Hancock Whitney Corp Q4 FY2020 Earnings Call

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 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 development 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-K are also posted with the conference call webcast link on the Investor Relations website. We will reference 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 broader 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, and 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.

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 carry back provision available in the CARES Act. As noted on Slide 7, 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 30, in part due to $318 million in forgiven PPP loan. 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 8 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 in 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 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, 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 million to $15 million or so next quarter, and it 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.

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 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 a 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 we 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. It has been mentioned in our comments, you can see in the deck that really the biggest driver of any compression in the first quarter. The excess liquidity that we have on the balance sheet kind of built up again toward the end of the fourth quarter. So 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. So lots of puts and takes there certainly, as we think about the entire year. But I think your thesis is largely right.

Okay. And any plans with the securities book at this point, looking to 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 feathering 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.

Okay. That’s helpful. And maybe just one follow-up question. You guys have done a lot of work to derisk the balance sheet, including the energy loan portfolio sale. Our 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 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 our regional economies and kind of what's going on there. But really, our narrative has been to the third and fourth 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 reserves 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’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 to $15 million, with again some room for that to be lower. So 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 towards what’s going on with our levels of criticized loans, non-performing loans, 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 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 the 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 cautious. 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'll talk again. But I would echo Mike's comments that the likelihood of provision being under net charge-off in the future is highly likely.

Maybe if I just ask the question another way, if I take first quarter extra day one CECL reserve build, is there any reason with a derisked portfolio that you couldn't get back to that point, assuming the data gets better and the economy continues to improve, etc.?

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 somewhere much further down the road, we could end up at a place maybe just north of where we began once CECL was.

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.

I'm 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, do you want to talk about asset quality in the hotel or hospitality book? And then, if it's a redirect, I'll handle it.

Sure. Yes. So as it relates to our hospitality book, obviously, there has been a lot of movement over the past quarter or several quarters with the changes in rules around occupancy levels in various jurisdictions. So that's definitely had an influence. But overall, the hotel portfolio itself has held up pretty well. We 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 is kind of to bridge through 2021 and get to a better place. From a performance standpoint, in the hotel portfolio in general, off of the bottom 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. And again, 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. 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 guidelines as well as just attracting the larger group 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 restaurants and to the small menu choices, controlling costs. And so they're managing through it. And overall what I would say is, you can see a key metric. Although they're 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 way back in the March-April timeframe. So I'll leave it, then John you can add to it. I know you have some thoughts.

In case Jennifer, you had another follow up, I'll wait to give you some more color.

No, that's great, thank you.

The only thing I would add is that on page 11 of the presentation there is something that is appreciated from the investor perspective, which is transparency that highlights the criticized deal and the past watch along with the structured solution breakout across the sectors we are focusing on. One of those sectors is hotels, and the overall breakdown of hospitality shows that there has been a surprisingly modest decline quarter-over-quarter, particularly during a period that is typically slow for the economy in those areas. As the quarters have progressed, we have grown a bit more optimistic. In terms of the markets in Texas and Florida, while I wouldn't say they are back to normal, they are closer to pre-pandemic levels than they were last summer. Those areas have shown significant recovery, and this is not limited to hospitality alone. The Mississippi and Alabama regions have also made a slower but good recovery with more attractive numbers. I believe none of these four states would be performing this way without the significant easing of restrictions. As a result, occupancy percentages and merchants' ability to operate have been less hindered compared to before and during the more restrictive shutdowns. Louisiana, particularly South Louisiana, is lagging behind and significantly contributes to the criticized percentages. Similar to my previous answer regarding the reserve, we would like to see another quarter of vaccine deployment and its success. Louisiana is actually performing quite well in vaccine deployment relative to other states in the southeastern region when you consider their pace against the number of vaccines needed. If that can continue to improve, we might see further easing of restrictions in South Louisiana, which would greatly benefit our business. Overall, it's still early to make solid predictions with many uncertainties involved. However, we are more optimistic than we were before. We are holding onto the reserve because we want to observe another quarter, and the outlook on revenue opportunities in those sectors is still somewhat unclear.

