Hancock Whitney Corp

NASDAQ:HWC

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to the Hancock Holding Company's First Quarter 2018 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded.

I will now turn the call over to Trisha Carlson, Investor Relations Manager. You may begin.

[Trisha Carlson, executive]

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 statement 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 statement, 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 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 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.

[John Hairston, executive]

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 two of those this quarter.

Operating ROA was 1.17%, with our goal of 1.15% to 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 our operating EPS at $0.90 per share.

Our results also includes 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 nonoperating 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 became breakeven.

In February, we

[Audio Gap]

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 business was less impactful

[Audio Gap]

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 a 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 Achary, who will add a few additional comments.

[Michael Achary, executive]

Thanks, John. Good morning, everyone. As John noted, we did have a strong quarter. Excluding nonoperating items of $0.07 per share, operating EPS for the quarter was $0.90 per share. Nonoperating items of $7 million included the one-time, all-hands bonus we noted last quarter, costs associated with HFC and pending Capital One transactions, the brand consolidation project and in 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 in the quarter was $183 million.

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 liquidity among clients. So given the sale of HFC, we are adjusting our end of period, year-over-year guidance to a range of 5% to 6%.

It's important to note that first quarter, new loan production was very strong, but large payoffs in nonbank equity markets were elevated. So we are looking for loan growth to improve in the second quarter and expect to report $250 million to $300 million in net loan growth.

So 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. And then the decline in our ALLL was related to the sale.

For the second quarter, we expect the provision in the range of about $9 million to $11 million.

Switching now to asset quality. I'd 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 3Q '16.

However, our level of nonenergy 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 3 years and does remain lumpy.

If we look at our nonenergy levels compared to nonenergy peers, we remain in line with those peer levels.

Deposits for the quarter were up $233 million, mainly related to our 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 the 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.

So 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. So let's go over to Slide 12 for 1 minute or 2.

The reported NIM for the quarter was 3.37%. 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 in nonaccrual loans, which compressed the margin another 3 basis points.

The sale of the financing 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 guide to for the first quarter.

Going forward, we expect the NIM to remain stable, all else equal. However, the second quarter impact to the NIM from the HFC sale is a negative 5 basis points.

Then with the 25 basis point increase, that will drive another 1 to 3 basis point expansion of 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 second 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.

[John Hairston, executive]

Thanks, Mike. Saundra, let's just go ahead and open the call up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Catherine Mealor with KBW.

[Catherine Mealor, analyst]

There are a lot of moving parts on the expenses. First, I think, this quarter, a much lower expense base than I think we were modeling. And then you take out the consumer finance company, 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 third quarter expense run rate?

[Michael Achary, executive]

Third quarter this year, Catherine? Okay so...

[Catherine Mealor, analyst]

Yes. Like Capital One won't come in until third quarter, correct?

[Michael Achary, executive]

Sure, sure. Exactly. So again, what we're guiding first to is basically a flat to slightly up level of expenses for the second quarter. And like any other quarter, there is certainly going to be moving pieces to 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. 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 third quarter and fourth quarter, 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 second or third week of July is what we're looking at now. So obviously, we won't get -- a 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.

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 '17, and of course this excludes our nonoperating items, to come in at a little bit less than 4% year-over-year. So hopefully, that's helpful.

[Catherine Mealor, analyst]

Okay, that's helpful. And that 4% includes the impact of Capital One and the consumer finance sale?

[Michael Achary, executive]

It does, yes.

[Catherine Mealor, analyst]

Okay, great.

[Michael Achary, executive]

As well as the impact of selling the finance company.

[Catherine Mealor, analyst]

Got it, okay. That's really helpful. 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 guess I would've thought, given the growth is a little slower and you've had a mid-80s loan-to-deposit ratio, you would feasibly be able to hold your deposit costs 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?

[Michael Achary, executive]

Well, I think more than anything else, what we're looking at, and I think I mentioned this in 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 in the consumer side, and that is a general awareness of what's going on with interest rates. So we talked a lot about deposit betas being pretty well behaved, really through year-end 2017. And then in the first quarter of 2018, we certainly saw our deposit betas kind of jump 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 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, 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 we'd 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.

[Operator]

And our next question comes from the line of Ebrahim Poonawala with Bank of America Merrill Lynch.

[Ebrahim Poonawala, analyst]

One, just wanted to clarify on Catherine's question on expenses, Mike, if I heard you correctly. For the 4% year over expense growth, all in, should we -- we should be using the 6 64 base from last year?

[Michael Achary, executive]

That's correct, Abraham. Yes.

[Ebrahim Poonawala, analyst]

All right. So -- and that 4% -- and that includes all the transactions, everything that's happened? So that's clear.

[Michael Achary, executive]

Yes, that includes, obviously, the sale of the finance company as well as the introduction of the Capital One Trust business.

[Ebrahim Poonawala, analyst]

Understood. And just in terms of -- another follow-up on the margin. Can we talk about, to be 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. Like what sort of 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.

