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Cadence Bancorporation  (NYSE:CADE)
Q4 2018 Earnings Conference Call
Jan. 28, 2019, 1:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Welcome to the Cadence Bancorporation Fourth Quarter and Full-Year 2018 Earnings Conference Call. All participants will be in listen-only mode.

The comments are subject to the forward-looking statements disclaimer, which can be found in the press release and on Page 2 of the financial results presentation. Both of those documents can be located in the Investor Relations section at cadencebancorporation.com. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Paul Murphy, Chairman and CEO. Please go ahead.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Thank you and welcome to our fourth quarter call -- fourth quarter and year-end 2018 earnings conference call. Joining me today are Sam Tortorici, Valerie Toalson and Hank Holmes.

I thought I would kick us off and take a moment and comment on a few of the major accomplishments from the year. First and most importantly, we're pleased that we've achieved our best year ever in terms of core operating performance. Adjusted earnings per share increased from a $1.51 last year to $2.07 this year, up 37%. Credit, a critically important area, a really good year, we charged-off 6 basis points for the year. We had healthy loan growth, very nice deposit growth throughout the year and I again take an opportunity to salute our dedicated hardworking bankers, it's their effort that make these results possible.

We continue to see a healthy NIM and our efficiency ratio showed improvement, which is now a multi-year positive trend. As a result of the really great year in 2018, our quarterly dividend will increase to $0.175, which is up 40% from a year ago. So from an operating standpoint, we feel really good and feel like we have a lot of great numbers to report.

Another key accomplishment in 2018 is that through multiple secondary offerings, we successfully completed the full monetization and distribution of cash and stock to our original investors, which has resulted in our stock now being 100% publicly held float. Our efforts have proved meaningful returns to our original shareholders who invested $921 million more than eight years ago to start our Company. I'd like to express my gratitude for their commitment and sharing of the vision and being part of Cadence's long-term value creation story.

Of course, the most important strategic decision of recent years is the decision to partner with the great team of bankers at State Bank. We liked State Bank after diligence and we like it even more today. Combined, I feel like we have a great team of bankers and I know there's a lot of enthusiasm, there's teams out making calls and focusing on doing a great job for clients. So I feel like it's really a good time to be a Cadence banker and to have such, such positive momentum.

Why don't I ask you to turn your attention to our slide presentation and let's take a look at Page 3. Net income $166.3 million for the year, $1.97, but backing out some of the adjusted numbers as I mentioned in my opening comments, really $2.07 for the year that generates return on assets of 1.52% and return on tangible common of 16.5%, which I would say indicate good profitability levels.

Our NIM of 3.61% is at an acceptable level. Loan growth of $1.8 billion, up 22%, really impressive and total deposits keeping pace, up $1.7 billion, driven mainly by core deposits, it's really a great story there. You look at the fourth quarter, it was unusually strong with $840 million in growth. So Sam's going to tell us more about that here in a moment.

Looking more closely at the efficiency ratio, those of you who remember our IPO roadshow, we said our goal would be to get in that 50% to 52% range. So we're pleased to beat that for the year at 49.6% compared to 54% last year and would note that the fourth quarter adjusted efficiency ratio was a touch lower at 49% flat. So we expect to see our efficiency ratio continue to trend favorably pro forma state and we're very committed and focused on expense management and leveraging the combined franchise.

So from a credit standpoint, we continue to produce clean results along with nice loan growth. Non-performers decreased from the year from 90 basis points closer to 80 basis points at year-end. As I mentioned, charge-offs were 6 basis points. One thing I thought we would report to you is that during the second half of 2018, we updated and enhanced our loan grading system, also a bit of a validation of the loan grading system. This was done in part due to CCIL (ph) preparation and in part just our ongoing efforts to strengthen the credit and control environment.

The additional scrutiny of the portfolio of course produced a few grade changes both ways, but no major negative surprises. I feel like this effort really has confirmed our confidence in our loan grading process and as I mentioned, this is a validation overall of the process. So I would take a step back and observe that we believe that our rigorous credit approval and credit monitoring processes are serving us well and we are not compromising on structure and rate for the sake of growth.

So in summary, I'm pleased with 2018. Our operating results, credit metrics, the deposit growth, earnings are on a good trend line and a nice NIM in our business. I believe State Bank is going to really add to our attractive story. You've heard me say many times, it really matters who you choose to have as your banker and so I believe the Cadence banker's intense focus on customer service and C&I banking -- it will be the key driver of our growth in the future just as it has been in the past. So I look around the franchise and talk to clients, we see our clients are continuing to grow and reinvest in their business. So we're proud of 2018 and we are enthusiastic -- enthusiastically looking forward to 2019.

With that, I'll turn it over to Sam. Thank you.

