Good morning, and welcome to the Hancock Holding Company's first quarter 2018 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. If anyone should require assistance during the conference, you may press star then zero on your touch-tone telephone to speak with an operator. As a reminder, this call is being recorded. I will now turn the call over to Trisha Carlson, Investor Relations Manager. You may begin.
Thank you, and good morning. During today's call, we may make forward-looking statements. We would like to remind everyone to review the safe harbor language that was published with yesterday's release and presentation and in the company's most recent 10-K, including the risks and uncertainties identified therein. Hancock's ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic development is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock 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 morning contain non-GAAP financial measures.
You can find reconciliations to the most comparable GAAP measure in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the investor relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO, Mike Achary, CFO, and Sam Kendricks, Chief Credit Risk Officer. I will now turn the call over to John Hairston.
Thanks, Trisha, and good morning, everyone. As we noted in the earnings release yesterday, we are pleased with solid results for the first quarter of 2018. The reported ROA topped 1% this quarter, and we accomplished another step towards achieving our newly announced corporate strategic objectives by realizing 2 of those this quarter. Operating ROA was 1.17% with our goal of 1.15%-1.25%, and operating ROTCE was 15.56% with a goal of greater than 15%. The positive impact from a lower provision for loan loss, lower operating expenses, and lower tax rate assisted in early attainment of those 2 CSOs. The result of all that is an improved level of operating EPS at $0.90 per share.
Our results also include the negative impact of tax reform, tax equivalent income, the sale of our Consumer Finance Company, typical first quarter seasonality, and the impact of the current rate environment on our capital ratios. Even with all these items, plus the non-operating items related to an all-hands bonus, several significant projects, we made good progress towards achieving our 2019 CSOs. Related to achieving our CSOs, we seized an opportunity during the quarter to sell a line of business that at best had become break-even. In February, we loan balance change related to the sale. The sale also impacted our net interest income and margin, but our expenses also declined as we reduced personnel and occupancy expense, as well as provision. In 1984, when the Harrison Finance subsidiary was created, it was a more significant portion of a then much smaller company.
In recent years, the Consumer Finance Company was less impactful. We look forward to enhancing our revenue from wealth banking and look forward to welcoming the Capital One team and clients to the Hancock Whitney organization. As noted on slide 17, the pending Capital One transaction was included in our new CSOs announced in January, but the sale of HFC, Harrison Finance, was not. We do expect that they will both be immediately accretive to earnings and anticipate they will contribute $0.10-$0.11 combined on an annual basis in 2019. Our capital remains strong. I did expect that we would report a March 31 TCE ratio a little closer to our 8% historical target. While the ratio was up 7 basis points to 7.80%, a charge to OCI for an increased loss on the AFS portfolio compressed the ratio 17 basis points.
We expect to continue building capital and look forward to deploying it first through organic growth. We will now turn the call over to Chief Financial Officer Mike Achary, who will add a few additional comments.
Thanks, John. Good morning, everyone. As John noted, we did have a strong quarter. Excluding non-operating items of $0.07 per share, operating EPS for the quarter was $0.90 per share. Non-operating items of $7 million included the one-time all-hands bonus we noted last quarter, costs associated with the HFC and pending Capital One transactions, the brand consolidation project, and the New Orleans regional headquarters move. Net loan growth did fall short of our guidance for the quarter at $88 million, but when adjusted for the $95 million decline related to the Consumer Finance Company sale, EOP growth for the quarter was $183 million. As you may have heard from others, the expected loan activity related to tax reform has not materialized as of yet, probably due to improved liquidity among clients.
Given the sale of HFC, we are adjusting our year-over-year guidance to a range of 5%-6%. It is important to note that first quarter new loan production was very strong, but large payoffs to non-bank equity markets were elevated. We are looking for loan growth to improve in the second quarter and expect to report $250 million-$300 million in net loan growth. While on the topic of loans, I would like to mention the lower provision for loan losses of about $2 million linked quarter and the $6.6 million decline in our ALLL. With the sale of the Consumer Finance Company, we were able to lower our first quarter provision to just over $12 million, the decline in our ALLL was related to the sale.