Thanks.

And our next question will come from Brett Rabatin with Hovde Group.

Hi, good afternoon, everyone. I 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 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 qualitative factor changes you might have made in the fourth quarter 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 macro-economic assumptions. We use Moody’s like most banks our size do, and we did move through a little bit more conservative mix of scenarios in the fourth quarter, so of 13, which we use in the fourth quarter is kind of listed out quickly and the 65% based on 25% as to 10% that’s straight. You go back to the third quarter, we were weighted again 50% based on 25% plus 1 and then 25. We did, I think, a little bit more conservatively in the fourth quarter. And certainly that helps inform, I think, where we ended up with our total reserves. 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 our charge-offs with the 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. 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 and grow the reserve.

That's helpful information. Regarding the balance sheet, there are concerns about excess liquidity and the difficulties in replacing the PPP portfolio as it diminishes. It might be too soon to provide concrete guidance on this. However, investors will eventually want to see growth in the portfolio and improvement year-over-year. What are your thoughts on this, which loan segments will drive that growth, and how does the current pipeline look?

I'll start off with a comment about PPP and then John can give cover around. But on Slide 9, in the middle of the page, there's the guidance that we've given to the first quarter, including some pretty specific guidance around both PPP forgiveness. So we're looking at estimating that number up to about $1 billion in the first quarter. And then 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. 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, this is John. Given the understandable fluctuations in PPP, I'll focus on the core. There are several factors to consider looking into the first quarter, and slide 9 of the presentation provides a lot of detail. We're anticipating around $200 million in run-off recorded each quarter due to the amortization of the indirect book, which will persist for some time. Additionally, there will be a reduction in the mortgage portfolio and home equity products, resulting in a couple of hundred million dollars leaving the business due to refinancing activity and indirect amortization. We need to address these figures just to maintain stability. We did tackle some of that with improved productivity in the fourth quarter, but the first quarter typically sees lower production because of our business nature. We provided guidance on that expected reduction, which is around $250 million as outlined on page nine of the presentation. We're not ready to discuss the full year until we get through this quarter and assess the impacts of PPP and other factors. However, we believe the productivity enhancements noted in regions will eventually lead to a more positive narrative as the year progresses. Much of this is connected to sentiment, which tends to rise with vaccine distribution and the lifting of certain restrictions affecting the market. While the outlook for 2021 appears positive, the first quarter loan growth may not be particularly strong unless PPP performs better than we anticipate in terms of run-off. Overall, I'm cautiously optimistic for the remainder of the year.

Okay. Great. I appreciate the color.

Sure. Thank you.

Our next question comes from Kevin Fitzsimmons with D. A. Davidson.

Hey, good evening, everyone. Just want to add on a 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 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 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 forgiveness. 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 and significant. So if that occurs, then really the biggest driver in compression in first quarter '21, we think will be how quickly we'll be able to offload the excess liquidity, that again kind of built up towards 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 as well as our ability to continue pushing down deposit cost, which again will continue in the first quarter and beyond as we mentioned.

And 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 the 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 with the same?

Yes, I’ll give you a few thoughts related to that. So I think first and foremost we absolutely see some pretty good growth in average earning assets in the first quarter. And one thing that impacted the level of liquidity towards the end of the year was at pretty good level of deposit inflow. So deposits were up December to September, nearly $700 million. And that certainly help impact the averages, not only in the bond portfolio but also in our level of short-term investments. So we will 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 million. So we’re able to overperform and have that number lower and I think that speaks a little bit better to our ability to really grow NII in the first quarter. But again, there are lots of unknowns and the level of PPP net activity could swing the numbers, depending on where that comes in.

Thanks, Mike. Regarding expenses, you provided a lot of details. I'm curious if the initiatives you've implemented over the past quarter are part of a larger assessment. You've mentioned the ongoing branch rationalization, but are there any other plans in the pipeline? I'm asking if there's more to expect in that area.