Samuel M. Tortorici -- President

Thanks, Paul. I'll be commenting on our deposit growth referencing Slide 10 of our presentation. As Paul mentioned, one of the things that we're most pleased with in the quarter as well as for the full-year is our performance in core deposit growth. Our quarterly growth in core deposits was the result of the continuing focus of our banking teams for the past several years on multiple initiatives to help build our core deposit funding in support of our loan growth.

We grew core deposits, which excluded brokered deposits by $837 million or 9% linked quarter, and we grew core deposits for the year $1.5 billion or 18%. The drivers here are primarily the expansion of commercial deposit relationships and the treasury management services along with consumer retail growth.

Our total deposit growth was 12% during the quarter, which brought our total deposits to $10.7 billion as of year-end. We are again pleased with our results in growing core customer deposits throughout our Texas and Southeast markets. We also increased non-interest bearing deposits by $359 million or 17% linked quarter with continued emphasis on reducing our reliance on brokered deposits, which were 10% of total.

Our deposit mix continues to be solid evidenced by our non-interest bearing deposits as a percent of total deposits at 23% for the quarter, consistent with recent quarters. Also, the high quality franchise at State Bank will be very additive to our core funding, both in terms of deposit mix and cost.

State Bank's fourth quarter 2018 cost of deposits was 79 basis points or 55 basis points lower than Cadence for the same period. State Bank brings an additional $4.1 billion of core low-cost deposit funding as well as attractive commercial and retail growth opportunities throughout Georgia and metro Atlanta.

As I mentioned on prior calls, I've relocated to Atlanta and excited to be leading our newly combined bank from our bank headquarters in Atlanta. Integration planning has been solid and we continue to target a smooth operational conversion in mid-February. I truly believe we have a great combined Company and we'll be focusing all of our efforts on successful execution and integration to provide enhanced shareholder value.

With that, let me turn it over to Valerie to go through a little more detail of our quarterly performance. Valerie?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Thanks, Sam. As mentioned, our revenue and our net interest income growth trends have shown consistent growth and it continues to be driven by our organic loan growth and asset-sensitive balance sheet. Our average earning assets increased nearly $1.05 (ph) billion on average for 2018 compared to the prior year, with net interest margin that increased 4 basis points during the same time period. Combined, this generated our 19% increase in net interest income year-over-year. And as Sam pointed out, this growth has been funded by core customer deposits. So it's really been a great playbook.

On Slide 11, the top left graph, the green line demonstrates the relative stability of our NIM throughout the year. Additionally, the net interest margin rollforward at the bottom left is helpful in really understanding the moving parts. For the full years 2018 versus 2017, NIM increased by 4 basis points, but when you look at the components of how we got to that 4 basis points, the natural asset sensitivity of our balance sheet is clear with the change in our originated loan yields making a positive 72 basis points of the change, offset by deposit cost changes with a negative 40 basis point impact.

There are other contributing factors that combined during the year to reduce NIM by 28 basis points including declining accretion, the impact of interest rate hedges and the rebalancing of our municipals portfolio during the year. When you look at the rollforward of the third quarter to the fourth quarter in 2018, the net interest margin declined a net 3 basis points. It's a lot simpler this quarter with the only meaningful impacts being changes in loan yields and deposit costs.

Our originated loan yield for the fourth quarter of '18 was 5.20%, up 12 basis points for the quarter and up 73 basis points from the prior year's fourth quarter, largely tracking LIBOR movements as over 70% of our loans are floating.

Deposit costs were up 19 basis points to 1.34% for the quarter and up 65 basis points from the prior year's fourth quarter. If you exclude the impact of brokered deposits, our deposit cost increased 14 basis points for the fourth quarter and 60 basis points from the prior year. Brokered deposits did increase modestly this quarter due really to the timing of loan growth, but of course, these will retreat in the first quarter with the consolidation of State Bank's balance sheet.

Turning to Slide 12, when you step back from the quarterly fluctuations for really a better fundamental view, our cumulative originated loan beta is 79% or 1.6 times greater than our cumulative total deposit beta of 49%. And as we've noted previously, we continue to model a 55% total long-term deposit beta and we anticipate that beta to really ease into deposit costs over a two to three quarter time frame based on our experience, not all within one quarter.

So when there are several quarters of rate increases like we've had, there can be a cumulative effect on the next quarter's deposit cost and that is what we saw in the fourth quarter and actually have seen throughout the year. As rate increases slow or stop, this cumulative dynamic is also expected to slow or stop.

If you would turn to Slide 13 for the fourth quarter, our total non-interest income was $21 million, down $3 million from the prior quarter and down $4.6 million from the prior year's quarter. Couple of things really drove that, compared to the prior year, the fourth quarter excluded revenues from the insurance subsidiary that we sold in the second quarter of this year as well as the impact of the Durbin Amendment, which began impacting Cadence in the third quarter.