For the second quarter, we expect a provision in the range of about $9 million-$11 million. Switching now to asset quality, I would like to point out that we had another quarter with a lower overall level of energy criticized loans. Our energy criticized loans are down to $523 million and are also down about 41% from the peak in 3Q16. However, our level of non-energy criticized loans has been increasing. That trend is likely to remain at current levels for another quarter or so, but we continue to stress there are no systematic or geographic issues and no segment or concentration concerns. The company's loan portfolio is growing about $6 billion over the past three years and does remain lumpy. If we look at our non-energy levels compared to non-energy peers, we remain in line with those peer levels.
Deposits for the quarter were up $233 million, mainly related to a higher level of CDs. This was partly responsible for the increase in our cost of funds to 58 basis points, up 8 basis points from last quarter. Defending our deposit franchise and controlling deposit costs are focus points for us. However, with customers having excess liquidity from tax reform and with the mature core deposit base, we are seeing a need to defend the deposit base with occasional promotional campaigns, which has, of course, led to a little bit in the way of higher deposit betas. From 2015 to 2017, including the First NBC transactions, our deposit betas were around 20%. In the first quarter of 2018, deposit betas had increased to about 30%. Going forward, we project those deposit betas to be around 35% or so. All of this leads to our margin commentary.
Let's go over slide 12 for a minute or two. The reported NIM for the quarter was 337. That was down 11 basis points from the fourth quarter. As we mentioned in our first quarter call in January, the impact on the TE adjustment related to tax reform was a negative 8 basis points or about $4.2 million. On top of that, this quarter, we had $1.7 million of interest reversals on non-accrual loans, which compressed the margin another 3 basis points. The sale of the Consumer Finance Company and the loss of those higher-yielding loans negatively impacted the NIM by another 2 basis points. If you adjust for those items, our reported NIM would have actually increased 2 basis points, and our core NIM would have expanded by about 4. Basically, in the ballpark of what we got to for the first quarter.
Going forward, we expect the NIM to remain stable, all else equal. The second quarter impact to the NIM from the HFC sale is a -5 basis points. With a 25 basis point increase, that'll drive another 1-3 basis point expansion of the NIM. Starting with the 337 NIM, adjusting for a full quarter impact of the finance company sale and the 25 basis point March rate increase, we're guiding for our second quarter NIM to be in the range of 333-335. Slide 16 in the earnings deck includes our near-term outlook and guidance. I've already discussed many of these items, but additional guidance related to revenue, operating expenses, and our effective tax rate are included in the deck. I will now turn the call back over to John.
Thanks, Mike. Sandra, let's just go ahead and open the call up for questions.
Ladies and gentlemen, if you have a question at this time, please press star and then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Catherine Mealor with KBW. Your line is now open.
Thanks. Good morning.
Hi, Catherine.
There are a lot of moving parts on the expenses. First, I think this quarter, saw a much lower expense base than I think we were modeling, and then you take out the Consumer Finance Company, and then you add in Capital One. Is there a way for you to guide us to how you're thinking about the expense base with all those moving parts together, maybe kind of like thinking about a third quarter expense run rate?
A third quarter this year, Catherine?
Okay.
Capital One won't come in until third quarter, correct?
Sure, exactly. Again, what we're guiding first to is basically a flat to slightly up level of expenses for the second quarter. Like any other quarter, there's certainly going to be moving pieces and parts as we move into the second quarter. The thing that will drive expenses a little bit higher in the upcoming quarter is the impact of our annual raises to our associates. We also have a full quarter's impact of losing the finance company's expense base. Add a little bit of growth on top of those two things, and again, that's the guidance for basically a flat quarter to slightly up. As we move into the third quarter and fourth quarter, obviously you'll have the expense base related to the Capital One transaction.
