Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's 4th 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, Tricia 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 ks and 10 Q, including the risks 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. In addition, 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 ks 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 Don Hairston, President and CEO Mike Acree, CFO and Chris Zaluca, Chief Credit Officer. I will now turn the call over to John Hairston.
Thanks, Tricia, and good afternoon, everyone. Thank you for joining us today. We are 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 result of 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 Q4 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 Q4, EPS of $1.17 was notable with strong PPNR performance and some extra earnings via 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 derisking strategy.
This benefit, which Mike will explain in more detail in a moment, added $0.21 to our 4th quarter's results. Adjusting for a normalized tax rate of around 18%, we would have reported $0.96 per share for the quarter, a solid end to the year. For the quarter, PPNR increased just over $4,000,000 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, PP and R was up just over $3,000,000 or almost 1% as we achieved the same level of revenue year over year despite 2 dramatically different operating environments. Overall, our asset quality metrics improved once again during the Q4 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 $13,000,000 in deferrals remain in total. Net charge offs in the quarter were 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 Q4, 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. And 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 9, 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 1 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 Q1 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 $4,000,000,000 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 percent 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 $104,000,000 or $1.17 per share with $0.21 related to 0 tax expense for the quarter. More on that shortly. For the year, we reported a net loss of 45,000,000 dollars 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 7, we were able to realize 22,000,000 dollars 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 Q1 of 'twenty one. Loans for the company declined $450,000,000 from September 30, in part due to $318,000,000 in forgiven PPP loans.
We expect the level of PPP forgiveness to grow significantly in the Q1 and could be as high as $1,000,000,000 or so. As noted on Slide 8 of our deck, the 1st round of PPP lending contributed between $0.15 $0.17 in quarterly earnings during 2020. As you can see on the same table on Slide 8, the new or extended round of PPP lending will allow us to partly offset the loans forgiven in the 1st round, keeping the impact to EPS flat. We currently expect to originate between $750,000,000 $1,000,000,000 in new PPP funding in the Q1. John mentioned our loan loss provision in his earlier comments, but I'd like to expand on that a bit.
So looking at Slide 13 and our guidance for the first quarter, we do expect to step down our provision to a range between $10,000,000 $15,000,000 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 percent of loans excluding PPP. Turning to our NIM and consistent with our guidance last quarter of a stable NIM, our NIM was down only 1 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 $700,000,000 and over $300,000,000 of PPP forgiveness. The result was a pronounced shift in our earning asset mix with securities up over $300,000,000 and short term investments up over $550,000,000 This dynamic compressed the NIM around 6 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 3 basis points from September. We expect to continue that focus of pushing down our cost of deposits with that trend continuing into the Q1 and beyond.
Slide 18 includes the drivers for our 4th quarter NIM and guidance what we expect in the Q1. So the most impactful NIM driver in the Q1 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 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 Q1 with the 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 Q1.
Given these factors, we expect overall fees to be down in the Q1. For the quarter, expenses were down $2,700,000 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 30 via staff attrition and other initiatives. We closed 12 financial centers in October and announced the closure of an additional 8 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 2 trust offices in the Northeast. And 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 determine 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. Our first question today will come from Michael Rose with Raymond James.
Hey, good afternoon, everyone. Hey, Michael. Maybe we could just
start with the margin.
I understand the commentary
around the quarter, and I
ex the impacts of PPP? Is the Q1 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?
Yes. Hi, Michael. This is Mike. And yes, 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 Q1 is the excess liquidity that we have on the balance sheet that really kind of built up again toward the end of the Q4.
So to the extent that we are able to ramp up levels of organic growth that is loan growth ex PPP, then certainly that will be very helpful in kind of paring down that level of liquidity. So lots of puts and takes there certainly as you think about the entire year, but I think your thesis is largely right.
Okay. And any plans with the securities book at this point to book and add at all?
Yes. 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 to 135 basis points, but then tying up that money with a much longer duration asset on the balance sheet. So 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 for business 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. And 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.
Well, I'll start off and then John can certainly add color about the regional economies and kind of what's going on there. But really, our narrative really has been to the 3rd and 4th quarters that what we plan 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. And certainly, you can see from the guidance that we've given for the Q1, 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. And we also guided to a provision level of $10,000,000 to 15,000,000 dollars with again some room for that to be even lower. So I think we're going to kind of begin that process of pairing back that big reserve, but we're going to be very measured.
We're certainly a keen eye towards what's going on with our levels of criticized loans and PLs and certainly what's going on in our regional economies.
The only thing this is Aaron. 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 Q4. And in the Q4, 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. And the vaccine deployment pace just hasn't matched up with what we had hoped for.