Other impacts from the third quarter included variability in earnings from the limited partnerships between the quarters and a net writedown of $1.3 million have a net profits interest in the fourth quarter. Partially offsetting these declines however was a meaningful increase in credit fees. Credit fees were up $1.6 million for the fourth quarter of '18 to $5.2 million for the quarter and up (ph) to $16.1 million for the full-year, an increase of nearly $4 million or 36%. These fees are driven by our loan volumes as well as we're leading more of our syndicated transactions.

Finally, to put the year into perspective, Slide 14 sets forth our adjusted performance, which excludes non-routine items that we detail in the release and the appendix of the slide deck. Non-routine items in the fourth quarter included some specially designated bonuses related to the transition of Cadence's ownership and float to the public, as Paul mentioned earlier, as well as merger related costs, which we will have more in the first quarter of '19 since we did close State Bank on January 1st and we'll have the February conversion.

The top left graph on the slide, the 42% increase in adjusted net income during the year is driven by our strong business development that resulted in 13% increase in adjusted operating revenues, our continued emphasis on efficiency and profitability resulting in only a 3% increase in adjusted expenses, and as Paul noted, our relentless focus on credit quality resulting in only 6 basis points of net-charge offs during the year. These efforts have resulted in the adjusted efficiency ratio that improved to 49% for the fourth quarter, 49.6% for the full-year and a full-year adjusted ROA of 1.52%, and adjusted return on tangible common of 16.54%. So while we've certainly been very pleased with Cadence's historical performance over the years, we are thrilled to now be merged with State Bank and look forward to discussing the consolidated Company results with you in the quarters to come.

Operator, we'd now like to open the line for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Steven Alexopoulos of JPMorgan.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hi, everybody.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Thanks for joining us.

Steven Alexopoulos -- J.P. Morgan -- Analyst

I wanted to start first with the elevated provision in the quarter. First, can you give more color on the increase in the specific reserves, which I would assume were related to the two new NPAs?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, so there are several things that in fact affected the loan provision, it really wasn't one thing in and of itself. There was a good chunk of it, you know, almost $5 million of it that was driven by simply the new loan growth because we did have the nice volume in the quarter. We also by about a similar amount, a little more than $5 million actually, increased our qualitative reserves, really that being for the most part split between our energy portfolio just with some of the changes in some of energy prices as well as then kind of general C&I with some of the economic factors that we factor in as we consider those qualitative.

On the specific reserves, those did go up about $4 million during the quarter and, yes, really related to the couple of non-performers that we brought in and then I think just a little bit associated with probably one that was already on specific review and then, so when you kind of factor all that in, we also had reductions in the provision related to the payoffs and then other movements within the portfolio. So it wasn't all driven by one thing.

Samuel M. Tortorici -- President

So, Steve, I would just add for the year, you look at $12.7 million provision for credit losses versus $10 million last year, it just happened to be a little lumpy this year with most of that falling in the fourth quarter and some other periods where it's been unusually soft. So we feel like it's a good year from a credit standpoint, 6 basis point charge-offs and in the middle you had a couple of non-performers, but provision levels year-to-year pretty consistent.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay and then separately, so Texas Capital this quarter did a nice job of breaking out leverage lending. How much of your overall loan book would be in leverage C&I? And maybe could you give us a sense in terms of which national businesses would be inward (ph) levered types of credits?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Sure, Steve, let me maybe start on that question with an observation that I think our credit discipline or our approach in leverage lending has been disciplined. Our results over the years have been favorable when compared to peer or regulatory reviews and we are focused on building relationships. So when we make a loan to a borrower that's considered leverage, we generally have a strong borrower and a strong sponsor relationship and we feel like we're not taking excessive risk and at the risk of pointing out something that many of you are aware of, we have very seasoned bankers who are deeply specialized in the industries where we often have sponsor backed deals and we underwrite each deal ourselves and we have the ability, influence the structure and of course, we have complete control over the selection of risk and just a reminder, our bankers have managed through the various cycles over the years and done quite well as have our policies withstood the test of time through expansion and recession.

So we don't have an appetite for and generally do not participate in Term B, light (ph) amortization or covenant light deals and our underwriting of each deal is analyzed for repayment capacity and it must have the cash flow that shows that the loan should repay within the time lines that adhere to the regulatory guidance. So with all that, to answer your question, at year-end, we have $655 million in loans to 53 borrowers that are considered leverage loans without moderating characteristics, that's an average of $12.3 million per loan. One of those loans is a non-performer, it's roughly $12 million.

