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Fulton Financial Corp  (NASDAQ:FULT)
Q3 2018 Earnings Conference Call
Oct. 17, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Fulton Financial Third Quarter Results Conference Call. At this time all participants are in a listen-only mode. Following management's prepared remarks we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions)

It is now my pleasure to turn the conference over to Jason Weber. Please go ahead.

Jason Weber -- Investor Relations

Thanks, Haley. Good morning. Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the third quarter of 2018. Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer of Fulton Financial Corporation. Joining Phil Wenger is Mark McCollom, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information and related slide presentation included with our earnings announcement which we released at 4:30 pm yesterday afternoon. These documents can be found on our website at www.fult.com by clicking on Investor Relations, then on News. The slides can also be found on the Presentations page under Investor Relations on our website.

On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations and business. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, and actual results could differ materially.

Please refer to the Safe Harbor statement on forward-looking statements in our earnings release and on slide 2 of today's presentation for additional information regarding these risks, uncertainties and other factors. Fulton undertakes no obligation other than as required by law to update or revise any forward-looking statements.

In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and slides 11 and 12 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.

Now I'd like to turn the call over to your host, Phil Wenger.

E. Philip Wenger -- Chairman and Chief Executive Officer

Thanks, Jason, and good morning, everyone. Thank you for joining us. I have a few prepared remarks before our CFO, Mark McCollom, shares the details of our third quarter financial performance and discusses our 2018 outlook. And when he concludes, we will open the phone line for questions.

Overall, we are very pleased with our financial performance for the third quarter. We continued to execute on our strategic initiatives such as focusing on growth, efficiency and profitability; to maximize shareholder value; and we grew our earnings to a record level.

Positives relative to the second quarter included an increase in our net interest margin, steady loan growth, strong growth in non-interest income and an improvement in our credit quality. Average loans increased 0.6% linked quarter and 3.1% year-over-year, which is in line with our guidance from last quarter.

The commercial loan growth lagged consumer and mortgage loan growth, linked quarter and year-over-year. We continue to see headwinds to loan growth from higher prepayments, mainly in our commercial business. The lending environment remains extremely competitive, and while we have competed on price in certain situations, we are remaining disciplined on structure.

On a positive note, our commercial pipeline remains healthy and our line borrowings stabilized this quarter after noticeable declines the prior two quarters. Despite slower loan growth, we believe we can deliver near double-digit growth in net interest income for the year as we continue to benefit from a rising rate environment.

We continue to invest in Philadelphia, which is a fast-growing urban market. Philadelphia is a natural extension of our current footprint and presents a tremendous long-term growth opportunity for Fulton. If you recall, we hired a Regional President and a team of commercial relationship managers in 2016. We opened a mortgage loan production office in May. And we've received regulatory approval to open two full service branches, with a third site currently in application. The branches are targeted to open early in 2019. In all, we have generated over $160 million in net loan balances since 2017.

In addition to Philadelphia, we have plans to grow in Baltimore, another market that represents a tremendous long-term growth opportunity for Fulton. We have a team of commercial and consumer lenders already serving the market. However, Baltimore is a targeted area for growth in 2019 and beyond. We have plans to open a mortgage loan production office early next year. And we have plans to open full service branches once our BSA/AML orders at our Maryland bank are lifted.

Turning to credit quality. Overall, asset quality improved linked quarter. Virtually every metric we monitor showed improvements during the quarter. Now, that being said, we are mindful of where we are in the economic cycle and are continuing to assess and analyze the loan portfolio for signs of weakness or stress. Our agricultural portfolio is an area we have been monitoring carefully due to compressed commodity prices. Now the portfolio saw a slight decrease in delinquencies, linked quarter, and net charge-offs were minimal.

Moving to fees. Non-interest income growth was strong, linked quarter, driven primarily by commercial loan interest rate swap fees. We had a solid pipeline heading into the third quarter that translated to a solid increase in swap fees.

Mortgage banking income was weaker, linked quarter, but our investment management and trust services income saw a nice increase. Assets under management and administration reached $11 billion.

Efficiency ratio declined for second consecutive quarter. For the third quarter, our efficiency ratio was 62.5%, inside our stated goal 60% to 65%, and reached the lowest level since the first quarter of 2013. We were pleased to see a decline in our efficiency ratio and we believe there are further opportunities to gain efficiencies. Opportunities exist as we continue to optimize our delivery channels, upgrade our origination and servicing platforms, consolidate our bank charters and exit our BSA/AML orders.

