Hancock Whitney Corp
NASDAQ:HWC
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Hancock Whitney Corp
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Good morning, and welcome to Hancock Holding Company's Fourth Quarter 2017 Earnings Conference Call. 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 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, President and CEO.
Thanks, Trisha, and good morning, everyone. We are extremely proud of a noteworthy fourth quarter to finish a strong year of improving performance. Our reported EPS for the fourth quarter was $0.64. That number included a $19.5 million or $0.22 per share charge related to the recent tax reform act and subsequent estimated remeasurement of our deferred tax asset. Adjusting for that item, operating earnings were $0.86 per share, up 13% linked quarter, with ROA of 1.10% and efficiency ratio of 56.6% and return on tangible common equity at 14.62%.
You may have heard us refer to the end of 2014 through the end of 2017 as the new day. This time span is when we reset the strategic direction of the company and work to streamline management, rightsize operating efficiency of all lines of business and return to our historical approach of relentless focus on continuous improvement.
Slide 8 reflects our success in achieving corporate strategic objectives, or CSOs, set at the beginning of the new day. With early achievement of our new day CSOs, we ended 2017 on a very positive note and entered the new year with opportunities to continue building upon that success.
Our next day begins with the recently announced wealth management transaction, a relocation of our regional New Orleans headquarters to the Hancock Whitney Center, the combination of our 2 iconic brands, and opportunities created by tax reform legislation likely to benefit all clients and shareholders. These are just a few of the items we have on our plate to start 2018, and we look forward to continuing improvement as we work hard to achieve our updated CSOs noted on Slide 23.
Just a quick reminder of the wealth management transaction I just mentioned. As noted on Slide 7 of the investor deck, we announced the acquisition of Capital One's trust and asset management business on December 18, with an expected closing in late second quarter of this year. The acquisition provides the opportunity for us to become a top 50 U.S. trust firm measured by revenue and establishes Hancock Whitney as a premier wealth management provider across the Gulf South region. It also helps improve our goal of enhancing noninterest income as a percentage of total revenue. We're excited about the transaction and expect it to be immediately accretive to earnings with notable returns.
Late in the fourth quarter, impactful tax reform legislation was passed. Along with most other banks, we absorbed in the recent quarter an estimated deferred tax asset remeasurement charge. We expect to earn back that amount through tax savings throughout this year, while also using the benefits to accelerate previously planned technology projects and upgrade and/or add branch locations where needed. These projects are designed for efficiency and revenue growth and will positively impact both clients and shareholders.
The primary driver for a successful 2017 was our team of committed associates. I particularly want to commend those 4,000 team members that worked relentlessly to produce a year of improvement we can all be proud of. We met our previous corporate strategic objectives a year early. We announced and converted 2 M&A transactions. We introduced new web and mobile banking capabilities. All this and more while continuing to deliver a 5-star service to our clients.
To show our appreciation to the team for achieving goals early and for the success all associates helped to create, the board and management have approved a bonus of as much as $1,000 to be paid later this month to each associate. This will add a onetime cost of between $3 million to $4 million realized the first quarter of 2018.
Our CFO, Mike Achary, will add a few additional comments. Mike?
Thanks, John. Good morning, everyone. Let me first add my thanks to our associates for a great year and a job very well done. It was a busy and successful year with a lot of hard work across the company. I do think our numbers and performance metrics do speak for themselves.
John already noted some of our quarterly measures earlier, but let me start by taking a few minutes to review some of our full year numbers and metrics. So on a reported basis, net income was up 44%, with EPS up 33%. After adjusting for nonoperating items and the fourth quarter DTA charge, net income was up 64% with EPS up almost $1 or $51%. Separately, our provision for loan losses returned to a more normalized level this year, and our ROA ended the year just under 1%.
John covered the highlights for the fourth quarter, so I won't repeat those numbers but will add a few comments of my own. So on the balance sheet, loan growth of $218 million fell a little short of our guidance. It does reflect $78 million in energy paydowns as well as significant levels of nonenergy paydowns across our footprint. Energy loans now comprise 5.6% of total loans, with an allowance of $70 million or 6.7%. Our loan growth outlook reflects a seasonal slowdown we typically experience in the first quarter of each year. And so we're guiding to $200 million to $250 million in end-of-period loan growth for the quarter. For the full year, we're guiding for loan growth in the range of 6% to 8% and expect to fund that loan growth with core deposits.
