Q4 2020 Hancock Whitney Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the Hancock Whitney Corporation's fourth quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode.
We will conduct a question and answer session and instructions will follow at that time as a reminder of 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 and are 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 presence.
Patients 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 Harrington, President and CEO, Mike <unk>, CFO and Crystal Luca of Chief Credit Officer, I will now turn the call over to John Hurston.
Thanks pressure and good afternoon, everyone. Thank you for joining US today, we're certainly pleased to begin 2021 with a broader horizon the 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 and active and meaningful participant and providing support to clients via the PPP program and many of the systems to the impacted markets and a very busy hurricane season, I am pleased to report fourth quarter.
2020 results there 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 of under pressure of our 4000 member team moving onto the fourth quarter EPS of $1 17 stance was notable with strong P P and our performance and some extra earnings be attached.
<unk> researched and executed by the excellent work of our tax rate. They used tax strategies implemented at year end net of the small tax credit for the quarter, allowing us to recoup a portion of capital. We spent earlier in the year and support of our Derisking strategy. This benefit which Mike will explain in more detail. The moment added 21 cents to our fourth quarters.
Adjusting for a normalized tax rate of around 18%, we would've reported 96 cents per share of the quarter of solid into the year.
For the quarter P P and our increased just over $4 million or 3% linked quarter as our NAV remained relatively stable expenses were down and many fee income lines of business showed improvement for the year P. P and <unk> was up just over 3 million or almost 1% as we achieved the same level of revenue year over year despite too.
The different operating environments overall of our asset quality metrics improved once again during the fourth quarter as criticized and nonperforming loans declined 5% and 20% respectively linked quarter Slide 11, and our deck provides additional details on our sector's under focus also please note on this slide there are no co.
And related deferrals from meeting and these focused segments and only 13 million and deferrals remain and total knee.
Net charge offs in the quarter related to energy health care and various other commercial and consumer credits the energy and health care related credits are criticized prior to the pandemic, but due to COVID-19. We're 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 $100000 we bill.
Maintaining a year and reserve is such a strong level is appropriate given the continued uncertainty regarding the timing of vaccine deployment and subsequent impact and the economy given the strength of the reserve. We expect net charge offs could begin to exceed provision levels and 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 nine that our regions reported net loan growth for the quarter. Unfortunately, the run off and are amortizing energy and indirect portfolios and the sale of mortgage loans into the secondary market and the beginning of round one PPP for.
Given this contributed to the reductions that overshadowed an otherwise decent quarter of core loan production. We expect this trend and 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 individuals' stimulus payments gear and seasonality as well as organic account acquisition the increase in deposits and reduction and loans is 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 and loan growth during 2021, but until we can we expect this will be of headwind as we began 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 from guidance to the near term we continue to rebuild our.
Capital and the quarter and ended the year with TCE of 764% and common equity tier one of 10.7 TCE, excluding PPP loans was 7.99% again, a solid and to a challenging year I will now turn the call over to Mike for further comments.
Thanks, John and good afternoon, everyone earnings for the quarter were 104 million or of dollars 17 per share with 21 cents related to zero tax expense for the quarter.
More on that shortly for the year, we reported the net loss of 45 million or <unk> 54 per share.
Our year end tax strategies allowed us to benefit from a tax net operating loss carryback provision available and the cares Act as noted on slide seven we were able to realize 22 million of benefit by carrying the tax N O L back two years with the 35 per cent tax rate.
The NOL was due in part to the loss, we took on the energy loans 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 and the first quarter of 'twenty one.
Loans for the company declined $450 million from September 30th and part due to $318 million and forgiven P. P. P loans.
We expect the level of P. P P forgiveness to grow significantly and the first quarter and could be as high as of 1 billion or so.
As noted on slide eight of our deck. The first round of P. P. P lending contributed between 15 and 17 cents and quarterly earnings during 2020.
As you can see and the same table on slide eight the new or extended round of PPP lending will allow us to partly offset the loans forgiven and the first round and keeping the impact to EPS flat.
We currently expect to originate between $750 million and a billion and new P. P. The funding and the first quarter.
John mentioned, our loan loss provision and his earlier comments I'd like to expand on that a bit so looking at slide 13, and our guidance for the first quarter.