On the capital front, we paid a quarterly common dividend of $0.12 per share. We did not repurchase any common stock during the quarter. And we have approximately $31.5 million left in our current share repurchase program, which is authorized through December 31st of 2018.

We continue to weigh all our options to deploy our excess capital in the most efficient and effective manner. Over the past several years, we distributed our excess capital through dividends and stock repurchases. Moving forward, we believe bank and non-bank acquisitions may play a bigger role in distributing our excess capital, especially as we exit our BSA/AML orders.

On the corporate front, we hit two milestones during the quarter. First, the BSA/AML consent orders issued to our subsidiary bank in New Jersey were terminated. And with respect to the remaining BSA/AML consent orders, we are confident that we are progressing toward achieving a similar resolution.

Second, last week we consolidated our subsidiary banks, FNB Bank and Swineford National Bank, into our largest banking subsidiary, Fulton Bank. Early feedback is that consolidation went well, and we hope to have the remaining subsidiary banks consolidated into Fulton Bank by the end of 2019.

At this point, I'd like to turn the call over to Mark McCollom to discuss our financial performance in more detail. Mark?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Thanks, Phil, and good morning, everyone. Turning to our earnings. Unless noted otherwise, the quarterly comparisons I will discuss are with the second quarter of 2018.

Starting on slide 4. Earnings per diluted share this quarter were $0.37 on record net income of $65.6 million. This compares to earnings per diluted share of $0.20 in the second quarter of 2018. As you may recall, our second quarter earnings were impacted by a customer fraud-related provision for credit losses of $36.8 million, which equated to approximately $0.16 per share after-tax.

We will now discuss each of the components of our earnings and provide some additional color.

Moving to slide 5. Our net interest income was $160 million, an increase of $4.1 million linked quarter, driven by a growing net interest margin which expanded 3 basis points during the quarter to 3.42% as well as modest balance sheet growth and an additional day of interest accruals in the third quarter. Our net interest margin growth has been driven by our assets repricing faster than our liabilities throughout the first nine months of the year.

In the third quarter, our earning asset yields increased 9 basis points as compared to the second quarter, whereas our total cost of funds increased at a slower rate of 7 basis points. The 25 basis point Fed rate increases in March, June and September this year, coupled with the increases we have seen in our interest-bearing deposit rates, have resulted in a year-to-date deposit beta of approximately 30%. This is higher than the 21% year-to-date deposit beta through June 30th but is in line with our previous expectations. We anticipate that our fourth quarter net interest margin will follow the macro themes of the past few quarters, meaning that we would expect to benefit from the September Fed funds rate increase but also expect to see rising deposit betas.

I also want to remind everyone that our balance sheet remains asset sensitive as 42% of our loan portfolio is variable, 36% is adjustable and only 22% is fixed rate. Of our loans that are either variable or adjustable, the two most relevant indices are Prime and 1-month LIBOR. Now these two indices account for 36% and 26% of our total loan portfolio, respectively.

Average loans increased, linked quarter, by $94 million for an annualized loan growth rate of 2.4%. Average deposits grew $450 million or 11.6%, linked quarter, annualized. The deposit increase in the third quarter was impacted by $210 million increase in our municipal business. This is expected seasonality in this public funds business and we would anticipate outflows to occur in this segment of our deposit base over the next couple of quarters as tax receipts are spent. However, excluding this municipal business, we were still able to deliver approximately $240 million of average deposit growth or 6.2% linked quarter annualized.

Turning to slide 6. Our credit performance in the third quarter continued the trend of steady improvement. Non-performing loans decreased $3.6 million to $120 million, and total delinquencies improved by 3 basis points to 1.15%. The allowance for credit losses as a percent of loans decreased linked quarter to 1.05% from 1.07% at the end of the second quarter. However, the coverage of the allowance to non-performing loans increased to 140% from 137% linked quarter.

Annualized net charge-offs to average loans were 8 basis points for the quarter or $3 million as compared to 101 basis points in the second quarter of 2018. Adjusting for the previously mentioned customer fraud, net charge-offs for the second quarter were 15 basis points.

Moving to slide 7. For the third quarter, our non-interest income, excluding securities gains, was $51 million, representing an increase of $1.9 million linked quarter. The increase was driven by commercial loan interest rate swap fees, which grew by $1.2 million to $3.6 million for the quarter. We also realized increases in debit and credit card revenues as well as our investment management and trust services income.