And so we might be a little conservative if we're flawed, it's being overly conservative. But 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 and then matches what the new administration is suggesting that they would consider acceptable. And at that point in time, I think we talk again. But I would echo Mike's comments that the likelihood of provision of being under net charge offs the future is highly likely.
Maybe if I just ask
the question another way, if I take Q1, ex the day 1 CECL reserve build, is there any reason with a derisk portfolio that you couldn't get back to that point assuming the data gets better and the economy continues to improve, etcetera?
Yes. That's a big question, Michael, and it's a good one. And 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 Cecil was sort of down the road.
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 and then if it's a redirect, I'll handle.
Sure. Yes. So 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. So that's definitely had an influence. But 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 kind of 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 market. And again, each market is a little bit different.
We keep reminding people that although we do have a bit of And 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. And then 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. But 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 guidance and guidelines as well as just attracting the larger groups that would normally go and visit those restaurants.
But 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 try to manage it through smaller restaurant, I mean, to me, small menu choices, just controlling costs. And so they're just they're managing through it. And overall, what I would say is, you can see in the AQ metrics, while those are elevated relative to the overall bank in hotel and restaurant, I think they're performing better than we would have expected, given what we started with back in the March, April timeframe. So I'll leave it and then John, you can add to it. I know you have some thoughts.
Yes. Jennifer, in case
you had another follow-up, I'll wait and then I'll give you some more color if you can solve them.
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 criticize NPL and even the past watch as well as structured solution breakout across the sectors in focus. One of those is hotel and then you see the overall breakdown of hospitality. And so 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. So 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 or the early summer. So 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. And I don't think any of those 4 states would be doing that if it weren't for the fact that restrictions have been significantly eased. And so 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. And similar to the answer to the last around 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. And so if that can be improved, then I think we perhaps would see restrictions east again in South Louisiana, which would be very helpful to the book.
So 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.
And our next question will come from Brett Rabatin with Hovde Group.
Hi, good afternoon everyone.
Hi, Brett.
I wanted to just go back to the reserve topic for a second and just make sure I understood, you had 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 Q4. Can you talk about maybe any qualitative factor changes you might have made in the Q4 versus 3Q and then how you think about that in 2021?
Sure, Brett. This is Mike. I'll start there. So I think the biggest change was probably in the macroeconomic assumptions. So we use Moody's like most banks our size do.
And we did move to a little bit more conservative mix of the scenarios in the Q4. So on Slide 13, what we used in the Q4 is kind of listed out. And just real quick, that was 65% baseline, 25 S2 and 10% S3. If you go back to the 3rd quarter, we were weighted, again, 50% baseline, 25 S1 and then 25 S2. So we did get, I think, a little bit more conservative in the Q4 and certainly that helped inform, I think, where we ended up with our total reserve.
But 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 3rd and 4th quarter so that we could end the year basically where we started at the end of the second quarter and that's where we are. So 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 in related reserves.
Okay. That's good color there. And 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 see eventually is like 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 and then John can add color around how we think we can grow the loan book going forward. But on Slide 9, middle of the page, there's the guidance that we've given for the Q1, including some pretty specific guidance around both PPP forgiveness. So we're looking at estimating that number up to about $1,000,000,000 in the Q1. And then we think that that could largely be offset actually by new PPP activity. The estimate that we give is between $750,000,000 and $1,000,000,000 And certainly with the portals open now, I think we've gotten off to a pretty good start in that regard.
So that work has just begun and will continue.
And 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. And there are a number of puts and takes and just looking to Q1 and Slide 9 of the deck shares a fair amount of detail there. There's about a little less than $200,000,000 runoff cooked in per quarter with the amortization of the indirect book, which will be around for a while yet. And then the mortgage activity induced reduction in the mortgage portfolio and home equity products, both lines and loans.
So that's a couple of $100,000,000 out the back door due to the refi activity and the indirect amortization. That's what we had to cover just to swim straight. And so, we did cover some of that with better productivity in Q4. Q1 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. And so we gave guidance to that reduction in the general dis synergy as
I think we said up
to $250,000,000 and that's on Page 9 of the day. We're not ready to until we get past the quarter and see all the impact of PPP and other items to talk about the rest of the year. But 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. And so while 20 21 looks bright, quarter 1 loan growth won't be a great story unless PPP actually covers more than we think of the runoff.
But we're optimistic a little bit more
so through the rest of the year.
Our next question comes from Kevin Fitzsimons with D. A. Davidson.
Hey, good evening, everyone. Just had an add on question on the margin. I just want to make sure I'm looking at this right. So when I look at Page 8, you discuss layout PPP and the effect on the margin. And then on Slide 18, you talk about the outlook for the margin and related PPP.