We've also talked a little bit about that transaction's closing date, moving from an initial kind of target date of June 30th to probably some time around the second or third week of July, is what we're looking at now. Obviously we won't get quite a full quarter's impact from the Capital One transaction in the third quarter, but it'll be there and certainly in the fourth quarter, will be there for the entire quarter. Instead of sharing those specific numbers right now, instead what we'll share is we're really expecting expenses for all of 2018 compared to 2017, and of course, this excludes our non-operating items, to come in at a little bit less than 4% year-over-year. Hopefully, that's helpful.
Okay, that's helpful. That 4% includes the impact of Capital One and the consumer finance sale?
It does, yeah.
Okay, great.
As well as the impact of selling the finance company.
Got it. Okay. That's really helpful. Thank you. Then, one thing on the margin. Can you just talk a little bit more about what drove the higher deposit cost this quarter? I guess I would've thought given the growth was a little slower and you've got a mid-80s loan-to-deposit ratio, you would feasibly be able to hold your deposit cost a little bit better than we saw this quarter. Was there anything related to the brand consolidation or your new IT platform that drove that? Or is it just in anticipation of better growth in the back half of the year, you're just trying to kind of front-run some of that early on this year? Thanks.
Well, I think more than anything else, what we're looking at, I think I mentioned this in kind of the prepared comments, this notion of certainly the realization that we have an outstanding deposit franchise. In this operating environment, certainly we saw this become certainly something that's much more of a sensitive point among many of our customers, especially on the consumer side, that is a general awareness of what's going on with interest rates. We've talked a lot about deposit betas being pretty well-behaved really through year-end 2017. Then in the first quarter of 2018, we certainly saw our deposit betas kind of jump up from a little bit less than 20% overall to something a little bit less than about 30%.
Again, I think what's happened more or less is that with the rate hikes that have happened up to now, inside the first quarter, you had, I think, this awareness by customers that we were in a rising rate environment. I think some of that has to do with the volatility in the equity markets from about, what was it, four or six weeks ago. A lot of talk about inflation and generally just a general rise in awareness that we're in a rising rate environment. I think that as much as anything else, has really introduced this new level of pricing sensitivity among customers.
I think what we're doing here is with some of the promotional campaigns we have in place, is really making an effort to get in front of that and make sure that we do what we need to do to defend our core deposit base. Going forward, I would imagine that we will probably not be as aggressive in introducing promotional rates. Would expect the deposit betas to kind of trail off a little bit. I realize that we kind of are guiding to another little bit of an increase in deposit betas, but it is something that's going to be a pretty significant focus point for us going forward.
Okay. That's really helpful, Mike. Thank you.
Okay.
Thank you. Our next question comes from the line of Ebrahim Poonawala with Bank of America Merrill Lynch. Your line is now open.
Good morning, guys.
Morning, Ebrahim.
Just wanted to clarify on Kathryn's question on expenses, Mike, if I heard you correctly. For the 4% year-over expense growth all in, we should be using the $664 base from last year?
That's correct, Ebrahim. Yes.
All right. That's 4%, and that includes all the transaction, everything that's happened. That's clear. Thank you.
Yeah, that includes, obviously the sale of the finance company, as well as the introduction of the Capital One trust business.
Understood. Just in terms of another follow-up on the margin, can we talk about, you're very clear on deposit betas in terms of your outlook for public fund deposits and in terms of borrowing, they both seem much higher beta. What's your appetite to let loan-to-deposit ratio run higher where earning asset growth would be below loan growth? If you could sort of talk through that, it would be helpful.
Yeah, that's something in terms of how we strategically manage our balance sheet that we're focused on and certainly thinking about. The dynamics there obviously depend on the outlook for loan demand, loan production, and how much credit we actually put on the balance sheet. Letting our loan-deposit ratios tick up a little bit is certainly something that's a possibility and may have some potential for us. I think you also asked a question about our public fund deposit book. That deposit book stands at a little bit north of about $3.1 billion. Just as a reminder, toward the end of the year, we usually see a seasonal inflow of those deposits and then a seasonal outflow as we work through the end of the first quarter into the second quarter.
