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. And as a reminder, this call is being recorded. I will now turn the call over to Tricia 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 ks 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 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 ks are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call.
Participating in today's call are John Hairston, President and CEO Mike Acree, CFO and Sam Kendrick, Chief Credit Risk Officer. I will now turn the call over to John Hairston.
Thanks, Tricia, and good morning, everyone. As we noted in the earnings release yesterday, we are pleased with solid results for the Q1 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 percent with our goal of 1.15 to 1.25 percent 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 business, 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 breakeven. 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 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 dime to $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. I'll now turn the call over to Chief Financial Officer, Mike Acree, who will add a few additional comments.
Thanks, Sean. Good morning, everyone. As Sean 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 $7,000,000 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 in the New Orleans regional dollars decline related to the consumer finance company sale, EOP growth for the quarter was 183,000,000 dollars As you may have heard from others that the expected loan activity related to tax reform has not materialized as of yet, probably due to improved a range of 5% to 6%.
It's important to note that Q1 new loan production was very strong, but large payoffs in non bank equity markets were elevated. So we are looking for loan growth to improve in the second quarter and expect to report $250,000,000 to $300,000,000 in net loan growth. So while the topic of loans, I would like to mention the lower provision for loan losses of about $2,000,000 linked quarter and a $6,600,000 decline in our ALLL. With the sale of the consumer finance company, we were able to lower our first quarter provision to just over $12,000,000 and then $9,000,000 to $11,000,000 Switching now to asset quality, I'd like to point out that we had another quarter with a lower overall level criticized loans. Our energy criticized loans are down to $523,000,000 and are also down about 41 percent from the peak in 3Q 2016.
However, our level of non energy criticized loans has been increasing. That trend is geographic issues and no segment or concentration concerns. The company's loan portfolio is growing about $6,000,000,000 over the past 3 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 $233,000,000 mainly related to a higher level of CDs.
This was partly responsible for the increase in our cost of funds to 58 basis points, so 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 of course led to a little bit in the way of higher deposit base. So from 2015 to 2017, including 1st NDC transactions, our deposit betas were around 20%. In the Q1 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.
So let's go over Slide 12 for a minute or 2. The reported NIM for the quarter was $3.37 that was down 11 basis points from the 4th quarter. As we mentioned in our Q1 call in January, the impact on the TE adjustment related to tax reform was a negative 8 basis points or about 4,200,000 dollars On top of that, this quarter we had $1,700,000 of interest reversals and non accrual loans, which compressed the margin another 3 basis points. The sale of the finance company and the loss of those higher yielding loans negatively impacted the NIM by another 2 basis points. If we then adjust for those items, our reported NIM would have actually increased 2 basis points and our core NIM would have expanded by about 4, so basically in the ballpark of what we got to for the Q1.
Going forward, we expect the NIM to remain stable all else equal. However, the 2nd quarter impact to the NIM from the HFC sale is a negative five basis points. There was a 25 basis point increase that will drive another 1 to 3 basis point expansion the NIM. So starting with the 3.37 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 2nd quarter NIM to be in the range of 3.33 to 3.35. 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.
Our first question comes from the line of Catherine Mealor with KBW. Your line is now open.
Thanks. Good morning.
Hi, Catherine.
So there are a lot
of moving parts on the expenses. First, I
think this quarter, so 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. So is there a way for us to for you to kind of guide us to how you're thinking about the expense base with all those moving parts together maybe kind of like thinking about a 3rd quarter expense run rate?
3rd quarter this year, Catherine? Okay. So I
think Capital One won't come in until Q3, correct?
Sure, sure, exactly. So again, what we're guiding first to is basically a flat to slightly up level of expenses for the Q2. And like any other quarter, there's certainly going to be moving pieces and parts as we move into the 2nd 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. But then we also have a full quarter's impact of losing the finance company's expense base.
We had 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 Q3 and Q4, obviously, you'll have the expense base related to the Capital One transaction. So we've also talked a little bit about that transaction's closing date. Moving from an initial kind of target date of June 30 to probably sometime around the 2nd or 3rd week of July is what we're looking at now.
So obviously, we won't get quite a full quarter's impact from the Capital One transaction in the 3rd quarter, but it will be there. And certainly in the Capital One transaction in the 3rd quarter, but it will be there. And certainly in the Q4, we'll be there for the entire quarter. So 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.