Deposit growth for the company in the fourth quarter came in at $719 million and reflects the typical year-end seasonality, especially in public funds. So of that increase, about $421 million was in public fund deposits. As a reminder, these deposits typically roll off our balance sheet in the latter part of the first quarter.
The company's NIM of 3.48% was up 4 basis points linked quarter and reflects a 7 basis point improvement in loan yields, a 2 basis point increase in the yield on the securities portfolio and a 2 basis point increase in our cost of funds. We expect around a 2 to 4 basis point improvement in the first quarter, mainly as a result of the December rate increase. However, this will be offset by an 8 basis point reduction in the TE adjustment to our NIM.
Overall, our credit metrics were noticeably better in 2017 than in 2016. Our provision for loan losses returned to a more normal level as energy concerns have lessened. With a few exceptions related to energy, our charge-offs remained within a normal range. Our criticized energy loans are declining as higher oil prices have been helpful in the recovery of credits impacted by the recent energy cycle. However, as we said before, the key to resolution to many of the remaining credits, especially in support services, is stabilization of oil prices over the longer term.
So outside of energy, the portfolio was also performing well. We recognize the trend of increasing nonenergy criticized loans over the past several quarters. However, we don't see anything systematic, and the level of criticized to total loans is not outside of historical levels. We do expect several larger loans to be resolved during the first quarter and for criticized levels to decline.
Noninterest income for the company in the quarter totaled almost $70 million and was up 4% on a linked quarter basis. We reported improvement in most fee income areas, which was partially offset by declines in seasonal businesses such as mortgage and investments. After adjusting for nonoperating items in the third quarter, our noninterest expense of $168 million was up about 1% linked quarter. Most of that increase was in personnel expense and related to performance-based incentive pay. We are becoming a more efficient organization with a steadily improving efficiency ratio that ended the year at 56.6%.
Our effective tax rate for the fourth quarter was 21% and 24% for the full year. The lower fourth quarter rate was related to the impact of incentive-based stock compensation and a deduction in excess of book expense when those shares vest. Typically, we have shares that vest in the first and fourth quarters of each calendar year.
Next, Slide 6 in our deck gives some context in the impact of tax reform. So for 2018, we expect our effective tax rate to be in the range of 16% to 18% and add about $0.07 to $0.09 per share to quarterly earnings. That quarterly impact is net of any reinvestments that John mentioned earlier. We also detailed our expected quarterly effective tax rate, which reflects the impact of stock compensation vesting I just noted.
Our TCE ratio was down 7 basis points from September and reflects the DTA charge for tax reform. We do expect to earn that back in 2018 and be closer to 8% for TCE by midyear.
As a reminder, our near-term outlook is on Slide 22 and our updated CSOs are on Slide 23.
I'll now turn the call back over to John.
Thanks, Mike. With that, Sabrina, let's open the call for questions.
[Operator Instructions] And our first question will come from the line of Michael Rose with Raymond James.
So you guys made some comments around some potential upgrades of some energy credits. Can you just give a little more color? I assume it's on the service portfolio, given the higher oil prices. But can we just get an outlook for what you expect the -- or where you expect the energy portfolio to kind of bottom out? And then would you expect to grow it, given the higher oil prices?
Michael, this is Sam. I'll start us off there. With the improving price of commodities, we expect continued improvement and healing in the risk rating profile for our upstream clients. We've already seen some of that. And we've got some additional candidates for upgrade, we think, as we move through the next couple of quarters. Also, the onshore drilling support segment are starting to show some improvement. The softest part, as you would expect, continues to remain the offshore support segment. So we'll continue to see 2018 to be a challenging year for that particular segment in the offshore support segment, but the other segments appear to be continuing to show some improvement. As it relates to growth in the portfolio, we've made great strides and continue to push down the concentration for overall energy. We think, as we've talked about before, we want to continue to rebalance the portfolio with more emphasis maybe on the upstream segment and less on the support services. So you may see, as we continue to contract the portfolio, a little bit of a stall relative to that 5.6% continue to come down at the rate that it has as we look to add and make the upstream segment as we continue to manage the other support segments. But our overall focus is to continue to move towards that 5% target that John has talked about in the past.