Moving to slide 8. Non-interest expenses were $135.4 million, an increase of $2.1 million from the prior quarter. The increase was driven largely by salaries and employee benefits, which grew by $1.9 million primarily as a result of higher incentive compensation due to stronger earnings for the quarter.

Our health insurance costs also increased this quarter as is typical later in the year as planned participant deductibles are reached. Increases were also seen in other outside services expenses, mainly due to costs associated with the aforementioned bank consolidations which just occurred and also in professional fees. These increases were partially offset by lower occupancy and equipment expenses as well as a $2 million decrease in the other expense category, which was driven by lower costs on other real estate owned and lower cost in our operating risk categories.

Income tax expense increased $5 million linked quarter due to higher pre-tax income. For the third quarter of 2018, our effective tax rate was 11.5%, which is in line with our guidance. This is an increase from the 9% effective tax rate in the second quarter of 2018, which was lower as a result of the significant provision for credit losses in that period.

Slide 9 displays our profitability and capital levels over the past five quarters. Returns on assets and equity, both improved in the third quarter of 2018, reaching the highest levels since the financial crisis. Our tangible common equity ratio remains strong.

Slide 10 provides a summary of our outlook for the year, which remains unchanged from the outlook we provided on last quarter's call with the exception of our net interest margin. For the fourth quarter, we expect our net interest margin to grow between 0 and 3 basis points.

And with that, we'll now turn the call over to the operator for questions. Haley?

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from Frank Schiraldi of Sandler O'Neill. Your line is now open.

Frank Schiraldi -- Sandler O'Neill & Partners LP -- Analyst

I wondered if I'm trying to figure out or think about how betas -- deposit betas were impacted by the muni inflows in the quarter, and so I'm wondering if you had any ability to break out maybe the incremental cost of the muni deposits coming on board versus other deposits in the quarter, something along those lines?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes. What I can say, Frank, that total book of business -- now, I'm speaking (inaudible) kind of the end of the third quarter. At the end of the third quarter, we have about $2.3 billion of deposits in that business. Of that, 58% of that is tied to an index. And a lot of times, that index is Fed funds. The total cost of deposit for that business is 136 basis points. So, again, some of that is core deposit money that we really covet. And then some of that is the higher-rate index money that just has the kind of inflows and outflows throughout the year.

Frank Schiraldi -- Sandler O'Neill & Partners LP -- Analyst

Okay. I guess, it was -- was it -- the higher-rate stuff was the -- is more the seasonal? Is that what you're implying there?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes, correct. Throughout the year, I mean, in the core operating accounts, the core checking accounts are obviously the lower-balance accounts that don't fluctuate as much as the seasonal money that comes in through a tax fund (ph).

Frank Schiraldi -- Sandler O'Neill & Partners LP -- Analyst

Okay. So is it reasonable to think about that inflows and outflows as kind of 2%-plus money?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

I think that's fair for the bump-up that we see in the third quarter, and then the drift-off over the next, subsequent couple of quarters.

Frank Schiraldi -- Sandler O'Neill & Partners LP -- Analyst

Okay. And then sort of connected to that is the borrowing costs linked quarter were actually down. And I don't know if that's -- you guys have talked about the promissory note product in the past. If you could just maybe speak to that phenomenon?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Well, we have a couple of other customer-related funding vehicles that we use. Those are going to vary in cost and those are going to vary in terms of features for the customers as to whether or not as the customer cares about FDIC insurance or not. If they care about FDIC insurance, we get off of that product, but then that's going to perhaps be a little bit lower cost to the customer because they're getting the insurance versus something that might not be FDIC-insured but then can carry a little bit higher rate to the customer to kind of pay them for taking that incremental risk.

Frank Schiraldi -- Sandler O'Neill & Partners LP -- Analyst

Okay. I guess, I'm just surprised by, unless I read it wrong, the incremental or I should say linked quarter reduction in -- I think it was both short-term borrowing costs as well as just the FHLB advance line. Is there anything specific that's kind of driving that just linked quarter?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Well, yes, the mix is going to be that, if you look at our balance sheet, the customer-related funding vehicles stay more constant. But as a percentage, those customer-related funding vehicles would have gone up as a percentage of our short-term borrowings and our Fed funds purchase would have gone down with the influx of that muni money.

Frank Schiraldi -- Sandler O'Neill & Partners LP -- Analyst

Okay. And then just finally on the swap fee income, Phil, you mentioned the strong pipeline, going into 3Q. As you look at the pipeline here going into 4Q, is your expectation that those levels should moderate or how should we think about that line item?