So hopefully, that's helpful. Okay.
That's helpful. And that 4% includes the impact of Capital One and the consumer finance sale?
Yes. Okay. Great.
As well as the impact of selling the finance company.
Got it. Okay. That's really helpful.
Thank you. And then one thing on the margin.
Can you just talk a
little bit about more about what drove the higher deposit cost this quarter? I just I guess I would have thought given the growth is 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 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. And in this operating environment. And certainly, we saw this become certainly something that's a much more of a sensitive point among many of our customers, especially on the consumer side. And that is a general awareness of what's going on with interest rates. So we've talked a lot about deposit data being pretty well behaved really through year end 2017.
And then in the Q1 of 2018, we certainly saw our deposit datas kind of jump up from a little bit less than 20% overall to something a little bit less than about 30%. And again, I think what's happened more or less is that with the rate hikes that have happened up to now, inside the Q1 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, 4 or 6 weeks ago, a lot of talk about inflation and generally just a general rise in awareness that we're in a rising rate environment. And I think that as much as anything else has really introduced this new level of pricing sensitivity among customers. So 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.
So going forward, I would imagine that we will probably not be as aggressive in introducing promotional rates. So 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. And our next question comes from the line of Ebrahim Poonawala with Bank of America Merrill Lynch. Your line is now open.
Good morning, guys.
Good morning, Ebrahim.
1, just wanted to clarify on Katrin'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 basis from last
year? That's correct, Ebrahim. Yes.
All
right. And that's 4% and that includes all the transaction, everything that's happened. So that's clear. Thank you.
Yes. That includes, obviously, the sale of the finance company as well as the introduction of the Capital One Trust Business.
Understood. And just in terms of another follow-up on the margin. Can we talk about I mean, so you're very clear on deposit betas. In terms of your outlook for public fund deposits and in terms of borrowing, they're both in much higher beta. Like what's your appetite to lower that to let loan to deposit ratio run higher where earning asset growth would be below loan growth?
Like if you could sort of talk through that it would be helpful.
Yes. That's something in terms of how we strategically manage our balance sheet that we're focused on and certainly thinking about. And the dynamics there obviously depend on the outlook for loan demand, loan production and how much credit we actually put on the balance sheet. So letting our loan deposit ratios tick up a little bit is certainly something that's a possibility and it has 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 $3,100,000,000 And 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 Q1 into the Q2. So I would expect that we would probably lose $200,000,000,000 to $300,000,000 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. And is there a sense that incrementally if we get another rate hike say in June, your margin should be neutral to that? Or do you still positive sensitivity to future Fed rate hikes?
No. We absolutely believe that we have positive sensitivity. And 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 1 to 3 basis points.
Got it. So your 4% expense guide, I mean, I'm just thinking through in 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?
Yes. That's about right.
Got it. And 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?
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 Q1 and for the year. What we expected for the Q1 was around $200,000,000 or little more in net loan growth. That was net of the Harrison Finance subsidiary of course.
So if you net out the HFC subsidiary that takes you to $105,000,000 or a little better. And we came in a little let's call it $90,000,000 modestly short. If you look at side 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 Q1 of 2018 over the same quarter of the previous year. But 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. And the second was obviously with mortgage rates up a bit, that demand is somewhat soft. So overall consumer production all in was 8% less in the Q1 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 12% better excuse me, 13% better in Q1 of 2018 and Q1 of 2017 and likewise up from the previous quarter Q4 2017 about the same amount. So all of that information is what is leading us to give the guidance for the all apparent amounts of improvement in the 2nd quarter and then some building throughout the rest of the year. But 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. And just as a you mentioned the tax reform hurt on the consumer side. Are we seeing any tax reform related pickup on commercial side or no?
Well, 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 period of the previous year. Q1 usually is a pretty seasonally low quarter for us. So 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 higher amount of production over time. So we really didn't have an issue in the Q1 outside of consumer with production.
Mike alluded to the challenge of payoffs and payoffs were about $50,000,000 higher than anticipated and more than $50,000,000 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. But the culprit for Q1 was really all about payoffs as opposed to production or demand.