Michael, this is John. Just to give maybe a little bit more detail on that overall concentration trend path. By the end of this year, we'd like to see the overall energy concentration numbers get below 5%. We think that's a good, healthy business to be in. And that 5% of the book, we feel like we can manage capital impact and cyclical downturns very well. In terms of the concentration point that Sam correctly mentioned, today, we have nearly 60% of the total outstandings in energy services of all flavors, 40% in the upstream. I think it's actually 57% to be exact. The overall mix needs to be more about 60% reserve-based lending and 40% services and midstream. So over the course of this year, we'll see that mix begin to reverse itself, so that by the end of the year, I would estimate that we'll be more than half RBL in the overall energy book. And by the end of '19, I think we'll get to that mix, that 60-40 RBL or upstream. That just tends to be a little bit less challenging to manage from a mix percentage when these types of downturns occur. But all of that mix change would still be underneath our approach to a 5% overall energy concentration by the end of this year. [indiscernible]
Yes, it's very helpful. And maybe as a follow-up for Sam, I did notice, just on a dollars basis, that the criticized and the NPLs on the nonenergy portfolio moved up now 6 quarters in a row. Again, I know the energy portfolio is offsetting that, but is there any particular trend you guys are seeing? Or -- I'm just trying to figure out why those balances are moving higher when most of the banks are seeing those dollar amounts move lower.
Sure. We are attentive to that, Michael. Right now, our nonenergy criticized loan levels are at 2.9% of that portion of that portfolio. That -- if you look historically back to 2012, we have typically run anywhere from 3% to 6% of criticized loans in the nonenergy portfolio. So we're just below some of the historical range. But keep in mind, we've grown the portfolio by $6 billion over the course of the last 3.5 years, and that's a $200 million increase in criticized loan levels. So we are monitoring it. There's nothing systemic there. We do expect to have bumps up and down. But as you alluded to, we've had several quarters of increases in criticized loans. We really think that's going to start coming down beginning with this quarter, the first quarter of '18 as we have resolution plans in place for a number of those credits. So stay tuned to see what that metric looks like. But again, it is not overly alarming for us as it continues to remain within a very reasonable historical range for us.
That's really helpful. And maybe just one more for me. Your outlook doesn't look like it includes any additional rate hikes in '18, and I appreciate the color. But Mike, if you could just remind us what your rate sensitivity is, and if you -- if we used forward curves, which essentially implies 3 rate hikes, really 2, right, 1 in December, what that could potentially mean for the core and the GAAP margin.
Sure, I'd be glad to, Michael. So again, when we talked about our outlook going forward, inclusive of the CSOs that are in the deck, just for simplicity purposes and modeling, we didn't include any additional rate hikes. Certainly, we're cognizant of the fact that in 2018, there's likely to be at least a couple. And I think most people are expecting somewhere between 2 to 3. So the guidance that we're giving around how that impacts our NIM going forward is around 2 to 4 basis points for every 25 basis point increase. So we can expect our NIM to increase by 2 to 4 basis points every time there's a 25 basis point increase in short-term rates. As far as our interest rate sensitivity, certainly, we remain moderately asset-sensitive. And on Slide 16 of the deck, there are some information around what parallel rate shocks and the impact those would have on our levels of net interest income. So basically, kind of the benchmark I think is an increase of about 200 basis points. And over a 2-year period, that should add about 5.5% to net interest income going forward.
That's really helpful. And just a clarification on the 2 to 4 basis points, is that on a GAAP basis or on a core basis?
It really is the same, because again, the difference between reported and core for us is our purchase accounting. And rate hikes really don't have much of an impact in that regard.
And the next question will come from the line of Catherine Mealor with KBW.
I wanted to see if you all could give us a little bit of more color around the modeling around the Capital One acquisition. We've got the revenue numbers there. Can you give us any sense as to what kind of level of expenses we should see come over with that franchise or maybe a kind of pro forma efficiency ratio, and how that impacts your efficiency goals as well?