Our colleagues at State Bank have approximately seven loans in the amount of $44 million, put an asterisk by that, we're still scrubbing that number. So on a combined basis, call it $700 million or about 5% of the combined Company. Really, the credit metrics are strong, NPAs are low, the credit quality and the risk grade of this portfolio is similar to our overall loan portfolio.

And so Steve, I know there are some people out there listening who might say, historical results are not an adequate way to measure risk and so I'm not really here today to persuade the listeners that we have no risk in the portfolio. Obviously, I don't think that, but I do believe that a well-underwritten, well-managed portfolio can withstand recessionary periods and perform quite well. I'll recall the recent energy downturn where we had a lot of stress in a short amount of time and we managed through that rather well. Always room for improvement there however.

So I take a lot of comfort in the experienced team of lenders and the credit professionals here at Cadence who are actively monitoring and managing the portfolios and even with the confidence I have in the team, we're not relaxed about it, we're forever diligent and we recognize that credit risk changes over time and its our job to be sure that those risks are well-managed and well-contained and I believe we'll continue to do so.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay, that's very helpful actually, Paul. Just a final one for Valerie. So if we look at the balance sheet, it does appear to be asset sensitive, but if you look at the NIM, for a variety of factors, it's drifted lower over the past year. With the Fed potentially on hold here, Valerie, how do you see the NIM progressing when rates are no longer rising at the short end. Thanks.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, so, you know, there is a number of factors, if you just look at Cadence historically, without State, but obviously that's going to change our dynamic significantly. You know, I think part of what we've talked about is a little bit of this timing factor for deposit costs flowing in and that's what we've seen in our margins really over this year and so, you know, if things were to stop and just looking at historical Cadence, then I think that we probably would have another couple of quarters of some modest deposit cost increases as that kind of normalizes out.

That being said, the State Bank balance sheet does improve our net interest margin and so, you know, when you take a look at their deposit cost and you know as we load that into our balance sheet when you take a look at their loans portfolio, yields, which are considerably higher than ours, both of those will have a net positive impact to our margin and they are actually slightly more asset sensitive than we are and so overall that'll further offset some of that. Actually more than offset.

Steven Alexopoulos -- J.P. Morgan -- Analyst

So inclusive of State, do you think the NIM can hold in relatively steady?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, I really do. You know, now that I give a big caveat that we haven't completed all the purchase accounting work and all of that, but just kind of when you look at the fundamentals of the balance sheet and the nature of that, we feel very good about the NIM on an overall basis.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay, great. Thanks for taking my questions.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Steve, just one last tidbit that fourth quarter NIM for State Bank was an increase of 3 basis points. Their cost of funds increased from 70 basis points to 75 basis points. So, you know, attractive deposit beta there and blending in with our balance sheet aligned with Valerie's thinking (ph) it should be a nice plus for us.

Operator

The next question will come from Brady Gailey of KBW.

Brady Gailey -- KBW -- Analyst

Hey, good afternoon, guys.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Thanks for joining us, Brady.

Brady Gailey -- KBW -- Analyst

So, Paul, I know in the past you've talked about, you know, this kind of longer term loan growth guidance have been this 9% to 11% range. If you look at '18, you were almost double that. You know, you finished with a very strong 4Q and I think the last time we spoke about this you said that, you know 2019 would be toward the lower-end of your guidance, I mean, closer to 9%. So what -- because I know State Bank will impact that some, but is that still the right way to think about forward loan growth for you guys?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes, I'm thinking 9%, 10% is a reasonable estimate. I mean, we'll see how the year goes. The pipelines are pretty attractive admittedly, so there is a chance we could do better there, but I think it's a reasonable way to think about it.

Brady Gailey -- KBW -- Analyst

All right and then, I know, I think you'll have (ph) a little over 10% of your loan book in franchise finance, specifically restaurants. I know we've seen some noise in that. Could you just give us an update on the credit quality of that portfolio and how you think that will trend going forward?

Samuel M. Tortorici -- President

Hey, Brady, this is Sam. So, yes, the -- our restaurant team really came on board really at the inception of Cadence over seven years ago, it's a team that's been together now -- for the vast majority of them for more than two decades. You know, they -- we've really developed a very diversified book of -- we bagged 42 concepts with great geographic diversification. Two-thirds of those are franchisees, a third is restaurant operating company. Our overall fundamentals from an internal risk rating perspective remains solid. Clearly, the industry has had some challenges, you know, wage inflation being probably one of the most noted, but really our portfolio is held up pretty well. We do have, you know, a small non-performer that we're working through, but that's been out there for a couple of quarters now. You know, we're just on top of the portfolio. There have been some issues, you know, that have surfaced around the industry here over the last couple of quarters and those have not been issues in our portfolio and I would say again, it's largely because of the discipline that we have around, which sponsors we partner with and which operators we partner with, and we have, you know, discipline around the leverage limits. We're not willing to push beyond where our comfort zone is.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

The other thing I would just add is on a combined basis that actually -- would be at about 8% combined with State Bank and it's an area that as we look at where our growth may come from in 2019 that we don't anticipate significant amount of growth from.

