IBERIABANK Corp (IBKC) Q4 2018 Earnings Conference Call Transcript

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Updated Fri, Jan 25, 2019, 1:27 PM

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IBERIABANK Corp (NASDAQ: IBKC)
Q4 2018 Earnings Conference Call
Jan. 25, 2019, 9:00 a.m. ET

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the IBERIABANK Corporation Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to hand the conference over to Jefferson Parker, Vice Chairman, Director of Capital Markets and Investor Relations. Please go ahead, sir.

Jefferson G. Parker -- Vice Chairman, Director of Capital Markets and Investor Relations

Good morning and thank you for joining today for our conference call. On our call this morning, we have Daryl Byrd, our President and CEO, who again will make summary comments on our earnings report, after which we will open for Q&A. Also in the room this morning, we have Anthony Restel, our Chief Financial Officer; Michael Brown, our Chief Operating Officer; Fernando Perez-Hickman, our Director of Corporate Strategy; Terry Akins, our Chief Risk Officer; Nick Young, our Chief Credit Officer; and Spurgeon Mackie, our former Chief Credit Officer and all are available for Q&A after Daryl's comments.

If you've not already obtained a copy of our press release and supplemental PowerPoint presentation, you may access these documents from our website at www.iberiabank.com under Investor Relations. Replay of this call will be available until midnight on February 1 and information regarding that replay is provided in the press release.

Our discussion today deals with both historical and forward-looking information. Our safe harbor disclaimer is provided in the press release and in the supplemental presentation.

At this point in time, I'll turn it over to Daryl for his opening remarks. Daryl?

Daryl G. Byrd -- President and Chief Executive Officer

Thanks, Jeff and good morning, everyone. We appreciate you being with us today. We are pleased to be able to report a very positive quarter, capping off an extremely successful year. Our team has been diligent as we work toward delivering both sustainable and profitable growth, achieving the guidance we laid out for the year and positioning our Company to deliver high quality results in the future. It's been a very busy quarter and we are proud of our results.

For the fourth quarter, we recorded GAAP EPS of $2.32 per share, which included a non-core permanent income tax benefit of approximately $65 million. You may recall that during last quarter's release, we announced that we anticipated recording this benefit associated with the filing of our 2017 tax returns, and we were pleased to see it come through, even a little better than expected. Excluding this and other non-core items, our core EPS was $1.86 for the quarter, a 7% increase on a linked quarter basis and an increase of nearly 40% from the fourth quarter of 2017. Once again, I'm happy to report this was a record quarter in terms of core EPS, our third consecutive record quarter.

In terms of performance metrics, in the fourth quarter and on a core basis, we achieved a 1.37% return on average assets, a 16.98% return on tangible common equity, a tangible efficiency ratio of 50.7% and core EPS growth of 19% compared to the fourth quarter of 2017, adjusted for changes in income taxes. For the full year, we reported a 1.30% ROAA, a 16.01% ROATCE, a 53.7% core tangible efficiency ratio and year-over-year core EPS growth of approximately 28%, also adjusted for income taxes.

I'm pleased to say that through the hard work of management associates, we successfully delivered and exceeded the financial metrics for our 2020 goals for the third consecutive quarter and for the full year 2018. We continue to remain focused on sustaining this level of performance and exceeding it in the future.

In the fourth quarter, our reported net interest margin came in at 3.81%, significantly better than our third quarter results and above our guidance, while our cash margin was 3.52%, an increase of 5 basis points. Recoveries were approximately $2 million greater than in the third quarter of 2018. And as I continue to remind everyone, while quarterly recoveries add to the margin, they're difficult to predict. We experienced increasing loan yields in the quarter as a full impact of prior rate increases flowed through our portfolio. Deposit costs, while continuing to rise with the overall increases in market rates, showed slower levels of increases in the quarter. In the fourth quarter of 2018, our loan beta was approximately 67%, while the deposit -- while the beta on total deposits was only 49%. Cycle to-date, we've experienced a 27% beta on total deposits.

Our strong balance sheet (inaudible) outstanding performance for the year was achieved while improving our already excellent credit quality, a hallmark of our organization. Credit metrics have improved in most categories. Criticized, classified and non-performing assets were down 28%, 30% and 5% respectively on a year-over-year basis. In particular, I would point out that our classified assets have fallen below 1% at the end of the year, which by any -- any standard is exceptional.