We do expect the step down our provision to a range between 10, and 15 million or so next quarter and actually could come and lower factors that play into that include levels of non PPP loan growth vaccine rollout and macroeconomic forecasts and we also think it's likely that net charge offs.
And will exceed our provision and future quarters.
As a reminder of our year and ACL was strong at 2.42% of loans excluding P. P. P.
Turning to our NIM and consistent with our guidance last quarter of the 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 E. O P deposit inflows of nearly $700 million and over $300 million of P. P.
The forgiveness of the result was a pronounced shift and 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 weren't able to offset most of that compression and 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 and December down another three basis points from September.
We expect to continue the focus of pushing down our cost of deposits with the trend continuing into the first quarter and beyond.
Slide 18 includes the drivers for our fourth quarter, NIM and guidance, what we'd expect and the first quarter.
So the most impactful NIM driver and 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.
And that excess liquidity should it remain at current levels could compress the NIM as much as 10 basis points.
With similar levels of P. P D forgiveness, and new loans, the net impact of all P. P. P activity could offset we believe.
Certainly the timing of forgiveness, and new activity could impact our numbers we.
We will also continue to be proactive in reducing deposit costs and expect the and the first quarter 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 and secondary mortgage and specialty income.
Hi activity slowed in the quarter and we expect that to continue as we move into 2021.
Specialty income, which includes areas like boldly and derivative sales can be volatile quarter to quarter and will likely be down and the first quarter.
These factors, we expect overall fees to be down in the first quarter.
For the quarter expenses were down $2 7 million as declines and personnel expense related to recent cost initiatives were.
Partly offset by higher nonrecurring 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 of these.
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 has some of your per.
As noted last quarter, we also closed our two trust offices and the northeast.
And as recently as yesterday, we have continued implementing cost saving measures by offering and 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 and the pandemic environment and the impacts to our regional economies, we determined at bats, and continue with the 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 the question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing Nicky to withdraw your question. Please press Star then two.
Our first question today and will come from Michael Rose with Raymond James.
Hey, good afternoon, everyone.
Michael maybe we could just hey, good afternoon, and maybe we could just start with the margin and understand the commentary around the quarter and I appreciate the color around the deposit costs.
Actually fallen to about 13 bps should we think about ex the impacts of the P. B piece is 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 and you can actually grow the core margin of her mirrors that the right way, we should be thinking about it.
Yeah, Hi, Michael This is Mike and Yeah, I think that's right for the most part.
And as we mentioned in our comments you can see the debt that really the biggest driver of any compression and the first quarter of the excess liquidity that we have on the balance sheet that really kind of built up again towards the end of the fourth quarter sales.
And to the extent that we are able to ramp up.
Level of organic growth that is loan growth ex PPP, and then considerably that'd be very helpful and.
And kind of paring down and that level of liquidity. So lots of lots of puts and takes there certainly as you think about the entire year.
And I think your thesis is largely right.
Okay, and any plans with the with the Securities book at this point look and add it all.
Yeah, I think that again with the level of excess liquidity. It really is kind of a walk in a bit of a balance between.
The money at the better and 10 basis points and pushing that into the bond portfolio right now, earning anywhere from 125 day 135 basis points, the debt kind of that mind with a much longer duration asset on the balance sheet. So we're going to do a little bit of both will go to monitor obviously, what goes on and with our balance sheet.
Every single day.
And what happens with the level of PPP for business as well as the new PPP activity.
And again.
And of play into that equation and I think for the most current.
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 law and portfolio sale and the reserves are really stout, you kept and basically flat this quarter, where we've seen some others have some some greater release, what's holding you guys back is just uncertainty and your markets as the gen.
I'll caution.
How should we think about the potential for reserve releases and we move through the year. Thanks.
Well I'll start off and then and John can certainly add color about the regional economies and kind of what's going on there, but really I inherited it really has been for the third and fourth quarter debt, we'll be planning to do with the kind of match off of our provision with charge offs and get to the end of the year with the the reserve and we spent some of.
Much hard work building.
Inclusive of the average loans, they all kind of attack at year end.
And certainly see from the guidance that we're giving for the first quarter. We certainly can see of scenario and probably I think it's probably more likely the not that we'll have charge offs exceed our levels of provision and and we also guided two of provision level of $10 million to $15 million with again, some room for that to be the lower so.