Yes, sure. This is Mike, obviously. And we haven't given out a lot of details yet related to that transaction. And as we get closer to actually closing the transaction toward the end of the second quarter, we'll provide some additional information. So what we're saying right now, of course, is that we expect the transaction to be immediately accretive as soon as we do close it. And then our return measures in terms of IRR and return on invested capital will be greater than 18% and 13%, respectively. We're also kind of guiding folks to expect, all things equal, an increase in our trust revenue somewhere in the $30 million range. We haven't given any guidance yet on the expense impact.
Okay, okay. Fair enough. And then on the expense side, I think, John, you mentioned that there was going to be about a $3 million to $4 million increase in the expense base in the first quarter from bonuses. Was that right?
Yes, ma'am. That's -- that will be a nonrecurring bonus tied, specifically our team and the CSOs, a year early for our team members.
Got it. Okay. So that's nonrecurring. So that is not inclusive of the near-term outlook for expenses to be flat to slightly up next quarter.
That's correct.
There would be -- the intent is to -- we'll have that paid by the end of the month. And so it'll be a first quarter '18 item, but it is nonrecurring.
And so on -- Catherine, on Slide 22 on the deck where we do give kind of our near-term outlook, again, as John indicated, the expense numbers in the guidance that were given for first quarter doesn't include any onetime or nonoperating items. And you can see toward the bottom of that slide, we kind of list out the things that, at this point, we're expecting in a way of nonoperating items for 2018. So when we talk about expenses being up -- flat to slightly up, that would not include the bonuses that John mentioned.
Got it. Okay. That makes sense. And then one last, just clarification on the 8 basis points that -- due to the FTE adjustment. So that impact -- there's no impact to the bottom line. We basically just take the dollar amount of that 8 bps out of the FTE adjustment, out of the margin.
You're correct, correct. And that's simply to reflect the tax equivalent net interest margin in terms of what we're expecting post tax reform.
And the next question will come from the line of Joe Fenech with Hovde Group.
I guess first with the dividend payout ratio, you guys, on the quarter earnings basis, is now falling slightly below I guess the low end of your target range. Does the dividend hike become more of a top priority now? Or is it more that we would need to see that payout ratio below the target range for a period of time before you consider that?
Joe, this is Mike. So when we think about our dividend payout ratio, obviously for the fourth quarter on a reported basis, it's at about 38%. If we back out the DTA, it's about 28%. So on an operating basis, that certainly puts us below the 30% to 40% that we've talked about in terms of where we'd like our dividend payout ratio to be. So the first priority for us really is to get our TCE ratio back over 8%. So we're at 7.73% as we stand today. And we also are guiding folks to expect that we'd be back above that 8% benchmark probably sometime around midyear in 2018. So at that point, we'll certainly consider things in the way of a potential dividend increase. Not signaling now that it's something that's absolutely in the cards, but it's certainly something that we'll look at once we get that TCE ratio back up to 8%.
Okay, fair enough. And then, Mike, just switching gears, I appreciate the more detailed guidance on NIM you just gave. Does that 2 to 4 basis points, from what you see now, hold, you think, through the second and potentially third rate hike? Just trying to gauge as to whether you see yourself benefiting more upfront and then maybe less as we move forward. I want to understand if you think margin expansion just gets more challenging with each successive rate hike, or you're just not expecting that at this point. And you -- from what you see now, you just see a similar benefit for the third rate hike as you maybe would expect for the first.
Yes, great question. And I think the wildcard there is probably deposit betas. So for us, at least through the 3 rate hikes we've had so far recently, our deposit betas, including the First NBC transactions, stands at about 18% or so. And our expectation is that, that number will rise and normalize a little bit more each time we have a successive rate increase. So the overall guidance from our perspective relative to our NIM is about 2 to 4 basis points for each 25 basis point rate increase. But I do think we'd probably move maybe a little bit more toward the bottom end of that range as we get additional rate hikes over the course of '18. So it does begin to erode a little bit.
Got it. Okay. And then, John, you've been opportunistic in your return to M&A with the 2 FNBC deals and now Capital One. Can you update the M&A strategy for us heading in -- well, we're in this year -- for this year and going forward? And also just interested specifically in the type of deal we aren't likely to see you do.
