, are those net of expenses or is that just the coupon and the fee that you recognize in the quarter? Just trying to get my arms around what that number means versus the five basis points of the NII impact. Just want to make sure I'm comparing apples to apples.
Yeah, sure. Obviously, net income is what we believe to be the after-tax earnings, and then that translates into the EPS. The PPNR would be the net interest income or margin impact of the loans inclusive of any fees that we're amortizing after we net any direct expenses. We do have some expenses that aren't netted against the fees, and they're expenses on a direct basis.
Great. Thank you very much.
Okay.
Our next question comes from Matt Olney with Stephens.
Thanks. Just one quick follow-up here. I want to ask about fee revenues. I totally appreciate you're just giving guidance on a quarterly basis at this point. Any more general commentary you can provide us on your various fee lines for 2021 that we should keep in mind for our forecast? Thanks.
This is John. We talked about first quarter simply because of the amount of volatility coming at us. I think the first quarter is what we said. I think we anticipate some lower fees. The reasons for that are secondary mortgage expected to diminish. The number of applications and dollars were down about 10% in the fourth quarter over third quarter. We anticipate that again. The specialty income is hard to predict. If we end up with more customer swaps and such or BOLI than we anticipate, we might outperform that a little bit. The bigger unknown really is as all the additional liquidity comes in, the average account balances go up, which presses down on recurring service income, which was a bright spot in the fourth quarter.
Until we see the magnitude of stimulus, and until we see the magnitude and placement of PPP, together with whatever non-cash stimulus ideas may come from the administration, it's really hard to project what the rest of the year looks like. It wasn't a lack of modeling or confidence in those lines doing well this year. In fact, we're bullish on them. There are just some big puts and takes that we can't size here in January. We're opting to stay close in the guidance.
Got it. Understood. Thank you.
You bet.
Thanks.
You bet.
Our next question comes from Christopher Marinac with Janney Montgomery Scott.
Hey, thanks. Just a quick question on if you would buy loans externally to deploy excess liquidity, would you do SNCs again in this environment? Just curious kind of what the trade-off is between all organic versus doing the purchase route.
Chris, you want to start and I'll wrap it up?
Yeah.
You pointed at me, so I'll say.
Yeah.
I think the answer is, we've invested an awful lot of time in a more granular portfolio. At risk of purchasing someone else's problems, I think we've kind of had all that we want. While we are in the business of syndications to a little lesser degree than we have been historically, we're still in them. I don't really see us purchasing a loan portfolio of any magnitude that would be in a specialty line or largely in syndications, especially leverage. You want to add to that, Chris?
Yeah, I guess what I would say is that we've never been really focused on buying SNCs just to kind of buy SNCs. If they're strategic, if they fit a sector that we're more active in, or if it's part of a larger strategy to support and build and develop a customer relationship, sometimes we'll do that. Also, we have been focused on just building out our syndications capability in general.
We're doing it in a very measured fashion. A lot of it is our own desire to manage risk, and so therefore, a lot of it is focused on being the agent and selling down risk so that we can manage our risk. In that process, you obviously need to be active in both sides. Therefore, there are situations where we're working with existing sources where we would sell syndications to, that we would also be in discussions around assisting and participating in syndications with them as well.
Chris, we didn't get the question about other methods, but we really did somewhat diminish hiring of bankers for a while when there was not much of a chance of calling clients because of the shutdown. We're back in that game now and have offensively hired people and will continue doing that throughout the year, focused on the markets with the greatest growth opportunity. I would far rather organically generate relationships that we know something about from bankers that are going to be managing those hands-on with those management teams than to do a portfolio purchase. You never say never, but at this point in time, I'd far rather do it organically if that's available. It's tough sledding right now, but it won't be for the whole year, and having a little bit more offensive firepower on the payroll, I think will be a tailwind.
Great, John and Chris. Thank you very much. I appreciate it.
You bet. Thanks for the questions.
That concludes our question-and-answer session. I'd like to turn the call back over to John Hairston for any closing remarks.
Thanks, Ally, for running the call. Thanks, everyone, for your interest, and we look forward to seeing you on the road or the virtual road a little later this quarter. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.