I think we're going to kind of begin that process of paring back of the Big Reserve.
But we're going to be very measured what percentage.
A keen eye towards towards what's going on with our levels of criticized loans Npls and <unk>.
And really what's going on and our regional economy.
The only thing this is John and the only thing I would add to that Michael is I think Mike's answer was was exactly spot on the only addition would be the the <unk>.
<unk> deployment protocol.
And it's been a little less and I think we would've all white to of saying given the expectations that were announced and the fourth quarter and and the fourth quarter, we talked about what degree of deployment would we think.
Cause us to adopt the mix of Moody's scenarios, and then we'd be a little bit more optimistic than the ones that we did and the vacuum deployment pace just hasn't matched up with what we had hoped for and so.
And we might be a little conservative if were and if were flawed and it's being overly conservative but at this point and time, we'd like to see another quarter of vaccine deployment actually happen.
See if that increases the two extra three assets across our footprint that we anticipate and the matches what the new administration is and suggesting that they would consider acceptable and at that point in time, I think we talk again, but I would echo mikes comments that the likelihood of provision.
And being under net charge offs of the future is highly lifetime.
Maybe if I just ask the question other way if I, if I take first quarter extra day one.
So our reserve build is there any reason with the Derisk portfolio that you couldn't get back to that point, assuming the data gets better and the economy continues to improve etc.
Et cetera.
Yes, that's the big question, Michael and and it's a good one and the way we've kind of thought about that and kind of talked about that somewhere and much further down the road.
We could end up out of place maybe just north of the way we began.
Once the food waste.
Very helpful. Thanks for taking my questions.
You bet. Thanks, Michael.
[noise].
Our next question will come from Jennifer Denmark with true with Securities.
Thank you good evening.
Hi, gentlemen.
Just curious if you could give us some color on what you're seeing and your hotel and restaurant book right now in terms of trends and and.
Underlying revenue trends for the borrowers.
Okay. Thanks for the question, Chris you want to talk about asset quality and the hotel or hospitality book and then the to redirect all all of that sure.
Yeah, so as it relates to all of the hospitality book and obviously, there's been a lot of moving.
Over the past quarter or several quarters with the changes and rules around.
Occupancy levels and the various jurisdictions. So that's definitely had an influence growth.
And for all of them.
The hotel portfolio itself has held up pretty well, it's been an inordinate amount of time.
And just kind of wrapping around arms around and working with the customers and putting in place the structured solutions and you can see you know.
The largest portion of structured solutions in the sector is under focus is and the hotel portfolio.
The idea that.
Kind of bridge through 2021.
And get to a better place.
From a performance standpoint.
In the and the hotel portfolio and general.
Off of the bottoms that they were experiencing in the.
And the late spring timeframe and they've come back quite a bit and certainly as it relates to our portion of the hotel portfolio and not hotels necessarily in general.
In the market and.
Again, each market is a little bit different and the keep reminding people that although we do have a bit of of concentration to a degree in AR and the New Orleans market. We do also have the hotel exposure more spread out and and those other markets they've come back a bit more.
And not necessarily to kind of pre COVID-19 levels.
But over the long.
Now they are.
Come back and then.
The rest of the hospitality sector of restaurants for instance, and a limited service fast food restaurants.
A lot less worry.
And at the higher cost to operate and things like that but yeah, but in general the performing.
Adequately and well and some situations.
On the full service restaurant side of things I think some of the bigger format.
Our restaurants are more challenged of kind of operate and fill the space just based on the rules and guidance and guidelines as well as just the 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.
And do outside of dining.
And things like that.
They've been able to kind of manage it through smaller.
Hum restaurant and it remains small and menu choices just controlling cost.
And so they're just.
And we're managing through it and overall you know what I would say is and you can see and the Ecu metrics, although the elevated relative to the overall bank and hotel and restaurant I think the.
Warming and are 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 and I know you have some thoughts yet and the alpha generating cash you had another follow up all the way and then I'll give you some more color of the herself.
No that's great. Thank you.
Okay, and the only thing I would add is on page 11 of the debt. There's a I think something from an investor perspective is appreciate the transparency that shows the criticized NPL and even the past watch is one of the structure solution breakout across the sectors and focus of one of those is hotel and then you see the overall breakdown of <unk>.