And 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 has not guidance that we've given, really the lion's share of that is not the vast majority is related to the finance company sale. And then then certainly as John indicated the Q1 for us is always a little bit of a seasonally challenging quarter and usually represents the lowest quarter of net loan growth. So the Q1 of this year was probably a little bit lower 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. And I'll hop off. My Rose is already yelling at me. Thanks for taking my questions.
Thank you. Thank
you. And our next question comes from the line of Jennifer Dembe with SunTrust. Your line is now open.
Thank you. Good morning.
Hi. Good morning, Jennifer.
Just a question on asset quality and energy loans. You said in the release that you're still expecting $95,000,000 of charge offs over the cycle. You've had about $81,000,000 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 and John feel free to wait in. But we are still having a sort of credit review as we continue through the energy cycle to talk about circumstances, migration, etcetera. We also do our impairment analysis. And 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. So we have regular discussions and debates about that. We have identified our most problematic credits that remain in the portfolio. And so 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. So it's not that it's stale and we're not looking at it, but 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 sort of run their cycle and the potential for recoveries is sort
of either concluded or is close to conclusion. We may have some lingering things out there. But this is really around sort of the remaining confidence
in the offshore segment of the portfolio, which at this point,
we would say is probably through 2018, maybe early 2019 view. But again, we'll continue to monitor. And frankly, the improvement of WTI, dollars 68 a barrel is a bit of a confidence booster, but we'll continue to assess that. So we've said before, while we are seeing some healing in segments of the portfolio
is the offshore segment that we're continue to spend a lot of time and focus on. Yes. Jennifer, this is John. I'll just give you some additional color. I think your question is very insightful.
From the beginning when we gave the charge off guidance and the overarching commentary, we looked at the cycle 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 and then finally, trailing recoveries probably from the very end of cycle losses. And so 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 thereabouts. But 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. I mean, 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. So 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. And then 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.
But recoveries on the marine side could extend into 2019. I don't know if that additional color on time line is helpful, but I thought it might be.
No, that definitely helps. And one more question. Your criticized non energy loans went up $35,000,000 Was that one credit or 2 credits or?
That was largely driven by 3
different credits
and distributed throughout the franchise. I think we had an industrial construction outfit,
food distribution and hospitality
and then a financial services vendor. So it's again no industry specific or geographic concentration there. But listen we the fact that we
specifically disclosed on slide 7,
Mike called it out means that we are monitoring the trend closely. We're not seeing any geographic drivers of trend nor a specific industry sector that's driving it. We haven't changed our underwriting or losing our terms in an
effort to generate volume. But what we're seeing, Jennifer, is some
covenant misses
at the transactional level.
In some cases, a missed of 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 attention monitoring and remediation. And so I think over the years, we've demonstrated the ability to identify rehab, work out and collect column credit. So 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, But it is getting our attention and it's getting
appropriate focus from us.
Thank you.
Thank you.
Thank you. And our next question comes from the line of Michael Rose with Raymond James. Your line is now open.
Hey, good morning, guys. Just a 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 2, but I thought those would have gone down or at least leveled off with the sale of the Harrison business. Can you give some comments there as to where you think that would what areas of the portfolio or geographies you think that the migration would continue?
Yes. That was actually our non energy criticized loans. But what we said was the current level should continue for another quarter or so. But as Sam just indicated, it's a pretty significant focus point for us. So 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. And just a follow-up question, just on fee income. Your outlook calls next quarter for fee income to be flat to slightly up. And 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?
Sure, Michael. This is John. Q1 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.
But 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 well, the reengineering wealth management that we did last year coupled with the midyear 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 Q1 and we expect continuing progress in those items. So 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, Q1 is usually skinny simply because 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 jaundice. But we did a little better in the Q1 for fees than we expected.
Okay. And the Capital One is the acquisition is still expected to add about $30,000,000 in revs?
Yes. That's about right, Mike.
Yes. And it's midyear, right? So we'll see better benefit from it than 2019. And just as a reminder, we had we really haven't guided towards what how to quantify any synergy driven benefit from the transaction 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 2nd or 3rd week in July.
Perfect. Thanks for taking my questions, guys.
You bet. Thanks, Michael.