Brady Gailey -- KBW -- Analyst

All right and then finally for me, you know, I know in late December when you all announced the increased exchange ratio, you'll also increased your buyback basically to buyback the stock -- the new stock that you had to issue to State above and beyond the initial deal. Is it right to think about that as being repurchased fairly aggressively here in the beginning of the year? How do you think the timing will shake out on buying back those shares?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, so I think, we all feel like our stock price is probably lower than representative of our performance. So, theoretically, that would probably make sense, but yet to be determined based on market factors and so forth on how that actually comes to pass.

Brady Gailey -- KBW -- Analyst

All right. Thanks guys.

Operator

And next, we have a question from Brad Milsaps of Sandler O'Neill.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Thanks for joining us, Brad.

Brad Milsaps -- Sandler O'Neill -- Analyst

Hey good afternoon, Paul. I just wanted to ask maybe more specifically at State Bank, I know you guys have been doing a lot of work to, kind of, rightsize the loan book and the expense base as to how you want it, when it comes over. I did notice that loans maybe were down a bit in the fourth quarter from where they were in the third. I just wanted to see if you could give us a sense of maybe on average or what you expect average earning assets to come over as of Jan 1.

And then secondly, maybe a little better sense on, kind of, where expenses will start the year just given kind of the moves you made with the mortgage company at State Bank, et cetera?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Right, so, yes, the -- I think the loan growth slowed down, you know, a little bit a result of just all the changes that are going on over there and are touched by design. I mean, we have such a strong loan pipeline here that we want to grow in both places of course, but given a little preference to the Cadence pipeline was one of the things that's been something we're considering and we've really asked them to focus on core deposits and low-cost screen (ph) core deposit franchise. So it's sort of the way we had it drawn up, I guess you might say.

So, we feel good about the whole transition, the conversion is set for February 15th weekend. A lot of planning has gone into that and credit quality at State has been outstanding throughout the year. Part of your question was on efficiency ratio, State reports about a 49% efficiency ratio in the fourth quarter adjusted. So we have benefited from some open jobs that are a result of the merger and some reductions in staffing at their mortgage company. So we're starting to see some advantage of the -- of those changing allocation to resources in the future. So hopefully, I'm going to heart of your question. I don't know, what else did I miss?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, I would also I guess just say that, yes, I mean they'll be issuing their call report here over the next couple of days and so you can kind of look to there as far as the average earning assets et cetera. One of the things that, obviously with the December 31 closing or end of the year and January 1 close, purchase accounting will certainly impact that and that's not been factored in, but conceptually their securities portfolio we will be reducing somewhat to get to about the same size as our securities portfolio as an overall percent of the balance sheet, you know, between 10% to 12%. So that is one of the things that you would expect to see in the first quarter.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay, Valerie and then on expenses, I mean, they had been running kind of mid-high $30 million on a quarterly basis. Maybe, more specifically, I would expect that's going to fall some not only with the cost saves, but with you taking the mortgage bank out as well?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, so if you kind of go back to what we actually originally disclosed when you look back at the May disclosures, we talked about a 30% save there and we're still thinking about that correctly. Now obviously some of that has come into play as we've worked through the year, it is -- there's been some attrition et cetera, but we're still thinking on an overall basis that we're pretty consistent with that. Because we have the February 1 conversion and because we ended up closing January 1st versus what we were really hoping for October 1st, maybe we get instead of three quarters of that (ph) in 2019, maybe it's closer to 50% of that, but looking at 2020 for a full-year implementation.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay and then just one final question on loan discount accretion. I think, originally you guys mentioned there wouldn't be a lot of change there. I know that you're still working through all the marks and purchase accounting adjustment it sounds like, I'm just curious, is that still, kind of a way to think about it in terms of what the amount of loan discount accretion income will see -- show up on a quarterly basis?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

I think, based on our knowledge today what we've disclosed is consistent. We did a disclose last week, an 8-K/A that does have some updated pro forma information as of September 30 with some of the estimates (ph) about time, but, yes, you're correct that we're still in the depths of really tweaking out what the 12/31, January 1st numbers will be, but if you go back to some of those prior disclosures, that will give you a pretty good direction and then we'll tweak out the finals as we go.

Brad Milsaps -- Sandler O'Neill -- Analyst

Great. Thank you.