Hospitality and so and that's intended to show what really has been.
And surprisingly modest degradation.
Quarter over quarter to what typically is a slow period anyway, and the economy and those areas. So.
We're probably as the quarters of gone by has continued to become a little bit more optimistic over time.
And I think in terms of markets.
Texas and Florida out.
And want to say, they're back to normal, but there are closer to normal pre pandemic levels than they are the the summertime. So they are the early summer so.
Those areas of recovered really terrific and and I'm not limiting that suggests the hospitality the.
The Mississippi, and Alabama footprint would be a notch slower, but also and good recovery and posting more attractive numbers.
And I don't think any of those force. Thanks.
And would be doing that and if it warrants of the fact, the restrictions have been significantly eased and so the occupancy percentage and the ability for those of Merck.
And as to operate has been less impacted than it was prior to.
To now and are more of a deeper shutdown, the Louisiana, and particularly SaaS the Louisiana.
The slower than that and really I think dominate some of the criticized percentage of what you see there and and similar to the answer and the last question around the reserve, we'd like to see another quarter of vaccine.
The deployment and cease and success and the state of Louisiana is actually doing a pretty good job and deployment. If you. If you extrapolate the deployment pace to how many vaccines are necessary. They are doing quite well relative to other states and the south eastern quarter, and so if that can be improved and I think we perhaps see restrictions and used again and SaaS, Louisiana.
It would be very helpful to the book So all of that's too early to tell and there's a lot of ifs and and and maybe isn't there, but but we're more optimistic than we were before we're maintaining the reserve because we most of the quarter and clear up the crystal ball, a little bit in terms of revenue opportunity and that sectors.
Thanks.
And our next question will come from Brett rabbits, and with Husky group.
Hi, good afternoon, everyone.
Hi, Brett.
Wanted to just go back to the reserve a topic for a second and just make sure I understood.
And I made the comment about Covid and just the rollout of the vaccine maybe it wasn't quite as fast as you were hoping and that May have had some impact on your decision.
Around the provision and the fourth quarter can you talk about maybe any of the qualitative factor changes you might have made and the fourth quarter versus <unk> and then how you think about that and 'twenty one.
Sure Brett this is Mike.
I'll start there and so I think the biggest change was probably and the macroeconomic assumptions. So we use Moody's like most banks our size too and we did we did move to a little bit more conservative mix of the scenarios and the fourth quarter. So on slide 13, what we use and the fourth quarter.
And it's kind of listed out and just real quick the 65% baseline and 25 to.
Two of the 10% is true if you go back to the third quarter, we were weighted.
And again, 50% baseline of 25 S 110, and 25 of us too so.
We did give you I think a little bit more conservative and in the fourth quarter, and certainly that helped and poor, but I think where we ended up with our total reserve.
And as I mentioned, a little bit earlier.
Of our narrative has been pretty steady through the second half of the year in terms of.
Wanting to to match of charge off the provision for the third and fourth floor.
And the year basically barely started at the end of the second quarter and that's where we are.
So again as we move into 'twenty one.
Absolutely can see that our charge offs will likely exceed our provision and we will begin the process of bringing the provision down and related reserve.
Okay. That's good color there and then I guess the other thing I know people are kind of looking at the the balance sheet, and obviously excess liquidity and you've got challenges, replacing the P. P. P portfolio as that runs down you know and maybe it's too early and hard to hard to give a firm guidance.
On it but I guess one of the things that investors are kind of wanted to see eventually and it's like the portfolio of growing and and are seeing year over year improvement you know how do you think about that and what loans segment gets you there and what does the pipeline look like at this point.
Well I'll start off of just a comment about TPP and and John can add color.
And then how do we think of them.
And.
But on slide nine new of the.
The page there is the guidance that we've given for the first quarter, including.
And some pretty specific guidance around the PPP forgiveness, and so we're looking at estimating that number up to about a 1 billion and the first quarter and.
And we think that debt could largely be offset actually by new PPP activity and the estimate is between 750 and the 1 billion and.
And certainly with the other quarter was open now and 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 and 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 at first quarter and slide nine of the debt shares a fair amount of detail there.
There's about a little less and a 200 million dollar of runoff cooked and per quarter with the amortization of the indirect book.