In the fourth quarter, we reported solid loan and deposit growth. Net interest margin expansion and diligent expense management producing positive operating leverage and improved efficiency.

Touching briefly on some of our newer markets. I can tell you that the Miami market is proving to be a great investment for our Company. We are pleased with the activity in South Florida and expect this market to be a strong contributor in 2019. Contrary to many of the concerns we heard as we entered the market, the credit profile of our clients in Miami is excellent. We are also pleased with our entrance in the Carolinas. While it's early for us in these markets, we are starting to see good client growth for a relatively small investment. It's important to note that we've seen significant contributions from corporate asset finance, treasury management and our energy lending groups in the recent quarter and year.

During the fourth quarter, we completed our existing common stock repurchase plan for 2% of outstanding shares and initiated new plan authorizing the repurchase of up to 5% of common shares outstanding over the next two years. In total, we repurchased 1.21 million shares of IBERIABANK common stock during the quarter at a weighted average price of $72.61 per common share. For the full year, we repurchased almost 2 million shares at a weighted average price of $75.46 per common share.

Early in the quarter, we declared a common dividend equal to $0.41 per share, an increase of 5% to the prior quarter. This was a third common dividend increase in 2018. For the year, we returned 65% of our total earnings to shareholders through a combination of common dividends and share repurchase. Also during the quarter, we restructured portions of our investment portfolio, selling almost $1 billion of available-for-sale securities at a $50 million pre-tax loss and subsequently purchasing $1 billion in securities. The restructuring resulted in a 164-basis point yield improvement in the bonds purchased. We continue to examine our businesses for ways to optimize our balance sheet, increase financial performance and enhance our capital base.

As mentioned in the press release, we revisited our 2019 financial guidance to reflect the current interest rate environment and our updated expectations. As we're all aware, there are many moving parts to the current economic climate and it's hard to predict exactly how all of it plays out. At this point in time, our focus is on delivering the midpoint of our 2019 core EPS range, a target of $7.30.

We set high standards for our performance and are pleased with the franchise we built. I want to point out a few significant milestones we've recently achieved. In the fourth quarter, we exceeded $100 million in core earnings. We recorded over $1 billion in net interest income for the full year. Our legacy loan yield is just slightly below 5% and we anticipate breaching that threshold shortly. Total headcount for the year was down 163 FTEs since 2017. However, excluding the employees retained from our Gibraltar transaction, we've reduced the size of our employee base over 240 FTEs, or roughly 7%. Organic loan growth for the year was 5%, despite the increased pressure from loan payoffs throughout the year.

While day-to-day, we are intently focused on creating and maximizing value for clients and shareholders, our decisions past and present have been and will continue to be about creating value over the long term. Our standards remain high and I believe we have the right associates and are in the right markets to continue to grow our franchise. I want to thank our team. The combination of hard work and dedication of every IBERIABANK associate positively impacts our clients in bottom line.

Before I wrap up, I want to take a minute to thank Spurgeon Mackie, our Chief Credit Officer, for all of his fine contributions as he steps away from banking and enters retirement. Spurgeon has been with us since 2010 and has been critical to our success, building our clientele, managing our risk exposure and helping to produce the excellent credit quality results this Company is so proud off. Once again, all of IBERIABANK and I personally want to thank Spurgeon and wish him well in the future. And finally, I want to thank our tax group, led by Edan Underwood, for all of the very hard work they put into our 2017 tax preparation, which resulted in the gains we discussed earlier. There were many moving parts to this and I appreciate how the team navigated the issue for our Company.

At this point, I'll open the call for questions. Denise?

Questions and Answers:

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And your first question will be from Jennifer Demba of SunTrust. Please go ahead.

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Thank you. Good morning.

Daryl G. Byrd -- President and Chief Executive Officer

Good morning, Jenny.

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Couple of questions. Anthony, could you talk about any other balance sheet optimization strategies you might be looking to employ over the next several quarters?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Jenny, I don't think we have anything material at least at this point that we have that we need to talk about.

Daryl G. Byrd -- President and Chief Executive Officer

Yes, we feel like we're in a pretty good place, Jenny.

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Okay. And you bought it back a lot of stock this year -- last year. What's the interest level at this point in 2019? I know you've got the big authorization out there.