[Michael Achary, executive]

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 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 $3.1 billion. And just as a reminder, toward the end of the year, we usually see a seasonal inflow in those deposits; and then a seasonal outflow as we work through the end of the first quarter into the second quarter. So I would expect that we would 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 would be short-term treasuries.

[Ebrahim Poonawala, analyst]

Got it. And is your sense that, incrementally, if we get another rate hike, say in June, your margin should be neutral to that. Or do you still [indiscernible] to see positive sensitivity to future fed rate hikes?

[Michael Achary, executive]

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.

[Ebrahim Poonawala, analyst]

Got it. So your 4% expense guide, I'm just thinking through in -- you should have revenue growth at least in the mid- to high single digits against the 4% expense growth, given outlook on loan growth and the margin for the year.

[Michael Achary, executive]

Yes, that's about right.

[Ebrahim Poonawala, analyst]

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?

[John Hairston, executive]

Abraham, this is John. I'll give you some color on that, that may be helpful. You correctly noted the finance company impact on the -- in the period, loan growth numbers, for both 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.

So if you net out the HFC subsidiary, that takes you to $105 million or a little better. And we came in a little -- it was right at -- let's call it $90 million, 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 first quarter of '18 over the same quarter of the previous year. But inside that 3% there were a couple of interesting trends. One of those 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 first quarter of '18 than '17. That was more than offset by a 12% increase in production on wholesale. And that nets out to 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 first quarter of '18 than first quarter of '17. And likewise, up from the previous quarter, fourth quarter '17, 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 second 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?

[Ebrahim Poonawala, analyst]

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 pick-up on commercial side or no?

[John Hairston, executive]

Well, you know 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 double digits from the same -- previous year. First quarter usually is a pretty seasonally low quarter for us. So we tend to compare it to the same quarter of the previous year, and it was up double digits 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 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 pay attention -- 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 first quarter was really all about payoffs as opposed to production or demand.

[Michael Achary, executive]

And, Abraham, just to kind of wrap up this part of the discussion. 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 finance company sale.

And then 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. So the first quarter 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.

[Operator]

And our next question comes from the line of Jennifer Demba with SunTrust.

[Jennifer Demba, analyst]

Just a question on asset quality in 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 million is still a good guidance?

[Sam Kendricks, executive]

Hey, Jennifer, this is Sam. I'll start it and John, feel free to weigh in. But we are still having a sort of credit by credit review as we continue through the energy cycle and talk about circumstances, migration, et cetera.

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.

[Jennifer Demba, analyst]

Does the cycle will extend to the end of next year or where -- what are you defining as the cycle at this point?

[Sam Kendricks, executive]

From our perspective, the cycle, at the point that we feel confident that we have, since we've 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, the charge-offs have sort of run their cycle and the potential for recovery has sort of either concluded or is close to conclusion, we may have some lingering things out there, but it -- 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 '19 view. But again, we will continue to monitor -- and frankly, the improvement of WTI, $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, it's the offshore segment that we're -- continue to spend a lot of time and focus on.

[John Hairston, executive]

Jennifer, this is John. I'll just give you some additional color. I think your question is very insightful.

Form the beginning, when we give 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; 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 '19 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. 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 Marine side could extend into 2019. I don't know if that additional color on timelines is helpful, but I thought it might be.

[Jennifer Demba, analyst]

No, that definitely helps. One more question. Your criticized nonenergy loans went up $35 million. Was that 1 credit or 2 credits or...

[Sam Kendricks, executive]

That was largely driven by 3 different credits in -- distributed throughout the franchise. I think we had a -- an industrial construction outfit, food distribution and hospitality and then a financial services vendor. So again, no industry-specific or geographic concentration there. But listen, we -- the fact that we specifically disclosed on the last -- Slide 7, Mike called it out means that -- we are monitoring the trend closely. We're not see any geographic driving trends or a specific industry sector that is driving it. We haven't changed our underwriting or loosened 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 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. And so I think over the years, we've demonstrated an ability to identify, rehab, work out and collect problem credits. So it will continue to get a lot of focus from us. Having said all that, while we are attentive to it, our nonenergy criticized loan levels are about on par with peers. But it is getting our attention and it's getting appropriate focus from us.

[Operator]

And our next question comes from the line of Michael Rose with Raymond James.

[Michael Rose, analyst]

Just one follow-up on the -- just a follow up on the commentary on the nonenergy credits. I think, Mike, earlier in the call, you said you'd expect nonenergy NPAs to increase for the next quarter or 2. But I thought those would've gone down or at least leveled off with the sale of the Harrison business.

[Michael Achary, executive]

Yes, Mike that was the [indiscernible]

[Michael Rose, analyst]

Can you give us some commentary as to where you think that would -- what areas of the portfolio or geographies you think that the migration will continue?

[Michael Achary, executive]

Yes, that was actually our nonenergy 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.

[Michael Rose, analyst]

Understood. 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?

[John Hairston, executive]

Sure, Michael. This is John. First quarter for '18 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 -- the reengineering in wealth management that we did last year, coupled with the mid-year Trust and Asset Management acquisition, will be a great progressive for wealth management in both '18 second half and '19.