Which will be around for a while yet and then the mortgage activity and due to production in the mortgage portfolio and the home equity products, both lines and loans. So that's a couple of hundred millions of dollars out the back door due to the refi activity and the indirect amortization.
That's what we have to cover just the swim straight and so we.
We did cover some of that with the with better productivity and 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 and so we gave guidance to that reduction and the general percentage of U S. I think we set up to $250 million and that.
And so on page nine of the day.
And we're not ready to until we get past the quarter and see all the impact of the PPP and other items. The talk about the rest of the year, but certainly we would think of the productivity improvements we saw in the regions. When it began to carry the day and become a more positive story as the year goes on a free.
Thankfully a lot of that is tied to a to the sentiment and the sentiment goes up with vaccine deployment and the elimination of some of the restrictions and impact on marketplace and so while 2021 looks bright.
Quarter, one loan growth won't be of great story and.
The less PPP actually covers more than we think of the runoff, but but I'm more optimistic of a little bit more so because of 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 kind of add on question on the margin I just want to make sure I'm looking at this rate so when I look at it.
Page eight you you'd discuss lay out people and the effect on the margin and then on Slide 18, you talk about the the outlook for the margin and and related P. B piece. So when you're talking about forgiveness net of funding you're are you you're baking in the P. P. P.
The acceleration of the fees rate the origination fees like I see.
And the tailwind is just talk about the impact of new PPP loans, but as this is what's netted in here somewhere of the.
The fees as well.
It is Kevin this is Mike and that's correct and the fees are netted and and again on slide nine now we kind of get the guidance and a little.
A bit more detailed of unusual around the level of new activity or funding and the.
And then also of the level of forgiveness and.
And we really think that there's a good chance of growth good natural pretty closely.
And if that actually happens in terms of the averages and then the overall impact of PPP quarter to quarter should net out to something.
Closer to insignificant so sort of that occurs in that matter and really the biggest driver of and compression and the first quarter of 'twenty, one and we think will be how quickly we'll be able to offload the excess liquidity debt again kind of built up towards the end of the year.
So sort of like this quarter was basically the the impact of the greater excess liquidity offset by the fees coming in from forgetting this essentially with some other factors as well yeah. That's largely correct, that's correct and as well as our ability to continue pushing down deposit costs, which again will continue and the first.
And kind of beyond as we mentioned.
And now all of this we've been talking about the percentage net interest margin, but if we talk about dollars of net interesting income and and.
And throw all of these different things out there in terms of looking at how you feel about first quarter and the the shift in terms of what's happening and the balance sheet.
How do you all feel.
Feel about NII or are you comfortable saying.
Yeah, I'll give you a few thoughts related to that so I think first and foremost we absolutely see.
Some pretty good growth and average, earning assets and the first quarter and you know one of the.
Things that impacted the level of liquidity towards the end of the year was a pretty good level of deposit inflows of deposits of our ERP.
The December to September.
Nearly 700 million and.
And that will certainly help the impact and you add.
Average is.
Not only and the bond portfolio, but also and our level of short term investments. So we'll we'll grow the base of earning assets we think.
Pretty nicely and the first quarter, probably the wildcard as.
And as much as anything else is going to be the.
The level of organic loan growth or not so I know, we guided to that number of being ex PPP as much as $2 50. So we're if we're able to.
Over perform and have that number lower and I think that speaks of.
A little bit better to our ability to really grow NII and the first quarter, but again, there's lots of unknowns and the level of PPP net activity.
And the numbers, depending on where that comes in.
Great detail and not and the initiatives and I'm just wondering a lot of it is or are things you've done to date or done in the past quarter and I'm wondering.
Is there.
And you kind of broader.
The deep dive going on I know, you mentioned and the ongoing branch rationalization, but any other nuts.
And not so much of 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 I mean, certainly we had the news that we shared inside the company yesterday and.
And then with investors and analysts this afternoon about the early retirement program that we're launching and so that that's something that depending on what the take rate is.
It could move into ethos therapy on the expense side, but to answer your question directly.
Our work is not done in terms of containing cost and our cost initiatives.
And we'll talk a little bit more about those.
As we implement them along the way and then certainly we'll be.
Very proactive and disclosing.