Sure, glad to comment on that. And I think what we've done the past 12 months is really no different than what we'd like to do the next 12 months. And that is primarily in market, or at least to the most extent, in market transactions where we can leverage expense synergies and our currency to get a really good return. So fee income businesses, including Capital One, are also businesses we're already in. And given that about 2/3 of the revenue from the Capital One transaction is in market -- that's also in market, and given that it's fee income and we'd like to see a little less dependency on NIM on a going-forward basis. It fits exactly what we said we want to do a year ago when we first had the conversation. So really no reason to change that strategy as those opportunities get exhausted. And as our currency relative to peers improves, then perhaps something that's a little more strategic makes sense. But at this point in time, our priorities are the same today as they were 12 months ago: in market, expense synergy takeouts and adding business in markets where we already have confidence in our leadership team.
Okay. And then last one for me, and I'll hop off. With respect to energy, John, the guidance on cycle charge-offs, $95 million, just looking for your degree of confidence in that forecast. You're at $76 million now. In your mind, is it a no-brainer that, barring an unexpected event, that guidance is firm? Or are there circumstances even with improvement energy prices that, that guidance might need to be adjusted somewhat?
Yes. In any commodities lending, I'd be afraid to ever say things are a no-brainer, so I'll not jump on that word. But what I would say is we remain confident with our $95 million ceiling, and we'll continue to monitor it as we get to 2018. That said, Sam mentioned earlier very appropriately that the risk with everything on land is continuing to diminish. Organizations are -- they're very efficient on land technology improvements. And skills development had been very beneficial to efficiency about reserve-based lending clients or E&P clients. And those organizations provide services to them. So the risk on land continues to diminish. Offshore, it's getting a little better, but we'd like to see prices improve a little bit more before we are prepared to waive a flag and say we think that the cycle is over. From a predictive viewpoint, based on what we internally believe crude prices and efficiency will do, we would think -- we think day rates for energy service providers offshore will begin to improve as we get towards the middle of the year to maybe late '18. That's, of course, dependent on demand globally and the U.S. continuing to improve. And we would expect at that point in time that really everything in the Gulf begins to improve as well. So that's -- from a timing perspective, I would look to 2019 as sort of the year where we're able to definitively say that the cycle is behind us.
And the next question will come from the line of Matt Olney with Stephens.
Going back to the previous discussion on capital and the TCE ratio, I think in the past, you've talked about achieving the 8% TCE ratio. And it looks like the CSOs on Slide 23, the targeting increased from 8% to 8.5%. Am I reading too much into this? Or is this a change from what we discussed previously?
Matt, this is Mike. And no, there's no change in terms of how we view that kind of 8% TCE threshold. And as far as the timing of getting to that, I think the impact of tax reform, specifically the DTA charge, has probably pushed that back a quarter or so. So that's why we're talking about that in terms of the middle of 2018. And to answer your first question, I guess, around the 8.5%, that is simply what we see or where we see TCE going, given what we are planning to do or what's build into our business plan for 2018 and 2019. And at this point, that business plan does not include anything in a way of a change in our dividend policy. But as I mentioned before, certainly that's something that is on the table for us to look at once we do get back to that 8% level. So no, I wouldn't read too much into the 8.5%. It's simply where we think we'll be at that point in time.
Okay. Mike, that's helpful. And then as far as the near-term outlook on Slide 22, I just want to clarify the time line on some of these items. For example, on the operating expenses, I believe the slide provides commentary on the first quarter. Is there any other commentary you can provide as far as the operating expense outlook for the full year '18?
Yes. So first off, on Slide 22 -- and again, when we talk about near-term outlook, that really is one quarter out. So all of that guidance that we're giving on that slide is really for the first quarter of 2018. And then the longer-term guidance is on 23 with our kind of new and revised CSOs. As far as expenses and the outlook for the full year, what we're expecting is something in the range of around 4% to just under 5%. And again, that's inclusive of some of the investments that John alluded to that we're making with part of the benefits that we'll be accruing related to tax reform.
And Mike, just to clarify, that 4% to 5%, does that include some unusual items you've discussed before that could happen in the first quarter?
Does that include what now?
Some unusual items that you referenced previously that we could see in the first quarter?
Well, at the bottom of 22, the things that we list out as nonoperating would not be part of that 4% to 5% potentially. Those would be items that we would call out as kind of nonoperating.
And Matt, just to be clear -- this is John. Those nonoperating items near term there is more like the first half of the year, not necessarily the first quarter of the brand consolidation work in the second quarter. So that's really the next couple of quarters, maybe even longer.