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Jenny, I think we guided -- Anthony to about $35 million in available capital per quarter coming up this year. So you should see us active.

Daryl G. Byrd -- President and Chief Executive Officer

Yes. And then Jenny, just remember that as long as we kind of trade, I'd like to say, around book value, that's always going to be fairly compelling from a price perspective for us.

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Okay. So do you think it could be very front-end weighted, Anthony?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

No, we've been pretty clear that we like -- that we've -- given our business model, right, we want to operate around 12.25% (ph) on total risk base, 8.5% on tangible common, right. So -- although if the price were to debt materially, we may choose to front load or pull a quarter worth of buys forward, but I would expect -- you should expect to see us by systematically through the year to try to manage to those kind of capital levels I talked about.

Daryl G. Byrd -- President and Chief Executive Officer

Yes, Jenny, we'll be pretty methodical in our actions there.

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Okay. All right. And can you just talk about the expense puts and takes this year, Anthony, in terms of your expense guidance, kind of what's coming down and what's growing?

Daryl G. Byrd -- President and Chief Executive Officer

Yes, Anthony, you can kind of do a buildup, you've done that.

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes. Look, I think if you take the expense base for the fourth quarter, the $166,000 (ph) and we just used that as the annualized run rate. And you look at the midpoint of the guide, it would imply, you've got about 4.2% worth of growth in the non-interest expense. So a couple of things just to keep in mind when I talk about that. One is, remember that December is somewhat of a slow quarter. Our payroll taxes are at the lowest point, our commission income is at a low point because of seasonal businesses. So, some of that 4.2% gets eaten up for those items just regarding to the norm. We're going to see about 3% worth of growth in salaries and benefits during the year, just reflective of the strength in the employment in the United States pushing salaries and benefits. You've got some growth in technology spends, offset by FDIC insurance and then just small things kind of scattered around the rest of the non-interest expense base. Should be pretty tight, fairly easy and contained for the year.

Daryl G. Byrd -- President and Chief Executive Officer

And Jenny, we'll stay very focused on expenses from a headcount and continuing to look at our branches.

Jennifer Demba -- SunTrust Robinson-Humphrey -- Analyst

Thanks a lot.

Operator

The next question will be from Ebrahim Poonawala of Bank of America. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning.

Daryl G. Byrd -- President and Chief Executive Officer

Good morning, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

So just had a question on the margin guidance, Anthony. In terms of, if you can just sort of talk through around both the cash and the GAAP margin, particularly given what the reset is going to be if you fully bake in the securities, restructuring as a starting point? And from thereon, like, what are you assuming in terms of the accretions impacting the GAAP margin and the cash margin without any rate hikes this year?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes. So that's a pretty loaded question, Ebrahim. So I'll give you a -- I'll give you a -- since I think we would have this question, look, let me do a little bit of a walk forward relative to total GAAP '18 to '19 and kind of just a high-level, recognize I'm not going to hit all -- all the points. But if you look at for '18, we had a margin of 3.75%. We are projecting about $15 million less in recovery prepayment related type accretion. So in 2018, we had about $35 million. We think that will drop to about $20 million recognizing that, as you continue to recover, there's only so much more to go. So we're bringing that number down $15 million. That's about 5 basis points out of the margin. We do continue to see the acquired portfolio, being that it's somewhat of a wasting portfolio, continuing to come down. Of the acquired portfolio, it's got a yield of about 5.6% for the year 2018. Our current yield as Daryl just mentioned, it's about 5%. So you give up a few basis points there. We do expect deposit betas to continue to climb a little bit in the first half of the year. Regardless of whether we get interest rate hikes or not, we get some back for the swap transaction. And then the curve has moved considerably lower over the last, call it, month of the year. So, I think when you roll all that together, you know the midpoint, maybe a little bit above the midpoint on the margin, feels like a good number for us.