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.

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, 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. But we did a little better in the first quarter for fees than we expected.

[Michael Rose, analyst]

Okay. And the Capital One is a -- acquisition is still expected at about $30 million in revs?

[Michael Achary, executive]

Yes. That's about right, Michael.

[John Hairston, executive]

Yes. And it's mid-year, right?

[Michael Achary, executive]

Yes. Right.

[John Hairston, executive]

So we'll see better benefits from it in 2019.

[Michael Achary, executive]

Right.

[John Hairston, executive]

And just as a reminder, we had -- we really haven't guided towards what -- 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.

[Sam Kendricks, executive]

And again, as we mentioned, the transaction is likely to close now the second or third week in July.

[Operator]

And our next question comes from the line of Brad Milsaps with Sandler O'Neill.

[Brad Milsaps, analyst]

Mike, you guys -- 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 call it 18% for the second quarter. And then, I think previously had it dropping off at 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?

[Michael Achary, executive]

Yes, Brad. Be glad to share some color there. So again, the first quarter effective tax rate came in at 18%. So that was a little bit higher than the 16% or 17% -- 16% to 17% that we had guided. And really the reason that occurred is that we made more money in the first quarter. And some of those additional earnings were taxed at a higher incremental rate. So given that, the guidance for the second quarter, again, has to come in, we think right around 18%. We still believe that third quarter will come in somewhere again around 18%. And then, we should show a decline in the fourth quarter, probably down to 15% or so. That should bring the full year and right at or just slightly above 17%. So 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.

[Operator]

And our next question comes from the line of Joe Fenech with Hovde Group.

[Joseph Fenech, analyst]

Most of my questions are 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% or 40%. I think last quarter you'd 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, whether anything has changed specifically, maybe falling a little shorter than near-term TCE target?

[Michael Achary, executive]

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 have got darn close to that number had we not had the OCI adjustment related to the unrealized loss in 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.

[Joseph Fenech, analyst]

Okay, helpful. And then 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 of bottom-line EPS estimates are going to hold in line here, but there were some cross-currents you talked about in some of the Q&A early related to credit -- or related to the increase in energy nonperformers and then the criticized nonenergy loan increase. So just trying to gauge the degree of confidence here, guys, in this new provision forecast and what you see is the risk to that near-term provision forecast, that would be.

[Michael Achary, executive]

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 and 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 you folks, both investors and analysts alike. So certainly some of the guidance is -- are related to the sale of 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 a finance company and 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 nonenergy 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. 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.

[Joseph Fenech, analyst]

Okay, and then 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. But do you -- looking out longer term, do you perceive the chessboard is 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 3 to 5 or maybe even 10-year strategic plan as it relates to M&A?

[John Hairston, executive]

Boy, 10 years is a long time. It's a reasonable question but what I'd say is nothing has changed in terms of our desires or our priorities for M&A since last quarter. And 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 to do 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 billion 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 billion. 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 bit closer to maybe to a 4 handle, I wouldn't say that we're going to change our appetite dramatically. Michael always tells, never say never, so I'm saying never -- not to say 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 what we're spending our time right now.

[Operator]

And our next question comes from the line of Christopher Marinac with FIG Partners.

[Christopher Marinac, analyst]

John and Mike, 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 relative differences on deposit betas or perhaps how do you think they will be as the next few quarters play out?

[Michael Achary, executive]

Chris, this is Mike. I'll start off and then John certainly can add some color. So I think that the consumer piece really has driven what we saw happen in the first quarter 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.

[Christopher Marinac, analyst]

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?

[Michael Achary, executive]

Yes, I think so, I think so. And potentially we'll [indiscernible] out of DDA accounts into interest-bearing transaction accounts but, again, that hasn't happened as of yet.

[Christopher Marinac, analyst]

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?

[Michael Achary, executive]

No, I'm not saying that at all. We're very happy with the mix of deposits that we have. So no desire changing the mix at all.

[Christopher Marinac, analyst]

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?

[Michael Achary, executive]

Yes. All things equal, it certainly does.

[Christopher Marinac, analyst]

And so, there's not an anticipation of recoveries in the current guidance, right, so that could be above and beyond what...

[Michael Achary, executive]

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. So the extent that we do is certainly very helpful to the overall provision.

[Operator]

And our next question comes from the line of Matt Olney with Stephens.

[Matt Olney, analyst]

Just wanted 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?

[Michael Achary, executive]

Yes, so what we've guided folks to expect, Matt, between those two transactions, again, is the $0.09 to $0.11. And we've also talked a good deal about the impact of the finance company being breakeven to incrementally negative on the consolidated earnings. So if we're looking to kind of break apart that $0.09 to $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.

[Operator]

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. Trisha Carlson.

[Trisha Carlson, executive]

Thanks, Saundra. And thank you, again. I'd like to reiterate we're -- 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.

[John Hairston, executive]

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.

[Operator]

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.