I would expect that we'd probably lose $200 million to $300 million of those deposits again as those municipalities put that money to work. As far as the rate sensitivity of that book, that book is very rate sensitive. Nearly all of those deposits are variable. They're tied to specific contracts that we have with each municipality, and for the most part, the metric that those deposits are priced off of would be short-term treasuries.
Got it. Is your sense that incrementally, if you get another rate hike, say, in June, your margin should be neutral to that? Or do you still see positive sensitivity to future Fed rate hikes?
No, we absolutely believe that we have a positive sensitivity. What we kind of talked about in the prepared comments is, basically all things equal, a 25-basis-point rate hike will impact the margin positively by one to three basis points.
Got it. Your 4% expense guide, I'm just thinking through, you should have revenue growth at least in the mid to high single digits against that 4% expense growth given outlook on loan growth and the margin for the year, huh?
Yeah, that's about right.
Got it. One quick one on loan growth. The consumer sale probably shaved about 50 basis points from loan balances for the year. I'm just wondering, did anything else change in terms of your outlook on lending pipelines that causes you to take that down so early in the year?
Now, Ebrahim, this is John. I'll give you some color on that that may be helpful. You correctly noted the finance company impact on the end-of-period loan growth numbers, both for the first quarter and for the year. What we expected for the first quarter was around $200 million or a little more in net loan growth. That was net of the Harrison Finance subsidiary, of course. If you net out the HFC subsidiary, that takes you to $105 or a little better, and we came in a little, let's call it $90 million, modestly short. If you look inside production for the quarter, as Mike mentioned in his prepared comments, the numbers were quite solid. In fact, production was about 3% better in the first quarter of 2018 over the same quarter the previous year. Inside that 3%, there were a couple of interesting trends.
One of them was the softness in consumer, and I'll call that primarily due to additional cash flow in the pockets of consumers, which will continue for some time until tax reform settles in and buying behavior begins to normalize. The second was, obviously, with mortgage rates up a bit, that demand is somewhat soft. Overall, consumer production all in was 8% less in the first quarter of 2018 than 2017. That was more than offset by a 12% increase in production on wholesale, and that nets out to a 3%. That's just an interesting trend that is not shocking given the impact of tax reform, but it is somewhat interesting. Notably, the pipeline is 13% better in first quarter of 2018 than first quarter of 2017, and likewise up from the previous quarter, fourth quarter 2017, about the same amount.
All of that information is what is leading us to give the guidance for the all apparent amounts of improvement the second quarter, and then some building throughout the rest of the year. In the annual guidance, we tried to correct it for both the finance company exit and a little bit more softness in consumer demand due to tax reform that occurred toward the end of the year. Is that helpful detail on where you were headed with your question?
No, that's extremely helpful. You mentioned the tax reform hurt on the consumer side. Are we seeing any tax reform-related pickup on commercial side or no?
There's been a lot more talk about it than there has been action so far, but I can't ignore the fact that production on the wholesale side was up double digits from the same quarter the previous year. First quarter usually is a pretty seasonally low quarter for us. We tend to compare it to the same quarter the previous year, and it was up double digits, up, as I mentioned before, in the low teens. That was encouraging to us, and the pipeline being similarly up against the previous quarter would typically note a higher amount of production over time. We really didn't have an issue in the first quarter outside of consumer with production.
Mike alluded to the challenge of payoffs, and payoffs were about $50 million higher than anticipated, and more than $50 million of that were from non-bank entities that we typically don't see as being that fiercely competitive as they are right now. We obviously are paying attention to our peers and their releases to see if they're likewise seeing the same kind of pressure. The culprit for first quarter was really all about payoffs as opposed to production or demand.