Relative to the cash margin. I expect to see cash some stability in the cash margin. Hopefully, we'll see that number move up a little bit. And so the gap between the GAAP and the cash will narrow through the year as we indicated we thought it would as we move through time.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

So fair to say that means -- I understand the accretion math, but the cash margin from 3.52% should be maybe get some December rate hike benefit and then it's -- you'd feel good about being relatively flat, even with no rate hikes on the cash margin?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes, well, keep in mind, I'm going to get the benefit on the cash margin of the bond transaction will help me out, the December move will help me out. So just like last quarter, we said that the cash margin was largely going to be influenced by mix movement as we move through the year. I would hope that we could grind a little bit higher on the cash margin, but it's really going to come down to the funding mix as well as the asset mix and how it comes on throughout the year.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Understood. And just second question tied to that. On deposit pricing, means, you guys have been quite promotional with the virtual bank online. Just wondering how you're thinking about core deposit growth coming from commercial clients versus having to do more promotions as the year progresses.

Daryl G. Byrd -- President and Chief Executive Officer

Ebrahim, our exception pricing has been around 18%. From a commercial perspective, I think I would go back and it's really the commentary we provided last year. One of the benefits as we run a very commercially oriented franchise, we certainly have consumers around our branches that bank with us, but we're pretty commercially oriented and thus, we can be a bit lumpy. And so you can see inflows and outflows in any given quarter. And we just remind people to be a little careful with that, it's not static and can be a little lumpy.So we feel pretty good about deposits. Anthony, I don't know if you have any other comments on pricing?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

No. I mean, Ebrahim, we recognize it's highly competitive environment for deposits. We like trying to hang around that 95% loan-to-deposit ratio, maybe a little bit lower. And so that will always be a focus for us. Obviously, we've spent a lot of money over the years building what we think is very competitive treasury management platform. We're extremely focused on growing clients, we believe that that growth is going to continue in the '19 and with that growth in clients, we expect to get good core deposit growth.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Operator

The next question will be from Catherine Mealor of KBW. Please go ahead.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Thanks, good morning.

Daryl G. Byrd -- President and Chief Executive Officer

Good morning, Catherine.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Just want to follow-up on the margin commentary and (inaudible) walk through is super helpful. On the -- as I think about the recoveries, are all of the recoveries in the -- basically in the non-cash piece or do you have any level of cash-related recoveries that are not captured in that cash margin?

Daryl G. Byrd -- President and Chief Executive Officer

The majority, the vast, vast majority of recoveries, Catherine, at least in '18 were in the acquired -- whatever, the acquired book. I will tell you that we did have some recoveries of some interest and other things on some of the energy loans that we were dealing within '18 that did flow through into the cash margin. I don't think that we're projecting any recoveries in the cash margin for next year at this point, but as you know -- yes.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Okay. Yes, I just want to make sure that wasn't inflated in a big way this year, just to think about. And then on the provision, you up -- increased your provision guide just a little bit. Any thoughts there as to -- it's a small move, but what prompted you to increase the provision guide for next year?

Daryl G. Byrd -- President and Chief Executive Officer

Catherine, we had good coverage of charge-offs and we would see that as pretty de minimis. So, as you look forward to next year, you kind of think about provisioning about 15 basis points of charge-offs; pretty consistent. We expect to get some loan growth and we expect to hold our reserve kind of flat. So that's kind of what you see in the guide for next year.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Great. So more of a, kind of, consistent level of charge-offs to little bit of better growth and that's just driving the higher provision versus anything you're seeing on the credit side.

Daryl G. Byrd -- President and Chief Executive Officer

Yes. And Catherine, from a credit perspective, our classifieds came down 30%. They are under 1%. We think we've got a stellar kind of position from a credit perspective and frankly think that we -- you hear a lot of talk about some kind of correction out toward 2020 or 2021. We think we're very well positioned if that were to occur. It's hard to predict. I made a couple of talks recently and I'm like little bit confounded by the 10-year moving around, because we have the lowest unemployment of my career, by any standard low interest rates, pretty tame inflation. But we get a lot of concerns about the length of time that we've been in this kind of post-war recovery. So, we think we're well positioned for that.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Great, thank you. Congrats on a great quarter.

Daryl G. Byrd -- President and Chief Executive Officer

Thank you.

Operator

The next question will be from Stephen Scouten of Sandler O'Neill. Please go ahead.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Hi, good morning, everyone.