And 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 <unk> with Bank of America.
Hey, guys.
Hey, John.
Just wanted to first of all the often hard to do this Mike.
And on the NII outlook.
I noticed the and the figure of deposit growth versus the average should we assume that you're the only asset growth in the.
The first quarter should be of.
And similar magnitude like six or $700 million of growth or more in <unk>, what's the full kill blue.
And then what I'm kind of up to us trying to figure it out but it does he see NII moving higher or lower.
In the in the first quarter relative to the 14 net of those things you could address net.
So our level of average earning asset growth.
Fourth quarter compared to the third was just under 500 million and inherently occupancy of.
And that level, and probably a little bit better and the first quarter and again the direct question about the level of the NII is really as I mentioned dependent upon really what happens to the net PPP activity.
And as well as the organic loan growth I think those two factors of probably the biggest drivers around how much of an increase we actually have and ion and the first quarter.
Abraham This is John and another factor that is impossible at this point in time the gauge is the impact of stimulus and.
And if there is a day that stimulus package and Q1 and if that includes the the incoming and administrations of assertions and had lots of <unk> thousand $300.
Per taxpayer of that that that's a few hundred million dollars that arrives and and ICA trial. So if that were to happen and.
The second week of February it's a different impact and if it's the last week of March and so we're not trying to be coy. There just some really big variables and at this point and time are impossible to assess but I think I'll and I'll, let Mike answered. It is about as best as we can with those and agree of variables and so and that's not something unique to us right.
And if you carried a fairly big consumer portfolio, which we are.
In terms of stimulus dollars can be impactful and that was part of the the excess liquidity that we had and.
And at the end and the.
The first round of stimulus.
Hello, and thanks for adding that John and just.
Just.
In terms of the remaining PPP fees like fees of $16 7 million P. P and I in fact that you called out for the first quarter. What's the total of the PPP fees that were left the total outstanding at the end of the era of tied to the previous force program.
Can you repeat the question again Abraham.
Uh huh.
Well, what's the total debt outstanding PPP fees, those that's where the mailing of outstanding at the end of the year.
Okay. So our total PPP fees from the first round.
On a gross basis, we're about 75 million and $68 million or so and a net basis and.
And we still have somewhere in the 16 and $17 million range or so.
The amortized between the first quarter and and whatever the remaining duration is of the.
The loans from the first round.
And then it starts over again, what the incoming tranche and so at that point begins to really kind of become co mingled.
Understood and you saw the film does like the second round of the P. P. John.
All of the disappears for the second zone gonna be.
A significant overlap with those of the what helped out in the first quarter I'm just trying to understand the level of visibility that you havent done the funding in the second zone do you is it the same borrower base that is gonna be funded with the downturn.
It's a good question and you know the visibility we have now and whats happened so far so we had the.
Pretty big team of people that worked very hard with 57 people in the shop over the holiday weekend.
Saturday Sunday and Monday, working the queue that was already building up and looking at the Q.
The the transactions that were first and the queue. We're largely second draws from the previous peak.
PPP recipients and then I think as the weeks going on it's become more distributed towards.
The first timers and so I think it's a little early to the claim what that mix is going to be because it's changing and.
And also you know typically the smaller borrowers come in a little lighter and.
So so far of the number of new to bank clients.
And 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.
And we have to grapple with the last time when the PPP funding heard the bulk of those deposits and settled the balance sheet for a period of time until business could reopen and began expanding them.
And we would anticipate that runoff is faster and this time, because it's largely business as our open but just maybe not the same capacity. They were pre pandemic. So we have the estimates of what that would be the sort of underlie the estimates of that Mike gave you for the quarter, but they are just they had estimates and I think reality and will help us shape. It up as we get to the end of the floor.
Got it thanks for taking my questions.
Sure you bet.
Our next question comes from Catherine Mealor with K B W.
Thanks, Good evening.
Hi, Catherine.
And wanted to follow up on asset quality and going back to slide 11, you are classified or criticized loans at the percentage of your COVID-19 at risk categories, and you're only 4% of just remain really low and so I just wanted to get your thoughts on your expectations for how you think.
And the flow of criticized loans will will be kind of directionally throughout the year do you do you think there's an expectation that this 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 most of your efforts around the structure explorations and the stimulus and PPP and and.