Operator

The next question comes from Michael Rose of Raymond James.

Michael Rose -- Raymond James -- Analyst

Hey guys, thanks for taking my questions. Just wanted to talk about some of the comments you made in the past about the longer term efficiency ratio, Paul being, you know, somewhere in the mid-50s. Is that, you know, in this changing environment, flat yield curve, maybe no more rate hikes. Obviously, State will help you, but is that kind of still in the cards and over what time frame do you think you could potentially get there? Thanks.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes, thanks Michael. So yes, I mean, if we're at 49% for the fourth quarter and they're right there, we get a conversion done in February, we continue to believe there is some operating leverage in the model. I think it can trend down over time, I mean, I would like to create a low expectation on how fast. I mean we've got a lot of work to do to get our heads around what changes need to happen in terms of the back office operating model and customer services first and foremost, the most important part of our thinking as we go through this conversion. So, you know, we're going to tend to be a bit overstaffed here and there to be sure we can handle any issues that might arise. So short-term, I think it takes a little time, but longer term, I think the improvement in the efficiency ratio is still an important corporate initiative and something we would like to see happen.

Michael Rose -- Raymond James -- Analyst

Okay and then maybe a follow-up separately in credit. Can you disclose what two industries those two non-performers were? And then, it looks like past dues 30-plus days were down, but was there any migration in criticized or classified?

Samuel M. Tortorici -- President

So we had a contractor that was a kind of a little -- I'm sorry, contractor that was kind of a specialty contractor and the other one, let's get back to that. I'm going to come back to get (multiple speakers).

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, that's actually a small healthcare.

Samuel M. Tortorici -- President

Small healthcare. That's right, that's right.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, they're really a general C&I and (ph) a small healthcare.

Michael Rose -- Raymond James -- Analyst

Okay and then any migration or change in the criticized or classified balances this quarter?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Not significant other than we did have the increase into the non-performers.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

The two NPA additions will be the biggest sort of credit metric, but overall, there are always some adds and some deletions from the watch list every quarter, but no material negative trends developing.

Michael Rose -- Raymond James -- Analyst

Okay and then maybe just one final one for me, Valerie. I know, you mentioned a writedown of, I think, $1.3 million in the quarter. I assume that was in other fee income. Was there anything else in there that kind of drove that big swing?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, so a couple of things, and that one was associated with a net profit interest that is really kind of -- well, it's associated with an energy credit that we now hold the net profit interest in, so it was impacted by the volatility of energy prices during the quarter and so that one tends to swing around a little bit, because it is impacted by those volatility of those credit prices.

The other thing that impacted it a little bit is we had less earnings from our limited partnerships' investments. We've got about, $35 billion (ph) to $40 billion (ph) or so of those investments and a good chunk of those are effectively fair valued every quarter and so that can vary a little bit as well, so --

Michael Rose -- Raymond James -- Analyst

Okay. Thanks for taking my questions.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Thanks, Michael.

Operator

The next question comes from Ken Zerbe of Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks.

Samuel M. Tortorici -- President

Hi, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

I guess maybe just starting off --. Hello? Just starting off with the $9.8 million special bonus that you guys received, can you just provide a little more information about that? I mean, was that for just management? Was it for all the employees? Like how does that tie back to sort of value creation for shareholders? Any information would be helpful?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes, Ken, there were about roughly 15 people that participated in that bonus pool and it is -- was mentioned, a result of the completion of the full float of the Company with a primary consideration of the Board. I think other things that I focused on when I look at how we're doing is the operating performance of the Company was pretty solid for the year and so I think that was also a factor.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. So -- sorry, so tied to operating performance, not just the secondary offerings?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

No, I would say the secondary offering was the reason the Board chose to do this and I think that the operating performance of the Company was kind of a prerequisite to being able to consider something like this that would be a special situation.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay and then just in terms of loan growth, the 9% to 10% loan growth you guys are talking for 2019, obviously, I presume that is on a stand-alone basis, but how should we -- and I could be wrong on that, but how should we think about with the addition of State, presumably, there maybe some runoff to State? I'm just trying to make sure I got all my numbers right. Or what is the right base to think about that 9% to 10% growth?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

We think combined 9% to 10% is the right way to think about it, which does bake in a little runoff at State.

Ken Zerbe -- Morgan Stanley -- Analyst

As if -- that combined basis, as if State were included on December 31st?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Correct.

Ken Zerbe -- Morgan Stanley -- Analyst

Well, I guess, it would be no -- so sorry. No, I don't want to be dense about this, but the 9%, 10%, that's end of period growth?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Basically, if you look at their loans plus our loans at the end of the fourth quarter, we're expecting for the full-year growth to be about 10%.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Average or end of period?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

I'm sorry?