Daryl G. Byrd -- President and Chief Executive Officer

Good morning, Stephen.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

I had one, just one last follow-up on the NIM. I'm just curious, Anthony, with the 4 bps kind of help you saw from the securities shift this quarter, how much incremental benefit will we see in 1Q or how much of that was already encapsulated in these numbers?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

So Stephen, the bond trade, we started selling bonds kind of, I'll call it, right before kind of Thanksgiving time and we wrapped that up early December and bought the bonds in the early part of December. So we didn't really get much -- didn't get much move really from the bond trade. I think you can -- I think I feel good, Stephen, I expect to see some positive movement to the cash NIM in the first quarter from the activities. Again, the top line number largely influenced by recoveries. Those are very, very hard for us to predict. So, I don't want to get too staked out on the top margin. I think for the year, I feel good, because things will, I feel good, that will average out to a good number, but it gets a little bit more challenging for me at the top line in the quarter.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

No, that makes sense, that makes sense. But on that 4 bps that you noted on Slide 10 that helped, that was still largely back-quarter weighted. So that 4 bps should theoretically be a little higher in 1Q at a minimum rate, just to isolate that particular event.

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Okay, great. And then maybe if we could talk about loan growth at a high level a little bit. Obviously, your guide for next year, 5% to 7%, a little bit higher than what we saw this quarter. I'm wondering what drives that move for you all. Is it more paydown slowing or is it overall origination activity and customer activity increasing? How are those puts and takes going to play into that guidance?

Daryl G. Byrd -- President and Chief Executive Officer

Stephen, I'll start on this one. Look, we are incredibly focused on (inaudible). And if you look at the year, we had about 5% growth for the year, but that was impacted by higher payoffs. Originations and fundings actually grew during the year. So, very pleased with that. We have a little bit more mix and maybe residential, but we feel good about that from a risk perspective. And my personal view is I think the payoffs we're seeing will probably crest over the next quarter or two. And it's really kind of -- I think kind of a natural event to see the payoffs. We've seen last year clients are going out and accessing the long-term nonrecourse markets in a period of rising rates. That's what they should do and that's normal and I tell our people, relax, wait for it to crest, because we think that will happen and just view it as a natural part of the cycle and please don't go out and do anything stupid, reacting to some kind of competitive pressure that we'll regret in a later time period. So, we're pretty comfortable with the guide.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Okay, great. And maybe just one last question from me. I appreciate the color you guys gave on the energy book in the presentation. Do you have any sort of, I guess, concentration cap on that, that you're approaching or given that so much of this was originated after 2017, do you feel pretty good about continuing to grow that portfolio as demand warrants?

Daryl G. Byrd -- President and Chief Executive Officer

Stephen, we have thoughts on concentration limits for all kinds of loans, but that's something we review on a regular basis. And it's kind of a risk-adjusted kind of thought process that we go through. Jeff, your thoughts on energy?

Jefferson G. Parker -- Vice Chairman, Director of Capital Markets and Investor Relations

Sure. Especially from the standpoint of Stephen asking the question, Stephen, what I would tell you is we did have good growth in 2017 and 2018 and today, as we sit here, we probably have about 80 to 85 relationships there. And we are very well diversified. And I should probably mention that after the fourth quarter decline in oil prices, we scrubbed the portfolio and performed a detailed review. I'm very comfortable that our companies are well hedged to their specific commodities and that where necessary basis hedges are in place. We have not stretched and we will not stretch. We remain focused on conforming energy lending and companies that have good assets, good management teams and the right financial metrics. The other thing I would say to you is we have not originated and oilfield service loans and so that's down under 10%; it's about a 9% today.

Daryl G. Byrd -- President and Chief Executive Officer

Huge change in mix for this Company.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Really helpful and thanks for that color and congrats on a great quarter.

Daryl G. Byrd -- President and Chief Executive Officer

Thank you very much.

Operator

(Operator Instructions) Your next question will be from Michael Rose of Raymond James. Please go ahead.

Michael Rose -- Raymond James & Associates, Inc. -- Analyst

Hey guys, good morning. Hope you're doing well.

Daryl G. Byrd -- President and Chief Executive Officer

Thank you, Michael.

Michael Rose -- Raymond James & Associates, Inc. -- Analyst

Just wanted to start on the margin. So your -- the guidance includes one rate hike. Let's just say, Anthony, that we don't get that and the curve remains relatively flat. You still think you can operate within that range that you provided?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes.