Ebrahim, just to kind of wrap up this part of the discussion, but again, if you look at the change in annual guidance that we've given, really the lion's share of that, if not the vast majority, is related to the finance company sale. Certainly, as John indicated, the first quarter for us is always a little bit of a seasonally challenging quarter, and usually represents the lowest quarter of net loan growth. The first quarter of this year was probably a little bit lower than we anticipated, but we're certainly looking at and guiding that we'll catch up in the back half of the year. Typically, as we go through the year, each successive quarter is a little bit better in terms of loan growth.
Understood. I'll hop off. Michael Rose is already yelling at me. Thanks for taking my questions.
Thank you.
You bet.
Thank you. Our next question comes from the line of Jennifer Demba with SunTrust. Your line is now open.
Thank you. Good morning.
Hey, good morning, Jennifer.
Just a question on asset quality and energy loans. You said in the release that you're still expecting $95 million of charge-offs over the cycle. You've had about $81 million to date. Can you just elaborate on what gives you confidence that 95 is still a good guidance?
Hey, Jennifer, this is Sam. I'll start it, John, feel free to weigh in. We are still having a sort of credit by credit review as we continue through the energy cycle to talk about circumstances, migration, et cetera. We also do our impairment analysis. As we have gone through those discussions over the last, what, 9 or 10 quarters, we continue to evaluate our current guidance relative to our outlook through the remainder of the cycle. We have regular discussions and debates about that. We have identified our most problematic credits that remain in the portfolio. We think the current guidance holds based on our assessment of sort of the forward direction as well as where we are in the relative stages of the resolution plans of each of those credits.
It's not that it's stale and we're not looking at it, we are very actively reviewing and debating the appropriateness of that range relative to where we are in the resolution plans of each of those remaining credits.
Does the cycle extend to the end of next year, or what are you defining as the cycle at this point?
From our perspective, the cycle at the point that we feel confident that we have essentially resolved credits to the point that we have very specifically sort of have a view to the overall improvement in each of the respective segments and the potential for recovery, that the charge-offs have sort of run their cycle and the potential for recovery is sort of either concluded or is close to conclusion. We may have some lingering things out there. This is really around sort of the remaining confidence in the offshore segments of the portfolio, which at this point, we would say is probably through 2018, maybe early 2019 view. Again, we'll continue to monitor. Frankly, the improvement of WTI to $68 a barrel is a bit of a confidence booster, we'll continue to assess that.
We've said before, while we are seeing some healing in segments of the portfolio, it's the offshore segment that we're continuing to spend a lot of time and focus on.
Jennifer, this is John. I'll just give you some additional color. I think your question's very insightful. From the beginning, when we gave the charge-off guidance and the overarching commentary, we looked at the cycle as being a season of degradation in the land side of the book, followed by the Gulf of Mexico, followed by healing in the land side, followed by healing in the Gulf of Mexico, then finally, trailing recoveries, probably from the very end of cycle losses. If we were to define the cycle as being the last charge-off and the last recovery, it probably is the end of 2019 or somewhere thereabout. Obviously, our interest is in trying to get whatever remaining issues we have of any significance resolved this year, and that looks like a pretty reasonable expectation. You saw some degradation in the energy book reported this quarter.
That is all about trying to get to conclusion with the offshore marine credits, and we're making good progress there. I think that's still a reasonable expectation that we can get the bulk, if not all, of the remaining problems on the path to healing or resolved otherwise before the end of the year. We'll have some trailing recoveries next year. We have already begun to get some recoveries. It's all on the land side right now. Recoveries on the marine side could extend into 2019. I don't know if that additional color on timeline's helpful, I thought it might be.
No, that definitely helps. One more question. Your criticized non-energy loans went up $35 million. Was that one credit or two credits, or?
That was largely driven by three different credits distributed throughout the franchise. I think we had an industrial construction outfit, food distribution, hospitality, and then a financial services vendor. Again, no industry specific or geographic concentration there. Listen, the fact that we specifically disclosed it on slide seven, Mike called it out means that we are monitoring the trend closely. We're not seeing any geographic driver to the trend nor a specific industry sector that's driving it. We haven't changed our underwriting or loosened our terms in an effort to generate volume. What we're seeing, Jennifer, is some covenant misses at the transactional level. In some cases, a miss to projections or a slower ramp-up of cash flow for an expanded operation, or maybe we see a transition in management of an enterprise.