Ken Zerbe -- Morgan Stanley -- Analyst

Sorry, presumably end of period, right, that you said because if you're using fourth quarter growth or fourth quarter balances --

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Period -- end of period, yeah.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Okay, perfect. Understood. All right. That's great. That's all I had. Thank you very much.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Thanks, Ken.

Operator

And our next question comes from Jon Arfstrom of RBC Capital Markets.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good afternoon.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Thanks, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

A couple of questions. On the loan growth for the quarter, Paul, energy was very strong. Can you touch a little bit on some of the drivers there and what the pipelines look like?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes, Jon, continues to be midstream. As many of you will remember, zero charge-offs in midstream year-to-date and a great team there and a great pipeline. The E&P portfolio has drifted down from almost $600 million outstanding to just under $300 million at year-end and that's where we have the most cautious view going forward. A few occasions, investors have asked, are you going to double-down on that business now since a few lenders have exited and our answer is no. It's still just an area where we're comfortable making loans, but really a very high bar and so very, very pleased with that, but we did have some growth and I'm sorry, Valerie is calling to my attention, it's a little north of what I talked about in terms of year-end balances for E&P, but -- and we did add a couple of credits over the year last year. So but, yes, midstream is really the biggest part of it today, about $739 million out of the $1.286 billion.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, OK, got it and then same question on the income-producing real estate. The balance was up quite a bit in the quarter and I'm wondering if there's anything unique happening there.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

No, we have active real estate lenders and we do primarily construction loans there and they had a good year last year and the pipeline is -- continues to be consistent with previous years.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

A lot of time it's funding on loans that have actually been booked to prior quarters is what. So there's a timing aspect in that.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes, just it's a big jump, which is why I asked. And then, I guess, Sam, I don't know if this is for you, but you talked about the core deposit growth earlier and I understand the loan growth guidance, but do you feel like this core deposit growth, you put up non-interest bearing growth at 9% year-over-year and what you guys call core 18% (ph). Do you feel like that's something that's repeatable or at least can keep pace with loan growth?

Samuel M. Tortorici -- President

Jon, as we've talked about I guess in prior calls, one of the key drivers of our core deposit growth particularly in IB (ph) has been bringing in new commercial relationships, often times leading with the lending side and then bringing in our treasury management expertise and cross-selling, which typically takes anywhere from six to nine months, to fully onboard and given our solid loan growth we've just seen this quarter-after-quarter, where we -- just the fact that our non-interest bearing has continued to keep up as a percent of the total just kind of shows you why -- how this plays out.

And so, yes, I think our confidence level is pretty high and then you bring in the State Bank franchise and they've got some markets where they have, you know, really strong market share. We think that we can continue to penetrate that and they have markets like Atlanta where their market share is fairly small and I think our ability to penetrate there is going to provide an added boost for us, maybe not over the short run, but definitely, over the long run.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

And we are looking to basically fund that loan growth with our core deposit growth as we look into the next year. That's (multiple speakers).

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, yes. I just -- not to belabor this, but it seems like maybe you have a little bit of room with a little more attractive loan-to-deposit ratio at State. Is that the right way to look at it?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes, definitely. Yes, one of the many attractive things about State is that it does give us a bit more flexibility.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes. Okay, alright. Thank you.

Operator

The next question will come from Jennifer Demba of SunTrust.

Jennifer Demba -- SunTrust -- Analyst

Thank you. Good afternoon. Just wondering if you could give us an update on hiring in Atlanta, what your goals are, if any, and how that's going. Obviously, there's been a lot of M&A in the market, pending and already closed. Just wondering what the competition is like for relationship managers there? Thanks.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes, Jennifer, this is Paul. Obviously, that question should be best handled by Sam, but I would just quickly overview. Our objective is to build a good quality business over a period of time and we'd like to hire some bankers this year, but we're going to be really selective and thoughtful and we've got a great team of bankers in Atlanta as it is and adding some C&I bankers would be a high priority, but I'll let Sam take it from there.

Samuel M. Tortorici -- President

Yes, I mean Paul basically shared what I was going to share. I mean, the encouraging thing, Jennifer, is that the inbound interest has been better-than-expected. And really, our focus right now is on a smooth and successful conversion of retaining clients, of retaining their key producers and right now, all that looks very positive, and so that's really kind of job one, but we have lines in the water and we should hopefully be able to make some nice additions as the year goes forward.

Jennifer Demba -- SunTrust -- Analyst

Okay great. Thanks.

Operator

The next question comes from Brett Rabatin of Piper Jaffray.

Brett Rabatin -- Piper Jaffray -- Analyst

Hey, good afternoon.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Hi, Brett.