So when you're talking about forgiveness net of funding, you're baking in the PPP, the acceleration of the fees, right, the origination fees? Like I see the tailwinds, just talk about the impact of new PPP loans. But is this 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. And again, on Slide 9, 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 forgivables.
And we really think that there's a good chance that those could match off pretty closely. And if that actually happens in terms of averages, then the overall impact of PPP quarter to quarter should add up to something close to insignificant. So if that occurs in that manner, then really the biggest driver then compression in the Q1 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.
So 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?
Yes, that's largely correct. That's correct. As well as our ability to continue pushing down deposit costs, which again will continue in the Q1 and kind of beyond as we mentioned.
And now all this we've been talking about the percentage net interest margin, but 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 Q1 and the shift in terms of what's happening in the balance sheet, how do you all feel about NII or are you comfortable saying?
Yes, I'll give you a few thoughts related to that. So I think 1st and foremost, we absolutely see some pretty good growth in average earning assets in the Q1. And one of the things that impacted the level of liquidity toward the end of the year was a pretty good level of deposit inflows. So deposits were up EOP December to September nearly $700,000,000 And that will certainly help impact the averages, not only in the bond portfolio, but also in our level of short term investments. So we'll grow the base of earning assets, we think, pretty nicely in the Q1.
Probably the wildcard as much as anything else is going to be the level of organic loan growth or not. So I know we guided to that number being ex PPP as much as $250,000,000 So if we're able to over perform and have that number lower, then I think that speaks a little bit better to our ability to really grow NII in the Q1. But 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. And 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 is or 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?
Yes, I think there is. I mean, certainly, we have 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. And so that's something that depending on what the take rate is, could move into EADL certainly on the expense side. But to answer your question directly, no, our work is not done in terms of containing cost and our cost initiatives. But we'll talk a little bit more about those as we implement them along the way.
And then 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.
Hi, Vijay.
I just want to first follow-up and sorry if you do this, Mike, around the NII outlook. So I noticed the end of period deposit growth versus average. Should we assume that your earning asset growth in Q1 should be of similar magnitude like $600,000,000 $700,000,000 of growth or more in 1Q versus 4Q? And then what I'm trying to get to is trying to figure out whether we see NII moving higher or lower in the Q1 relative to 4Q levels, so if you could address that?
So our level of average earning asset growth 4th quarter compared to 3rd was just under $500,000,000 And certainly, I can see us at that level and probably a little bit better in the Q1. And again, a 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 Q1.
Ebrahim, this is John. Another factor that is impossible at this point in time to gauge is the impact of stimulus. And if there is indeed a stimulus package in Q1 and if that includes the incoming administration's assertions, they'd like to see a $1400 per taxpayer event. That's a few $100,000,000 that arrives in an ACH file. So if that were to happen 2nd week of February, it's a different impact than if it's the last week of March.
And so we're not trying to be coy, there's just some really big variables that at this point in time are impossible to assess. But I think all in all, what Mike answered is about as best as we can with those degree of variables. And that's not something unique to us. If you carried up a fairly big consumer portfolio, which we are, then those stimulus dollars can be impactful. And that was part of the excess liquidity that we had in the first round of stimulus.
Thanks for adding that John. Just in terms of the remaining PPP fees, so I see the $16,700,000 PPNR impact that you call out for the Q1. What's the total PPP fees that were left that were outstanding at the end of the year tied to the previous first program?
Can you repeat the question again, Ebrahim?
What's the total outstanding PPP fees that were remaining outstanding at the end of the year?
Okay. So our total PPP fees from the first round, on a gross basis were about 75,000,000 dollars and then $68,000,000 or so on a net basis. And we still have somewhere in the $16,000,000 to 17 $1,000,000 range or so that will amortize between the Q1 and then whatever the remaining duration is of the loans from the 1st round.
And then it starts over again with the incoming tranche.
So at that point, it begins to really kind of come and co mingle.
Understood. And just in terms of like the 2nd round of PPP, John, are the recipients for the 2nd round going to be a significant overlap to those who were helped out in the Q1? I'm just trying to understand the level of visibility that you have in terms of funding in the 2nd round. Do you is it the same borrower base that's going to be funded with round 2?
It's a good question. And the visibility we have now is what's happened so far. So 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. And looking at that queue.
The transactions that were first in the queue were largely second draws from previous PPP recipients. And then I think as the week's gone on, it's become more distributed towards first timers. And so I think it's a little early to claim what that mix is going to be because it's changing. And also typically the smaller borrowers come in a little later. And so far the number of new to bank clients that are in that pipeline is a good bit larger than we had last time.