Yes.
That's helpful. And then beyond the first quarter, if we don't assume any more interest rate hikes, how should we be viewing the core margins?
So absent of any rate hikes, again, in the first quarter, we should see an increase of the 2 to 4 that we mentioned to kind of call out. Now that's outside of the 8 basis point adjustment that will happen because of tax reform. So if there aren't any additional rate hikes, I would expect, all things equal, for that NIM to be mostly sideways, maybe up, with an upward bias of just a little bit, 1 basis point or 2.
And the next question will come from the line of Emlen Harmon with JMP Securities.
On the CSOs, you give us kind of a range of 10% there between $1 and $1.10. What are the primary variables you're thinking about that would drive hitting the high versus the low end?
Well, that's a long list. We're adding -- I'll give you some general commentary. This is John. We're doing really well, and I'm real proud of the account growth that we're experiencing. And as you know, we depend a good bit on liquidity out of the retail portfolio to fund growth. On the commercial portfolio, which, through the last several years, has been -- where we were seeing loan growth. So our ability to continue adding accounts, continue using our treasury services offerings to lever commercial deposit relationships also, that's going to be how we fund the balance sheet and keep NIM at a nice upward clip. So I think that's probably the biggest challenge that we as banks, not just our bank but every bank has in a rising rate environment is continuing to fund our balance sheet growth in the loans side with a good mix of core deposits. Secondly, the fee income initiatives that we've been focused on the last several years are bearing fruit. The -- I think we have an appendix slide that breaks out the fee income sections, and 2 of those 4 are very impressive. Our mortgage doesn't look really great the last couple of quarters. Some of that's seasonal and driven by the rate environment. But we have high hopes for mortgage, as a percentage of the marketplace that we operate in, continuing to improve. And then finally, the wealth management work that we're doing, both with Capital One and investments we've been making for the last 18 months or so, both in people and in product and systems, we expect that to improve. So if all the fee income initiatives work well, if we're able to fund our loan growth with good core deposits, and if energy goes the direction we expect and hope that it does, then certainly, that would lead you to consider more the upper end of the range.
And then the only thing I would add to that is the range is really presented there to allow for certain items on our balance sheet and income statement to underperform potentially and some areas to overperform. So it's simply a range between, I wouldn't call it the worst case, but kind of the lower end of where we're expecting if some things fall short of expectations, and then the higher end of the range where we have more things that overperform than underperform.
Got it. That's extremely helpful. And then just the commentary on waiting on TCE to rebuild before kind of revising the capital strategy. Could you talk about how that impacts your willingness to consider M&A? And I guess does that commentary kind of hold for any deal that could potentially move the capital ratios a little lower?
Emlen, this is Mike again. No, I wouldn't say that. In other words, we're not putting M&A on hold, pending our TCE getting back to 8%. Certainly, we're looking at opportunities and certainly are considering things. And so while there's nothing that we're ready to announce or close to announcing, we would not let, for the right transaction, the fact that we're a little bit below 8% preclude us from moving forward with any transaction.
And the next question will come from the line of Jennifer Demba with SunTrust.
My question has really been asked, but back on Emlen's line of questioning. John, where could you -- where do you think geographically or category-wise you could see loan growth potentially better than your outlook for this year?
Jennifer, that's actually a great question. In the western part of our franchise in Texas and Louisiana, those are the markets that have been most affected by the energy cycle. And so there, while we've had nonenergy sectors have done very well [indiscernible] interruption of the storm in Texas. So those have been areas that have traditionally been really great growth areas for the company, that the last couple of years have been rather benign in demand. So I think what we'll see happening is that western part of the franchise, defined as Baton Rouge and West, we'll see better loan demand there in '18 versus '17. We think the eastern part of the franchise, Mississippi and East, will continue to be a solid performer. And then New Orleans as a whole has a better outlook today than it did a year ago. So I wish I could give you the areas where we really aren't expecting growth. But at this point in time, 2018 has a more rosy outlook from -- in terms of consumer confidence, business order confidence. The tax reform bill has impacted the way our clients feel about potential growth. They're talking to us about expansions and buildings and things. And right now, it's premature to say that that's going to suddenly fire up loan growth for the banking industry. But the attitudes have definitely changed in the past 3 or 4 months as the possibility of a cash flow availability from lesser taxes begin to take hold and has become a reality. So I think in summary, we're going to see the overall franchise do better for loan growth given tax reform. It may take a quarter or 2 for that to happen, but I'm thinking the back half of the year will tell us whether that's really a reality or not. Our confidence is pretty high. And then the western part of our franchise will improve as crude becomes less of a dampening effect.