Brett Rabatin -- Piper Jaffray -- Analyst

I wanted to just go back to talking about the leverage book. I think if we're looking at the quarter, you've got a couple of portfolios where people are kind of worried about the market, just kind of given a few other banks and again, you're obviously not experiencing some of the pain that some others are. I was hoping maybe you could just give us a little more color around the leverage book, various concentrations and industries and then just does that book grow from here or give us maybe some color around your expectations for how that book trends over the next year or two?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes, I'll make a comment and I'd like Sam or Hank to comment. I would say growth would be in line with the overall growth of the bank, percentage-wise. We're -- it's not something that we're trying to manage down or up. We're comfortable with where we are. It does tend to be spread out between restaurant, healthcare, technology and general C&I would be where the leverage deals are. Midstream, we sort of look at it a little bit differently. So we're back to the basics. Modest leverage, well-managed, is something to keep an eye on for sure. I mean, leverage is a key credit indicator, but with the good sponsorship and good operating companies, it can be very well-managed. So I think I made the point earlier, our charge-off lifetime to date on the leverage book are zero and with one $12 million non-performer today, we feel like that's not awful.

Samuel M. Tortorici -- President

So I may just add to that, I think we've been very disciplined with the way we've underwritten these credits. Often times, I mean, we are in a situation where when you look at it from a debt-to-cap perspective, we're at a low percentage and that discipline along with not chasing terms and making sure that we're being consistent is what we'll see going forward.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. That's good color there. And the other thing I just wanted to talk about was kind of the progression in '19 with State and just trying to make sure I've got kind of modeled right, the integration and how you achieve the expense base (ph). Can you just talk about maybe the first quarter especially and just sort of how things trend in 2Q with the expense base?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, so this is Valerie. First quarter is going to be a little messy, just to be candid. Obviously, we'll be bringing in and consolidating the entity. We'll be integrating in the purchase accounting adjustments. We'll be converting the organization as of the middle of February. We will have merger-related costs that will come into play. Now we'll do our best to highlight all the unusual items here and make it as transparent as we possibly can to you all, but that's what we're going to see in the first quarter, a little bit of rebalancing like I mentioned of their securities portfolio and so it is going to have a number of moving parts, which are all in accordance with how we expected this to play out.

Going forward, after the conversion, that's really when we start to see the efficiencies and see the integration of the Company as really kind of operationally, that drive a number of the efficiency numbers and the expense saves that we've been anticipating. We talked about, back in May, like I said, I think 75% of those coming in to 2019. That may be 50% to 75% at this point just because we did have a later closing than we anticipated back then, but we're still very confident in the ability to achieve all of that by 2020 and I don't know if that helps, but it's just going to kind of be a gradual increase as we go through the year of seeing that integration.

Brett Rabatin -- Piper Jaffray -- Analyst

That's very helpful. Thanks for the color.

Operator

(Operator Instructions) And our next question is a follow up from Steven Alexopoulos of J.P. Morgan.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Steven, are you there?

Steven Alexopoulos -- J.P. Morgan -- Analyst

Yes, I'm here. Thanks for taking the follow up. Regarding the $10 million special bonus paid in the quarter, I saw that some of the unvested shares, Class C, would vest after the LLC was collapsed. How much of the $10 million special bonus was an actual cash payment and how much was related to unvested shares vesting?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

The $10 million special bonus was all cash.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, yes and it really had nothing to do with Class C units at the LLC.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay was there any additional comp expense in the quarter from unvested shares vesting?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

No.

Steven Alexopoulos -- J.P. Morgan -- Analyst

No? Okay. That was my follow-up. Thanks.

Operator

And our next question is another follow-up, this one from Jennifer Demba of SunTrust.

Jennifer Demba -- SunTrust -- Analyst

Hi. A question for Valerie. What are you thinking on a tax rate for 2019 at this point, Valerie?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes, right now, we're looking at around a 23% rate. Now that gets impact -- that's on (ph) a full-year basis. That gets impacted by non-deductible expenses. There are some of the merger costs that are non-deductible, so it may be higher in the first quarter, but on a full-year basis, looking at about 23%.

Jennifer Demba -- SunTrust -- Analyst

Thanks.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Paul Murphy for any closing remarks.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Well, I thank all of you for joining us. Again, we feel like 2018 was really a solid year, very focused on the conversion in 2019. With that, we stand adjourned.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 51 minutes

Call participants:

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Samuel M. Tortorici -- President

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Steven Alexopoulos -- J.P. Morgan -- Analyst

Brady Gailey -- KBW -- Analyst

Brad Milsaps -- Sandler O'Neill -- Analyst

Michael Rose -- Raymond James -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Jennifer Demba -- SunTrust -- Analyst

Brett Rabatin -- Piper Jaffray -- Analyst

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