Thank you. And 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 gone with 18% for the 2nd quarter. And then I think previously you had a dropping off a fair amount in the 4th. As you look out the rest of the year, do you think it kind of runs at 2018 or is there some volatility to it?
Yes, Brad. Let me go ahead to share some color there. So again, the Q1 effective tax rate came in at 18%. So that was a little bit higher than the 16% to 17% that we had guided. And really the reason that occurred is we made more money in the Q1 and some of those additional earnings were taxed at a higher incremental rate.
So given that, the guidance for the Q2 again has to come in, we think right around 18%. We still believe that the 3rd quarter will come in somewhere again around 18% and then we should show a decline in the 4th quarter probably down to 15% or so. That should bring the full year in right at or just slightly above 17%. So the full year guidance or the range related to the full year guidance was 16% to 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. And our next question comes from the line of Joe Finich 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 on the supplement of 30% to 40%. Think last quarter you had indicated that mid year was around the time you might look to make a move there given some other factors.
Can you update us in 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. And this quarter, I think we would have gotten darn close to that number had we not had the OCI adjustment related to the unrealized loss on the bond portfolio. So 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 then 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. And then the change in the provision estimates are going to hold in line here. But there were some crosscurrents you talked about in some of the Q and A earlier related to credit, related to the increase in energy non performers and then the criticized non energy loan increase.
So 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. Just first overall, just a couple of comments about the guidance overall and we certainly understand that there are a bunch of moving pieces and parts and we're not here to basically tell people what to put in their models or to run their models. But 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. So 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. So the increase in the non energy criticized as well as the NPAs going up. 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. And then we've talked a lot about the guidance related to expenses. And 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. And then last one for me. John, the pending change in the $50,000,000,000 threshold, I understand what you've said in terms of your M and A focus near term and appreciate some of the challenges with respect to stock currency at this point. But do you looking at 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 $50,000,000,000 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 3 to 5 or maybe even 10 year strategic plan as it relates to M and 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 and A since last quarter. And really the $50,000,000,000 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 end market moderate risk financial transactions that are beneficial to valuation improvements.
And but as those pile up over time, that $50,000,000,000 threshold begins to be meaningful. So we understand from our peer banks that are in the 40s that some of the preparation work for that SIFI level begins to hit long before you get to 50. So we're probably 2 or 3, 4 transactions away from that becoming more meaningful to us. So we're not ignoring it. We're paying attention to it.
But 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. So I'm saying never. 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. And our next question comes from the line of Christopher Marinick with FIG Partners. Your line is now open.
Thanks. Good morning. Hey, Chris.
John and Mike, I wanted to ask a
little bit more on the deposit cost questions and comments of earlier. If you were segment the base between the commercial depositors and the consumer depositors, what are the relative differences on deposit betas? Or perhaps how do you think they will be as the next few quarters play out?
Chris, this is Mike. I'll start off and John can certainly add some color. So I think that the consumer piece really has driven what we saw happen in the Q1 more so than on the commercial side. So 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, that potentially is there with the commercial side.
So that would mean that the commercial side sort of catches up to what you saw on the consumer side this quarter. Is that right?
Yes, I think so. I think so. And potentially move money out of BDA accounts into interest bearing transaction accounts. But again, that hasn't go.
So 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, not saying that at all. We're very happy with the mix of deposits that we have. So no desired change in the mix at all.
Okay, great. And then 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?
Yes. All things equal, it certainly does.
And so there's not an anticipation of recoveries in the current guidance, right? So that could be above and beyond what
we have. 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. So the extent that we do is certainly very helpful to the overall provision.
Okay, great. Thanks guys. Appreciate it. Thanks.
Thank you. And our next question comes from the line of Matt Olney with Stephens. Your line is now open.
Hey, 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 to $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?
Yes. So what we've guided folks to expect Matt between those two transactions the the finance company being breakeven to incrementally negative on the consolidated earnings. So if we're looking to kind of break apart that 0 point $0.11 about $0.02 or so maybe as much as 0 point 0 $3 will come from exiting the consumer finance 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 for me. Thanks guys.
Okay. You bet. Take care.
Thank you. And 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. And at this time, I'd like to return the call to Ms. Tricia Carlson.
Thanks, Saundra, and thank you. Again, I'd like to reiterate, we 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. So 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 Saundra 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.