And John, even in the eastern side of our franchise, so in some of our Florida markets, we've had really good production and really good loan growth that we also have had probably an above-normal level of paydowns. A lot of that due to businesses being sold. So to the extent that, that lessens, you can see loan growth really kind of track up in that part of the franchise.
And that's a good point. We did have an unusually high number of businesses that we were banking elect to sell their businesses during a time where investors were looking for places to diversify their revenue streams. So a number of our clients shared with us plans to sell. And then last quarter and the fourth quarter and in the third quarter, we saw those things happen. So that was a contra to loan growth. But production has been very strong, and the outlook for production continues to be strong. Even in the first quarter, which is seasonally quite low for us, the production outlook has been pretty good, which led to the loan growth guidance that we gave of $200 million.
And the next question will come from the line of Peter Ruiz with Sandler O'Neill.
This is actually Bradley Milsaps. Just want to follow up on Emlen's question regarding the CSOs. I appreciate all the guidance there. It appears current expectations you got for you guys to cross kind of that $1 in EPS earning power late this year, early next. You'll pick up $0.08 or so from taxes. However, you consider -- probably also assumes a couple of rate increases in there. So where do you think folks are kind of underestimating your ability to kind of get there? Is it all coming from fees you discussed or better expense control? Or do think you can grow a lot faster? Just kind of curious kind of how you guys got to that $1, $1.10 without the help of rates.
Brad, this is Mike. It's nothing more than, again, the development of what we referred to as our business plan and all the inputs that go into that. I think, certainly, some of that is related to a full year kind of ongoing impact of the First NBC transactions. It's a continuation of the great loan production that we've had, especially in the second half of the year. And then especially in the fourth quarter, you saw some pretty good production in terms of deposit growth. So it's all of those things combined, along with many of the initiatives that we've been working on for quite some time in terms of fee income, and a lot of those things really maturing and being at a position where they really begin to add to the bottom line. And then on top of that, certainly, you have the transaction with Capital One around the trust and asset management business, which, again, we believe, will be accretive really as soon as we close that transaction. So I think we have a path, certainly, that we've kind of outlined to get to that $1 level of EPS, and it's not going to be easy. Certainly, the goals are aggressive, and it's our responsibility as a company and the management team to ensure that we execute in that regard. So I know it's a little bit of a long-winded answer, but...
No, no, that's helpful. I appreciate it.
And the next question will come from the line of Casey Haire with Jefferies.
This is Elan Zanger on for Casey. You brought in some higher-cost deposits with FNBC earlier last year. And I believe you said you would honor those rates through the end of the year. Just wondering what the plan is for those deposits in '18.
This is Mike. And yes, we have talked a little bit about -- or maybe a great deal about the potential of maybe adjusting those rates once we got to the end of the calendar year. And at this point where we are now, we really have no plans to change those rates or to reduce them at this point. The overall rate environment has been helpful with the rate increases we've had in 2018. So we talked a little bit about initially the potential for those higher rates to really be not so outsized, if you will, once the rate environment begins to kind of catch up. And certainly, that's happened, I think, to a large degree. It doesn't mean that we won't adjust them at some point if we decide that that's the right thing to do. But as of right now, we have no plans to adjust those rates.
Okay, that's helpful. And it looks like liquidity balance continues to drip lower. Just wondering if you guys have a range where you feel comfortable.
Nothing that we've stated publicly. Certainly, that's something that we manage internally, given our risk parameters and discussions that we have with examiners. But nothing that we've talked about publicly.
I'm showing no further questions at this time. I'd like to turn the call back over to Mr. John Hairston for closing remarks.
Thank you, Sabrina, and thanks to you for keeping our call very good. And I'm certainly appreciative to all those who dialed in for your investor interest. We look forward to visiting with you again next quarter. Take care.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect. Everyone, have a wonderful day.