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.

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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 on 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, we were an active and meaningful participant in providing support to clients via the PPP program and rendered assistance to impacted markets in a very busy hurricane season.

I'm pleased to report fourth quarter 2020 results that were 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 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 - hey good afternoon. 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 that really 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 the – our regional economies and kind of what's going on there.

But really, our narrative really 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 anti-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. And 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 – toward what's going on with our levels of criticized loans, NPLs and certainly, what's going on in our regional economies..

The only thing – this is John. The only thing I would add to that, Michael, is I think Mike's answer was exactly spot on. The only addition would be - the vaccine deployment protocol has been a little less than I think we would have 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 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 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, et cetera?.

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 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 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 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 guidance -- 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..

Okay. The only thing I would add is on page 11 of the deck, there's a -- I think something from the investor perspective is appreciated transparency that shows the criticizing deal and even the past watch as well the structured solution break out 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 a surprisingly modest degradation quarter-over-quarter to 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 of 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. So they are -- early summer. So those areas have recovered really terrific. And I'm not limiting that just to 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 four 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 and a more deeper shutdown mode. Louisiana, particularly South Louisiana is slower than that and really, I think, dominates some of the criticized percentage you see there.

And similar to the answer to the last question about the reserve, we'd like to see another quarter of vaccine deployment and see some success.

The State of Louisiana is actually doing a pretty good job in deployment, if you extrapolate their deployment pace to how many vaccines are necessary, they're doing quite well relative to other states in the southeastern quarter.

And so if that can be improved, then I think we perhaps will see restrictions eased again in south Louisiana, which would be very helpful to the book. So all of that's too early to tell with a lot of ifs and maybe is and there. But we're more optimistic than we were before.

We're maintaining the reserve because we want to see another quarter and clearly the crystal ball, a little bit in terms of revenue opportunity in those sectors..

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 is real quick 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 conservative 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 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..

Okay, that's good color there. And then I guess the other thing, I know people were kind of looking at the balance sheet and obviously excess liquidity. And you've got challenges replacing the PPP portfolio as that runs down. I think it’s maybe too early and hard to -- hard to give firm guidance on it.

But I guess one of the things that investors are going to want to see eventually is like the portfolio growing and seeing year-over-year improvement.

How do you think about that and what loan segments gets you there, and what does the pipeline look like at this point?.

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 is has just begun and will continue..

And Mike, I would just say, this is John, with the understandable volatility of PPP, I'll just stay away from that, just focus on core. And there are a number of puts and takes just look to first quarter. And Slide 9 of the deck shares a fair amount of detail there.

There's about as little as a $200 million run off booked 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 million out the back door, due to the re-fi activity and the indirect amortization. That's what we have to cover just to swing straight. So we did cover some of that with better productivity in fourth quarter.

First quarter is seasonally one of our lower production times just because of the nature of where we are and the types of business that we have. And so we gave guidance to that reduction. And in the general vicinity, as I think we said, up to $250 million and that's on page nine of the deck.

We're not ready to -- until we get past the quarter and see all the impacts 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 and impact on marketplace. And so while 2021 looks bright, quarter one loan growth won't be a great story, unless PPP actually recovers more than we think of the runoff that, but I'm more optimistic, a little bit more so to the rest 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 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 tail winds 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 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 overage 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 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 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 over perform 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’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.

I’m just wondering a lot of it is things you’ve done -- or done in the past quarter, and I’m wondering if there are any kind of broader deep dive going on -- I know you mentioned the ongoing branch rationalization, but any other -- not so much a main 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 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 in 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 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..

Thanks for adding that gentlemen. Just in terms of the remaining PPP fees, I see the $16.7 million PPNI impact that you call out for the first quarter.

What's the total PPP fees that were left -- that were outstanding at the end of the year, or 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 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 decline 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 business get reopen again, spending them. We would anticipate that run off is faster this time because largely businesses are open, but just maybe not 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, 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 are 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 in 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 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 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..

And is there any kind of trigger specifically that would -- with your underwriting that would that would push a loan to go under criticized or classified.

We've heard different things from different companies, some are putting entire portfolios at risk asset classes on criticized just to watch it, unite communities that today that if there's a credit that can't make amortizing P&I payments off of current operations, it's downgraded immediately to criticized.

Any kind of color like that you can give to help us know what may trigger that that movement?.

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 towards 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 watch 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 guys addressed most everything, did want to follow-up on Kevin Fitzsimmons question regarding expenses? Mike, as you sort of think through your list of initiatives, I mean, you could -- can you maybe describe it sort of maybe versus what you've done thus far, kind of what you means you're in, in terms of kind of thinking through the other number of things that you might have to work through and '21.

Just trying to get a sense of kind of the magnitude of what else could be coming down the pike in terms of expense levers that you might have?.

Sure. Be glad to Brad, certainly at the same time without creating some kind of expectation. Yes, I'd say we're probably in the third or fourth thing somewhere around that, in terms of the things that we have in mind to do that maybe we haven't yet execute on. So certainly there's more to come.

We mentioned that we 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 takeaway for that will be, in fact, 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 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 were -- we talked about first quarter, simply because of the amount of volatility coming at us. And I think the first quarter is what we said everything looks despite 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 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 customer swaps and such. Although we may anticipate, and we might outperform that a little bit.

But the other big unknown really is as all of the additional liquidity comes in the average account balances go up, which presses down on recurring 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 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 and it's just some big puts and tags that we can't size here in January. So we are opting to stay close to the guns..

Got it. Understood. Thank you. .

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

Hey, thanks. Just a quick question on if you would to -- if you would buy loans externally to deploy excess liquidity which reduce mix again in this environment, just curious kind of what the tradeoff is between all organic versus doing the purchase. .

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 little 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. .

And I guess what I would say is that, we've never been really focused on buying mixed 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 -- 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 too that we would also be in discussions around assisting and participating in syndications with them as well. .

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 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 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 tail wind. .

Great, John and Chris, thank you very much. I appreciate it. .

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..