Michael Rose -- Raymond James & Associates, Inc. -- Analyst

Okay. Very straightforward. Maybe just moving on to loan growth. Two questions, first, core C&I was good this quarter, obviously that was indicated in the HA data. Do you think that continues and maybe how much this core C&I kind of contribute to the growth outlook this year? And then secondly, been a lot of questions around leverage lending this quarter, can you break down what if any exposure that you have? Thanks.

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes, Mike, we have pretty limited exposure from a leverage lending perspective, Terry, what is it?

Terry L. Akins -- Senior Executive Vice President, Chief Risk Officer

About 1% of loans.

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

1%, something like that. So, pretty limited exposure from that perspective. And let Michael jump in here, but we've always been a strong C&I lender. You get the impact of some paydowns and some movement in that regard, but that's what we're really good at. Michael, your thoughts?

Michael J. Brown -- Vice Chairman, Chief Operating Officer

Yes, I mean I think what I would emphasize is we've got a very diversified portfolio in terms of geography as well as areas of focus. So one of the things that I think we create in terms of value is being able to have markets that are driven by different economic factors. So, if a market softens, we have other markets that excel. And that's really what we saw in this past year in 2018. To Daryl's comments earlier about our expectations around growth, they're fairly modest at 5% to 7% based upon historical performance. We've actually seen our production grow through the year. So, originating at pretty consistent level of loans, we're seeing higher levels of fund-ups, which if you look at the fourth quarter, resulted in the highest production we had through the year, which is frankly a little bit unusual.

Third quarter is typically the best or most productive for the Company. We're just seeing a higher level of payoffs, which we expect to crest as Daryl said in this year. Once that crest, we should see a pretty nice pickup in growth and it's going to come from our focus on commercial, which is going to be C&I and CRE to some degree, again, focused on the higher quality end of the spectrum and that was reflected in a reduction in the watch list during the fourth quarter, which impacted loan growth, but certainly was the right decision from a quality perspective. So, we're fairly bullish about the ability to continue to grow through the year and grow with the percentage that we've outlined.

Michael Rose -- Raymond James & Associates, Inc. -- Analyst

That's great. Maybe one last follow-up for you, Michael. Are there any categories or geographies where things may seem a little overheated or you're a little bit more cautious at this point?

Michael J. Brown -- Vice Chairman, Chief Operating Officer

I mean, you touched on it. Leverage lending is an area that a lot of banks have moved into. Frankly -- I think Daryl has used the term around syndications, it's sort of easy lending, particularly on the PE side, where the business model is around buying a business and leveraging it to the highest extent possible. That scenario we are not playing in. It's a very difficult higher risk part of the business and it's just not something we want to do. So I would suggest that's not an area we would grow. We're just really focused on small and middle-market C&I businesses or their equivalent in real estate. It's nothing flashy, it's just sort of basic banking business. We think that's lower risk and longer term fits our focus much better than any other part of the spectrum.

Daryl G. Byrd -- President and Chief Executive Officer

And Michael, at this point, we feel pretty good about all the markets that we're in.

Michael Rose -- Raymond James & Associates, Inc. -- Analyst

Great. Thanks for all the color, guys. Appreciate it.

Daryl G. Byrd -- President and Chief Executive Officer

Thank you.

Operator

The next question will be from Casey Haire of Jefferies. Please go ahead.

Casey Haire -- Jefferies & Co., Inc. -- Analyst

Thanks, good morning, guys.

Daryl G. Byrd -- President and Chief Executive Officer

Good morning.

Casey Haire -- Jefferies & Co., Inc. -- Analyst

Question on the fee guide. A nice performance in the fourth quarter here, but still about, by my math, 6% below the guide for next year. So I know you guys have seasonality in the middle part of the year and some of your line items. But it looks like it's going to take some growth on top of that to get there. So basically, what are the drivers to get to you to that $215 million (ph) low level?

Daryl G. Byrd -- President and Chief Executive Officer

Casey, Anthony will walk you through it and I'll front-end his comments a little bit. Look, it's really hitting -- we think will hit a number of singles this year and we've got areas like our treasury management group we think will do pretty well. We think mortgage may actually be a double this year for us. We think they're going to perform a little bit better in the coming year. Anthony, your kind of...