Just things that we consider to be potential weaknesses that require additional attention, monitoring, and remediation.
I think over the years, we've demonstrated an ability to identify, rehab, work out, and collect problem credit. It will continue to get a lot of intense focus from us. Having said all that, while we are attentive to it, our non-energy criticized loan levels are about on par with peers. It is getting our attention and it's getting appropriate focus from us.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Michael Rose with Raymond James. Your line is now open.
Hey, good morning, guys. Good morning. Just to follow up on the commentary on the non-energy credits. I think, Mike, earlier in the call, you said you'd expect non-energy NPAs to increase for the next quarter or two. I thought those would've gone down, or at least leveled off with the sale of the Harrison business.
Yeah, Michael, that was actually.
Can you give some commentary as to what areas of the portfolio or geographies you think that the migration would continue?
Yeah, that was actually our non-energy criticized loans. What we said was.
Got it.
The current level should continue for another quarter or so. As Sam just indicated, it's a pretty significant focus point for us. Our hope would be that we'd be able to show a positive trend related to that sooner rather than later.
Understood. Thanks for that. Just a follow-up question, just on fee income. Your outlook calls next quarter for fee income to be flat to slightly up. I know that's been a big push for you guys. Can you give your sort of overarching thought as to where you stand in several of those businesses? I know you've spent some money to build out some of those businesses, and just what the outlook might be for the year. Thanks.
Sure, Michael, this is John. First quarter for 2018 was actually a pretty good fee income quarter. It's typically very benign as the early part of the year. Several less processing days, and also includes calendar-driven distractions that might interrupt Section 20 or mortgage fee opportunities. It was a little better than we expected. As we had hoped, mortgage is not suffering as much for us as it may be for those folks who are much more dependent on the mortgage refinance business. We're really not. It's a piece. It's not a substantial piece of our mortgage business, so we are expecting that to be a reasonably good story for the year, despite the environment for interest rates.
We expect the re-engineering of wealth management that we did last year, coupled with the mid-year Trust and Asset Management acquisition will be great progressive for wealth management in both 2018 second half and 2019. The investment subsidiary and annuity transactions, merchant, all things related to card fees were very good in the first quarter, and we expect continuing progress in those items. With the exception of just the market volatility and its impact on Section 20 and on annuity fees, the fee income business continues to make good progress. As I mentioned before, first quarter is usually skinny simply because there's fewer processing days, and that's a meaningful impact to us. When it's a few days longer, it's a really good impact. When it's shorter, it can be a little bit more jaundiced. We did a little better in the first quarter for fees than we expected.
Okay.
Does that help?
The Capital One acquisition is still expected to add about $30 million in revs?
Yeah, that's about right, Michael.
Right.
Yeah. It's mid-year, right? We'll see better benefit-
Right
from it in 2019.
Right.
Just as a reminder, we really haven't guided towards how to quantify any synergy-driven benefit from the transaction, the remainder of the book, and we'll talk more about that after it closes and settles.
Again, as we mentioned, the transaction is likely to close now the second or third week in July. Perfect. Thanks for taking my questions, guys.
You bet. Thanks, Michael.
Thank you. Our next question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is now open.
Hey, good morning.
Hi, Brad.
Mike, you guys, and John addressed most of my questions, but did want to follow up on the tax rate. I think on the last call, you gave some pretty specific quarterly guidance, kind of every quarter for the year. It looks like now you're just at least going with 18% for the second quarter. I think previously you had it dropping off a fair amount in the fourth. As you look out the rest of the year, do you think it kind of runs at 18%, or is there some volatility to it?