But again, it's pretty early to tell. And 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 extending 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. So if 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 for taking my questions.
Sure. You bet.
Our next question comes from Catherine Mealor with KBW.
Thanks. Good evening.
Hi, Catherine.
Wanted to follow-up on asset quality and 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. And so 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, you want to start that one?
Yes, sure. Again, I hate to evade the question, but I mean 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 twenty twenty to put those structured solutions in place for mostly focused obviously on anybody, but certainly mostly focused on the hotel and restaurant portfolio as you can just see by the numbers there. And I think that what we've done should help them for a reasonable period of time through 2021. So 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. I mean, 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. And 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. And so I think we feel good that the hospitality book is stabilized to a large degree. But again, things can happen that you just haven't really anticipated.
And then the rest of the portfolios, as you can see, with retail and being probably another 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. But it's hard to say that we're kind of 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. But right now, I don't really see a dramatic movement in either direction. We'll have some ins and outs.
Yes. 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. And I think the reason the hospitality didn't is loaded heavily to restaurants.
So and that is heavily focused in New Orleans where we still have the most restrictions in terms of occupancy levels. And so that's why I said a couple of times on the call, the vaccine deployment pace matters a lot. And the second impact that could be extremely positive is how the structure of the coming stimulus package is actually delivered. So 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. But it's unfortunately, we're not writing the legislation in order to get a vote unfortunately.
So hopefully that will be considered.
And 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 criticize just to watch it. Unite Communities said today that there's a credit that can't make amortizing P and I payments off of current operations and it's downgraded immediately to criticize or any kind of color like that that you can give to help us know what may trigger that movement?
Yes. So we generally stick for the most part towards financial metrics that drive classifying a loan in the various categories of past, watch and then criticize or classify. To the extent that there are overriding So we do have a pretty detracting from that view of the risk rating. So 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 alone 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 worst rated credits and includes those sector under focus credits that aren't already in watch. So 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 path.
Our next question comes from Brad Milsaps with Piper Sandler.
Hey, good evening. Hey, Brad. You guys have addressed most everything. I did want to follow-up on Kevin Fitzsimons' question regarding expenses. Mike, as you sort of think through your list of initiatives, I mean, could you maybe describe it sort of maybe versus what you've done this far, kind of what inning you're in in terms of kind of thinking through the other number of things that you might have to work through in 'twenty one?
Just trying to get a sense of kind of the magnitude what else could be coming down the pike in terms of expense leverage that
you might have? Sure. Be glad to Brad. Certainly at the same time without creating some kind of expectation, I'd say we're probably in the 3rd or 4th inning somewhere around that in terms of the things that we have in mind to do that maybe we haven't yet executed on. So 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. And then at that point, we kind of go from there in terms of the other things that I think we'll be looking at.
Great. That's helpful. And then just kind of one housekeeping thing. The chart the table that you guys include on Slide 8 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 5 basis points of NIM impact. Just want to make sure I'm comparing apples to apples.
Yes, sure. So 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. So we do have some expenses that aren't netted against the fees and they're expensed 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 and I totally appreciate you're just giving guidance on a quarterly basis at this point. But 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 were we talked about Q1 simply because of the amount of volatility coming at us. And I think the Q1 is what we said.
I think we anticipate some lower fees. Now the reasons for that are secondary mortgage expected to diminish. The number of applications and dollars were down about 10% in the Q4 over Q3. So we anticipate that again. And the specialty income is hard to predict.
And if we end up with more customer swaps and such or BOLI than we anticipate, then we might outperform that a little bit. But 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 4th quarter. So 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. So it wasn't a lack of modeling or confidence in those lines doing well this year. In fact, we're bullish on them.
It's just some big puts and takes that we can't size here in January. So we're opting to stay close in the guidance.
Got it. Understood. Thank you.
You bet.
And our next question comes from Christopher Marinac with Janney Montgomery Scott.
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? You want to start and I'll wrap it up. Yes. You're pointing to me, so I'll take it.
Yes. I think the answer is, we've invested an awful lot of time in a more granular portfolio and the at risk of purchasing someone else's problems, I think we've kind of had all that we want. And so while we are in the business of syndications to a little lesser degree than we have been historically, we're still in them. But 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. Can you add to that, Chris?
Yes. I mean, I guess what I would say is that we've never been really focused on buying SNCs just to kind of buy SNCs. But 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. So it's and 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. But in that process, you obviously need to be active in both sides. And so 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.
And 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, right, because of the shutdown. We're back in that game now and have offensively hired people and we'll continue doing that throughout the year focused on the markets with greatest growth opportunity. And so 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 forward to 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, Johnny 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, Ali, 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.