Yes, I think there is. I mean certainly we have the news that we shared inside the company yesterday and with investors and analysts this afternoon about the early retirement program that we’re launching. And so that’s something that what the take rate is, could move the needle certainly on the expense side. But to answer your question directly no, our work is not done in terms of containing cost and cost initiatives. We’ll talk a little bit more about those as we implement them along the way and certainly we’ll be very proactive in disclosing the actual results from the early retirement program.

Okay, thanks Mike.

Our next question comes from Ebrahim Poonawala with Bank of America.

Hey, guys. Just want to first follow-up and hard to do this Mike, around the NII outlook. So I noticed the end of period deposit growth was average. Should we assume that your earning asset growth in the first quarter should be of similar magnitude like $600 million, $700 million 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 first quarter relative to 4Q levels. So if you could address that.

So our level of average earning asset growth, fourth quarter compared to third was just under $500 million. And certainly I can see is at that level, and probably a little bit better in the first quarter. 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 first quarter.

Hey, Ebrahim, this is John. Another factor that is impossible at this point in time to gauge is the impact of stimulus and the stimulus packaged 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. So if that were to happen in the second week of February, it's a different impact than if it's the last week of March. So what I'm trying to record is there are some really big variables that at this point of 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 a fairly big consumer portfolio, which we are, then stimulus dollars can be impactful. And that was part of the excess liquidity that we had in the first round of stimulus.

Thank you for that information. Regarding the remaining PPP fees, I noticed the $16.7 million PPNI impact you mentioned for the first quarter. Can you provide the total amount of outstanding PPP fees at the end of the year associated with 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 million, and then $68 million or so on a net basis. And we still have somewhere in the $16 million, $17 million range or so that will amortize between the first quarter and then we have the remaining duration of the loans from the first round.

And then it starts over again with the incoming tranche.

So at that point, begins to really commingle.

Understood, and just on terms of like 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 trying to understand the level of visibility that you have in terms of funding in the second round interviews. Is it the same borrower base that's going to be funded with round two?

It's a good question. And the visibility we have now and what's happened so far, so we have a pretty big team of people that work very hard, 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 weeks gone on, it's become more distributed towards first timers. So I think it's a little early to conclude 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 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 timing of that PPP draw is also one of the big variables, we have to grapple with. Last time when the PPP fund incurred, the bulk of those deposits on the balance sheet for a period of time until businesses get reopened again, spending 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 we have estimates of what that would be that sort of underline the estimates that Mike gave you for the quarter. But just that estimates, I think reality will help us shape it up as we get through 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. Wanted to follow up on asset quality and going back to Slide 11, your classified 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 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?

Yes, sure. Again a great question, but it really is kind of hard to call that. I guess what I would say is that we’ve certainly put a lot of effort in the second half of 2020 to put those structured solutions in place or mostly focused obviously on anybody, but 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 structural solution. We have to kind of reopen that discussion with them. The good news is, is that Section 4013 of the CARES Act allows for continued support for working with customers without the concerns that previously would exist with TDR at least until a pandemic is declared behind us. And not to say that we wouldn't talk to 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 portfolio as you can see with retail and being possibly another sector that has a larger percentage. Again it would just is a matter of the economy, getting back a little bit, people feeling comfortable spending money, opening restrictions to allow people to go out and visit some of the locations in 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.

This is John. I think it's hard to tell right now, but I think it would be fair to say that retail and healthcare both improved markedly in terms of criticized ratios quarter-to-quarter, hospitality didn’t. And I think the reason hospitality is aligned heavily to restaurants. So that is heavily focused on New Orleans, where we still have the most restrictions in terms of occupancy levels. And so that's what I said a couple of times on the call, the vaccine deployment case 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, the economy, if they are beneficiaries of funding sources that will help, then I think we'll see greater benefits. But it's where, unfortunately, we're not writing the legislation in order to get a vote, unfortunately. So hopefully, that'll be considered.

Is there a specific trigger within your underwriting process that would cause a loan to be categorized as criticized or classified? We've heard varying approaches from different companies, with some placing entire portfolios or asset classes under scrutiny to monitor them more closely. For instance, there are businesses that downgrade any credit unable to meet amortizing principal and interest payments from current operations to criticized status immediately. Can you provide any insight into what might lead to such a decision?