Brad, be glad to share some color there. Again, the first quarter effective tax rate came in at 18%, so that was a little bit higher than the 16%-17% that we had guided. Really the reason that occurred is that we made more money in the first quarter, and some of those additional earnings were taxed at the higher incremental rate. Given that, the guidance for the second quarter, again, is to come in, we think right around 18%. We still believe that the third quarter will come in somewhere, again, around 18%, then we should show a decline in the fourth quarter, probably down to 15% or so. That should bring the full year in right at or just slightly above 17%.
The full-year guidance, or the range related to the full-year guidance was 16-18, and we still think we'll come in somewhere right about the middle of that full-year guidance.
Great. Thanks, Mike.
Okay.
Thank you. Our next question comes from the line of Joe Sinnott with Hovde Group. Your line is now open.
Good morning. Excuse me. Most of my questions were answered, just a couple more here. On an operating basis, guys, the dividend payout was around 27%. You all reiterated your target, I saw, in the supplement of 30%-40%. I think last quarter you had indicated that midyear was around the time you might look to make a move there, given some other factors. Can you update us on your thinking there, and whether anything's changed, specifically maybe falling a little short of that near-term TCE target?
Joe, this is Mike. No, I would say that nothing really has changed. Certainly, we would like to be at 8% or higher. This quarter, I think we would've gotten darn close to that number had we not had the OCI adjustment related to the unrealized loss on the bond portfolio. Assuming that we don't have to deal with that OCI adjustment again anytime soon, we're still guiding to be, again, pretty close to that 8% by midyear. If that occurs, certainly, as we talked about last quarter, we'll look at the dividend payout ratio and adjust accordingly, as we talked about.
Okay. Helpful. Thanks. The change in the provision forecast was notable and is important as I'm thinking about it in the sense that it's going to be needed to offset maybe the NIM and loan growth guidance change if bottom-line EPS estimates are going to hold in line here. There were some crosscurrents you talked about in some of the Q&A earlier related to credit, related to the increase in energy nonperformers, and then the criticized non-energy loan increase. Just trying to gauge the degree of confidence here, guys, in this new provision forecast and what you see as the risks to that near-term provision forecast would be.
Sure. First, overall, just a couple of comments about the guidance overall. We certainly understand that there are a bunch of moving pieces and parts. We're not here to basically tell people what to put in their models or to run their models. We believe by giving the guidance in pretty granular format, that that's something that is helpful and useful to folks, both investors and analysts alike. Certainly, some of the guidance is related to the sale of the finance company part of the NIM compression. Certainly, the vast majority of the change in guidance on loan growth is related to the sale of that entity. Certainly, some of the positives, though, as you indicated, is the change in lower guidance related to the provision. Big part of that is the finance company.
Another part of it certainly is and I think speaks to our confidence around our ability to resolve some of the asset quality issues that we talked about a little bit. The increase in the non-energy criticized as well as the NPAs going up. Even with those things happening, we still feel very confident that we'll be able to adhere to the guidance that we've given around the provision. We've talked a lot about the guidance related to expenses. Again, we feel pretty good and have a high degree of confidence that we'll be able to adhere to that guidance as well.
Okay. Last one for me. John, the pending change in the $50 billion threshold. I understand what you've said in terms of your M&A focus near term and appreciate some of the challenges with respect to stock currency at this point. Looking out longer term, do you perceive the chessboard as potentially opening up a bit more in terms of what you would consider from a strategic standpoint? If $50 billion is no longer something you would need to think about, or is it really not impactful at all to how you're thinking about that three to five or maybe even 10-year strategic plan as it relates to M&A?
Boy, 10 years is a long time. It's a reasonable question, but what I'd say is that nothing has changed in terms of our desires or our priorities for M&A since last quarter. Really, the $50 billion threshold change, should that happen, and I certainly hope it does, its impact is really all in the long term. We would continue doing the same types of transactions we've been doing both in market, moderate risk, financial transactions that are beneficial to valuation improvements. As those pile up over time, that $50 billion threshold begins to be meaningful. We understand from our peer banks that are in the 40s that some of the preparation work for that $50 level begins to hit long before you get to 50. We're probably two or three, four transactions away from that becoming more meaningful to us.