And all of those variables.
Of course, you want to start out yes sure.
Yeah.
Again and he does.
Dave the question, but and it really is kind of hard to call that I guess, what I would say is as debt. We certainly put a lot of effort and the second half of 2020 to put the structured solutions in place.
And for mostly focused obviously on anybody but certainly most of is mostly focused on the hotel and and.
And the restaurant portfolios you can just see by the numbers there and.
And I think that what we've done should help them for a reasonable period of time through 'twenty and 'twenty one.
So a lot of it will be as a result of just general of challenges that maybe of some of the customers that didn't.
Ask for a structured solution, we have to kind of reopen that discussion with them.
And the good news is that the section 40 <unk> of the cares Act.
<unk> allows for continued.
No.
For working with customers without.
The concerns that previously would have existed for TD or at least until the pandemic is declared.
The behind Us and.
And notwithstanding 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.
You know is the stabilized.
A large degree, but you know again things can happen that you just haven't really anticipated and then the rest of the portfolios and as you can see.
Retail and.
The possibly another sector that has a larger percentage.
You know again it really just is a matter of the economy getting back a little bit people feeling comfortable spending money.
The opening of restrictions and allow people to go out and and visit some of the locations and stores and and purchase but.
It's hard to say that we're kind of at the peak and net 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.
And we'll have some ins and outs.
Yeah. This is John and.
I think it's hard to tell right now, but the I think it would be fair to say retail and.
And the health care, both improved markedly in terms of criticized ratios quarter to quarter hospitality didn't and I think the reason the hospital at the end of this love and heavily the restaurants. So.
That is heavily focused and new Orleans, where we still have the most restrictions in terms of occupancy levels and so that's what I've said a couple of times on the call of the vaccine deployment.
The pace matters, a lot and the second impact that could be extremely positive is and how the structure of the coming stimulus package is actually delivered.
And if it's done prudently.
And those industries, which have been the most.
Harmed by the.
The effects of the pandemic the economy.
They are beneficiaries of our funding sources that would help and then.
And I think we'll see greater benefit, but it's we're unfortunately were not right and the legislation in order to get a flow and unfortunately, so but hopefully that will be considered.
And is there kind of any kind of trigger.
Typically that would.
And with your underwriting that would that would push of loan to go I'm sure criticized or classified we and we've.
Heard of different things from different companies some are putting the entire portfolio as of the at risk.
Asset classes on criticize just to watch it.
And I community and set today that if theres a credit that can't make amortizing P&I payments off of current operations and it's downgraded immediately to the criticized.
And you kind of color like that and you can guess to help us and what may trigger that debt.
Isn't it.
Yeah. So.
We generally stick for the most part towards the financial metrics that drive classify them alone and the various categories of the past watch and.
And criticized and 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 more maybe detracting from that view of the risk rate.
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 the classic classification perspective.
I think.
What we're also doing is this category of sectors under focus to the extent that.
And alone is not already in watch or criticized we have the whole shadow of watch process, which basically looks at sectors and.
And essentially overlays are watch and portfolio management process.
Which is enhanced for watch and worse rated credits.
And includes the sector under focused credits that aren't already and watch so even though we don't.
Formerly 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 it's still a path.
Yeah.
Okay. That's very helpful. Thank you.
Youre welcome.
Our next question comes from Brad Milsap with Piper Sandler.
Yeah.
Hey, good evening.
Hey, Brad.
You guys of addressed most everything and did want to follow up on Kevin Fitzsimmons question regarding expenses kind of like as you sort of think through.
Of your list of initiatives I mean could you maybe describe it sort of you know maybe versus what you've done thus far kind of what you need and you're in.
In terms of kind of thinking through the other number of things that you might have to work through and 'twenty. One just trying and get a sense of kind of the magnitude of of what else could be coming down the pike in terms of.
The expense leverage that you might have.
Sure be glad to brands and certainly at the same time without creating some kind of expectation.
We're probably in the third and fourth and somewhere around around that and in terms of the things that we have in mind to do that maybe we haven't yet executed gone and so certainly the theres more to come.
You mentioned that we certainly are.
To do branch rationalization studies, we continue to work on things like attrition.
You know the the early retirement program is something that the.