Yes, so we generally stick for the most part towards financial metrics to drive classifying a loan in the various categories as watch, and then criticized, 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. So we do have a pretty structured approach to evaluating our credits and putting them into the various categories. And we feel pretty good about where they are right now from the classification perspective. I think what we're also doing is, this category of sectors and the 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 watching and worst-rated credits, and includes the 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.

Okay. That's very helpful. Thank you.

You're welcome.

Our next question comes from Brad Milsaps with Piper Sandler.

Hi. Good evening.

Hi, Brad.

You touched on most of the topics, but I wanted to follow up on Kevin Fitzsimmons' question about expenses. Mike, as you go over your list of initiatives, could you describe how that compares to what you’ve done so far? I'm trying to understand the potential magnitude of other expense levers that you might need to address in 2021.

Sure, I'd be happy to. I want to clarify that I don't want to set any expectations. I would estimate that we are in the third or fourth stage regarding our planned initiatives that we have yet to implement. There is definitely more to come. We are still conducting branch rationalization studies and addressing issues like attrition. The early retirement program is a key factor, and we will be evaluating its outcomes. From there, we will determine the next steps regarding the other initiatives we plan to explore.

Great. That's helpful. And then just kind of one housekeeping thing that the charts, the table that you guys include on Slide 8, as relates to the quarterly impact of PPP. In terms of PPP in our 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 an 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 that translates into the EPS. The PPNR would be the net interest income or margin impact of the loans inclusive of bank fees or amortizing after we net any direct expenses. So we did have some expenses that are netted against the fees and their 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 and I totally appreciate you've just given 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 discussed the first quarter mainly due to the volatility we are facing. I believe the outlook for the first quarter is in line with our previous expectations, despite some lower fees. The anticipated decrease in secondary mortgage applications and dollars, which fell about 10% in the fourth quarter compared to the third quarter, is a key factor. We expect this trend to continue, and the specialty income remains unpredictable. There's a possibility that we may have more customer swaps which could slightly boost our performance. However, a significant uncertainty lies in the influx of additional liquidity. As average account balances increase, this may reduce our recurring service income, which had been a positive aspect in the fourth quarter. Until we fully understand the scale of the stimulus measures and how the PPP is implemented along with other potential non-cash stimulus initiatives from the administration, forecasting for the remainder of the year is quite challenging. This isn't due to a lack of modeling or confidence in those revenue streams performing well this year. In fact, we have a positive outlook; it’s just that there are several major variables that we can't quantify at this point in January, so we are choosing to remain cautious.

Got it. Understood. Thank you.

And our next question comes from Christopher Marinac with Janney Montgomery Scott.

Hey, thanks. I have a quick question about the possibility of purchasing loans externally to utilize excess liquidity, which might affect our mix in this environment. I'm interested in understanding the tradeoff between pursuing all organic growth versus making those purchases.

Chris, you want to start and I'll wrap it up?

I think the answer is we've invested an awful lot of time in a more granular portfolio. And 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 lesser degree than we had 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.

We've never really focused on acquiring mixed assets just for the sake of buying S&Cs. However, if they are strategic, align with sectors where we are more active, or are part of a larger strategy to support and develop customer relationships, we may consider it. Additionally, we have been concentrating on enhancing our syndications capability in a careful manner. A significant part of this approach is driven by our desire to manage risk, which means we focus on being the agent and distributing risk to maintain control. In this process, we need to be active on both sides. Therefore, we sometimes engage with existing sources where we sell syndications to also discuss how we can assist or participate in syndications with them.

And Chris, we 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 to call them clients 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 great 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. We never say never but at this point in time, we're going to do it organically, if that's available. It's tough sledding right now, but it won't be for the whole year and I have a little bit more offensive firepower on the payroll, I think will be a tailwind.

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, Ellie, for running the call. Thanks everyone for your interest, and we look forward to seeing you on the road, or the virtual road later this quarter. Take care.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.