We're not ignoring it. We're paying attention to it. Until we get a little closer maybe to a 4 handle, I wouldn't say that we're going to change our appetite dramatically. Mike always tells me, never say never. I'm saying never. I'm saying that I'm not saying never. If something were to come up that made sense for shareholders and for the company, then we'd give it due consideration, but that's not where we're spending our time right now.
Thank you.
You bet. Thank you. Thanks for the question.
Thank you. Our next question comes from the line of Christopher Marinac with FIG Partners. Your line is now open.
Thanks. Good morning.
Hey, Chris.
John Hairston and Mike Achary, I wanted to ask a little bit more on the deposit cost questions and comments of earlier. If you were to segment the base between the commercial depositors and the consumer depositors, what are the relevant differences on deposit betas? Perhaps how do you think they will be as the next few quarters play out?
Hi, Christopher Marinac, this is Mike Achary. I'll start off, and John Hairston can certainly add some color. I think that the consumer piece really has driven what we saw happen in the first quarter, more so than on the commercial side. On the commercial side, I do think, though, that the bigger potential there is maybe changes or potential changes in the mix of deposits. We certainly have not seen that happen to any large degree as of yet, but I think that potentially is there with the commercial side.
That would mean that the commercial side sort of catches up to what you saw on the consumer side this quarter. Is that right?
Yeah, I think so. I think so.
Okay.
Potentially move money out of DDA accounts into interest bearing transaction accounts. Again, that hasn't happened as of yet.
Mike, would you like to change the mix of commercial versus consumer over time? Is that something that you've thought about or that we should focus on in the future?
No, I'm not saying that at all.
Okay.
We're very happy with the mix of deposits that we have. No desired change in the mix at all.
Okay, great. A separate question on provision expense outside of what you've already mentioned. If you are successful at having recoveries from the energy book, does that help influence the provision expense at all in the future?
Yeah, all things equal, it certainly does.
There's not an anticipation of recoveries in the current guidance, right?
No, we're not building an assumption that we'll have a certain level of energy related recoveries in the future guidance or guidance going forward. The extent that we do is certainly very helpful to the overall provision.
Okay, great. Thanks, guys, appreciate it.
Okay.
Thank you. Our next question comes from the line of Matt Olney with Stephens. Your line is now open.
Hi. Thanks, guys. Good morning. Just want to go back to the EPS guidance around the Consumer Finance sale and the impact of the Capital One transaction. I think you mentioned $0.10-$0.11 on a combined basis. I was looking for a little bit more than that. Any other details you can provide as far as the main drivers or assumptions you're making in that outlook?
Yeah. What we've guided folks to expect, Matt, between those two transactions, again, is the $0.09-$0.11. We've also talked a good deal about the impact of the Finance Company being breakeven to incrementally negative on the consolidated earnings. If we're looking to kind of break apart that $0.09-$0.11, about $0.02 or so, maybe as much as $0.03 will come from exiting the Consumer Finance Company business, and then the balance would be related to the acquisition of the Capital One Trust and Asset Management business.
That's helpful. That's all from me. Thanks, guys.
Okay, thank you.
Okay, take care.
Thank you. I'm showing no further questions. At this time, ladies and gentlemen, I would like to apologize for today's technical issues with the webcast and would like to let you know that the replay will be available as soon as possible. At this time, I'd like to return the call to Ms. Trisha Carlson.
Thanks, Sandra, and thank you again. I'd like to reiterate or apologize for any problems with the webcast, and we'll have the replay up there as quick as possible. What was not heard on the webcast by some folks was my forward-looking statements and John and Mike's opening comments, which were in line with what was in our earnings release and our slide deck, and then our first question from Catherine Mealor at KBW. Again, we apologize. I'll turn that over to John.
Thank you for that, and thanks everyone for your focus and your attention to our company. Thank you, Sandra, for moderating the call today. You all have a great week.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.