Let's see in terms of what the take rate for that is and what the impact and then at that point and we kind of go from there in terms of the other things debt.
We'll be looking at.
Great. That's helpful. And then just kind of one housekeeping thing that the the chart. The table that you guys include on slide eight as it relates to the quarterly impact of PPP by the P. P and our numbers and that table are those net of <unk>.
The expenses or is that just the coupon and the fee that you reckon.
<unk> recognized in the quarter, just trying to get my arms around what.
And what that number means versus the five basis points of net impact just want to make sure I'm comparing apples to apples.
Yeah sure. So obviously net income is what we believe to be the after tax earnings and and that translates into the EPS. The P. P and NR would be you know the.
Net interest income of our barge and impact of the loans inclusive of any fees that were amortizing and.
After we get any direct expenses. So we do have some expenses that are netted against the fees and their expense down of direct basis.
Great. Thank you very much.
Okay.
Our next question comes from Matt Olney with Stephens.
Thanks, just just one quick follow up here I wanted to ask about the revenues and I totally appreciate you 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.
<unk>.
And this is John.
We were we talked about first quarter.
Because of the amount of volatility coming at us and.
The first quarter.
And what we said I think we anticipate some lower fees and now the reasons for that are a secondary mortgage are expected to diminish the number of applications and dollars were down about 10% and the fourth quarter over third quarter. So we anticipate that again.
And the specialty income is hard to predict and if we end up with more cash.
Customer swaps and such are borrowing and we anticipate and we might outperform that a little bit but the other bigger right now and really as it has all of the the additional liquidity comes in and the average account balances go up which presents down on the recurrent service income, which was a bright spot for fourth quarter. So until we see the magnitude of stimulus.
And until we see the magnitude and placement of PPP together with whatever noncash stimulus ideas might come from the administration and its really hard to project what the rest of the year looks like so it wasn't the lack of modeling our confidence in those lines doing well. This year in fact, we're bullish Aman it's low.
And just some big puts and takes that we can't size here.
And here in January so, we're opting to stay close and the guidance.
Got it understood. Thank.
Thank you you bet. Thanks, you bet.
And our next question comes from Christopher Merrimack with Janney Montgomery Scott.
Hey, Thanks, just a quick question on if.
If you would see if you would buy loans externally to deploy excess liquidity, which you do snacks again in this environment, just curious kind of what the tradeoffs between all organic versus doing the purchase route.
Okay.
Chris you want to start and I'll wrap it up.
Yes, your point and a soft I think the answer is we've invested an awful lot of time and a more granular portfolio and the <unk> at.
At risk of a purchasing someone else's problems I think.
Kind of had all of that and we want and so.
While we are and the business of syndications to a little lesser degree and we have been historically, we're still in them but.
But I don't really see us purchasing of loan portfolio of any magnitude that would be in the specialty line or largely and syndications, especially leverage and then out.
Out of that Chris and I guess, what I would say is as debt.
<unk>.
We've never been really focused on buying the snakes just of kind of buy snacks, but if theyre strategic if they fit.
Our sector that were.
More active in.
Or if it's part of the larger strategy to support and build and develop of customer relationship sometimes we'll do that.
And so.
And also we have been focused on and just building out our syndications capability and general and where.
We're doing it and the very measured fashion a lot of it is is our own desire to <unk>.
Manage risk and so therefore, a lot of it is focused on.
The the agent and selling down risk so that we can manage our risk but in that process, you, obviously need to be active and both sides.
And so therefore, there are situations, where we're working with existing.
The sources, where we would sell.
The syndications to that we would also be and discussions around.
And the assisting and participating and syndications with them as well.
And Chris.
We didn't get the question about the other methods but.
We really did somewhat diminished hiring of of bankers for a while when there was not much of a chance of column clients right because of the shutdown.
And we're back and that game now and have all principally hired people and and we'll continue doing that throughout the year focused on the markets with greater growth opportunity and so I would far rather organically generate relationships that we know something about from bankers that are that are going to be managing those hands, along with those management teams and to do of portfolio purchase.
You never say never but.
But at this point in time and forward the do it organically.
It'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 of tailwind.
Great John and Chris. Thank you very much I appreciate it.
Thanks for the questions.
This 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 see and hear on the road of the virtual road Little later this quarter and take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.