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes. I think when you look at it, Daryl is right, Casey, a lot of singles, right. We expect good growth out of treasury management. We're going to have growth in our -- out of the trust area over -- year-over-year. Probably (ph), income will be up year-over-year. We are expecting some nice improvement in the mortgage company year-over-year. I'll tell you the same thing I said all of last year to the extent things are deviating a little bit there. We've got levers in the expense base to kind of offset some of that, which we did this year and so, I'll say that that kind of maintains as we move into '19. So, as Daryl pointed, there's a lot of little singles kind of scattered around. The big thing is we are expecting some decent growth out of the mortgage company, reflecting all of the recruiting that we've done throughout the year.

Casey Haire -- Jefferies & Co., Inc. -- Analyst

Okay, great. And just on the expense side, I mean, if it does -- if the fees do fall short, is there flexibility on the -- could you violate that -- could you go below the $685 million on the expense side?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes, I think we can.

Casey Haire -- Jefferies & Co., Inc. -- Analyst

Okay, great. Thank you.

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Thank you.

Operator

The next question will be from Matt Olney of Stephens. Please go ahead.

Matt Olney -- Stephens, Inc. -- Analyst

Hey, thanks. Good morning, guys.

Daryl G. Byrd -- President and Chief Executive Officer

Good morning, Matt.

Matt Olney -- Stephens, Inc. -- Analyst

In the guidance, you mentioned that the first quarter could be a little bit seasonally soft. Remind me of some of the major points that we should focus on within our forecast and then specifically on the earnings front, would you expect that softness to result in EPS below the $1.86 that you guys reported in the fourth quarter?

Daryl G. Byrd -- President and Chief Executive Officer

The answer is yes. And first quarter is always seasonally soft for us, Anthony, do you want to give some of the numbers in particular?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes, what I'll tell you is we lose two days, Matt, two days. If you look at just on a per day net interest income, we made about almost $2.9 million a day. So obviously, will have that impact. We've got about $3 million worth of incremental payroll taxes with all the payroll taxes reset. The Company pays raises in the first quarter globally in March. So we have one day worth impact to that.

Daryl G. Byrd -- President and Chief Executive Officer

Typically slow in mortgage.

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Mortgage entitled is slow just because those are pipeline-driven businesses. So coming through the holidays with it being cold, just pipelines are soft as they always are. So, we'll have the normal -- the normal things. So, to Daryl's point, we will come down obviously from the fourth quarter, kind of levels. We did take a look at kind of street numbers that are out there and we think those are reasonably in the range of where we're going to -- where we are to land.

Matt Olney -- Stephens, Inc. -- Analyst

Okay. That's helpful. And then circling back to mortgage, that's a group you've been retooling over last year. Is that still in a hiring mode as far as kind of retooling that and when would you expect that group to breakeven?

Daryl G. Byrd -- President and Chief Executive Officer

Fernando?

Fernando Perez-Hickman -- Vice Chairman, Director of Corporate Strategy

We fully expect our mortgage business to be profitable in 2019. We are pleased that with how we have stabilized the business in 2018 and are in a solid position to achieve positive results in 20 -- in this coming year. Despite the headwinds of higher rates, reduced margins and strong competition, we believe 2019 will be a positive contribution to the Bank.

Matt Olney -- Stephens, Inc. -- Analyst

Okay. Thank you for that. And then just circling back on the cash margin, it feels like that cash margin will move higher in the first quarter, I think kind of flatten out the rest of the year if the positive drivers happen in December that the Fed funds hike along with the balance sheet restructuring. Is that right -- the right way to think about that, Anthony, as it moves up in 1Q and then flattens out beyond that?

Anthony J. Restel -- Vice Chairman, Chief Financial Officer

Yes, I think that's -- I think that's a fair -- I think that's a fair view given that -- those assumptions that you just laid out relative to the movement from the Fed and where the curves are.

Matt Olney -- Stephens, Inc. -- Analyst

Okay, great. Thank you, guys. Appreciate it.

Daryl G. Byrd -- President and Chief Executive Officer

Thanks.

Operator

And ladies and gentlemen, that will conclude our question and answer session. I would like to hand the conference back to Daryl Byrd for his closing remarks.

Daryl G. Byrd -- President and Chief Executive Officer

I want to thank all of you for joining us today. I hope everybody has a really great weekend. Thanks.

Operator

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines. And once again, the conference has concluded. You may disconnect your lines.

Duration: 37 minutes

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