E. Philip Wenger -- Chairman and Chief Executive Officer

We believe that we'll have strong swap fees again, but it's possible that they will moderate soon.

Frank Schiraldi -- Sandler O'Neill & Partners LP -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Chris McGratty of KBW. Your line is now open.

Chris McGratty -- Keefe, Bruyette & Woods Inc. -- Analyst

Phil and Mark, looking at the composition of your loan growth year-to-date, I think you mentioned in your prepared remarks C&I balances are effectively flat and a lot of the growth has been driven by (inaudible) family. I'm interested in kind of the sustainability of the mortgage growth given where rates have backed up to and also maybe how you're thinking about broadly the source of in the composition of loan growth, entering 2019.

E. Philip Wenger -- Chairman and Chief Executive Officer

So we do expect our mortgage volume to be down fourth quarter, a combination of seasonality and demand. You know when rates would have gone over 5%, which they have from time to time, demand slows down. We're still getting, on the commercial side, being impacted largely by prepayments. And some of it's good. We had 40 -- another $40 million of criticized and classified loans that pay off during the quarter. So that helps us from a provisioning standpoint. So yes, loan growth is a challenge and I -- we expect to see that in the fourth quarter again.

Chris McGratty -- Keefe, Bruyette & Woods Inc. -- Analyst

Okay. Thanks for that. Maybe kind of pivot into the implications on capital returns. Phil, you talked about the buyback that's still out for another couple of months. I think last quarter, you said if loan growth doesn't materialize you'd really consider potentially return to the buyback. In your prepared remarks, you sounded, at least what I heard is more optimistic about M&A in the two markets that you referenced. Is that kind of the narrative that you want us to all kind of think about that M&A is probably a top priority for 2019?

E. Philip Wenger -- Chairman and Chief Executive Officer

I think for the balance of the year, buybacks probably look even more opportunistic to us in the fourth quarter. And as we move into the next year, we still have some BSA orders that need to go away. And if they do, any strategic acquisition comes our way we'd like to be part of it, whether we actually would be the acquirer or would depend on an awful lot of things, including price. So it's -- I mean, it's something we want to be involved in, but it's really hard to say that in 2019 we're going to have an acquisition.

Chris McGratty -- Keefe, Bruyette & Woods Inc. -- Analyst

Okay. Thanks for that color. Just to clarify a point, in terms of targeted institutions that you'd like to look at, could you just remind us geography, size, balance sheet profile?

E. Philip Wenger -- Chairman and Chief Executive Officer

Yes. So in our current five-state footprint, we operate in 52 counties and so -- and in 15 of the 52 counties, we have market share position as first, second, third, fourth or fifth. That's where we, in those markets is where we generate our growth and our profits. So we'll be looking at institutions within our footprint that give us (inaudible) in counties that we're in but we really don't have much and then also counties that are kind of holds (ph), if you will. And $1 billion to $7 billion I think we've said is our primary target I think as we venture into the acquisition mode. In an ideal world, we like to do a couple (inaudible) but it really depends on the opportunity.

Chris McGratty -- Keefe, Bruyette & Woods Inc. -- Analyst

Great. Thanks a lot for taking the question.

Operator

Our next question comes from the line of Austin Nicholas of Stephens. Your line is now open.

Austin Nicholas -- Stephens -- Analyst

Maybe on the deposit seasonality in the municipal deposits, could you maybe give us a feeling on the magnitude of the inflow and kind of the expectations in general for the outflow there? You may have already addressed that, but if you could get some color there, that would be helpful.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes, this is Mark. Good morning. The -- on an average balance basis, $210 million of our growth this quarter was related to the municipal deposits on an average balance basis. Now, a lot of that money wasn't coming in until the second half of the quarter, so on a spot balance that number is higher. And in prior years, we've seen that number be anywhere in the kind of $400 million to $600 million, $700 million range in terms of the spot balance. But, again, some that even comes in during the third quarter and then immediately starts to bleed off a little bit. And the time period that we start to see the low watermark of our muni business is about six months from now.

Austin Nicholas -- Stephens -- Analyst

Got it. Thanks, Mark. That's real helpful. And then maybe just on the core, the core NIM improvement, obviously, up very nicely. Was there any, outside of normal movement in any kind of loan fees or anything that was affecting yields or was it pretty just across-the-board lifting of all the boats?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

No. It was pretty much across the board. There was nothing unusual in terms of non-accrual -- interest or loan fees or anything like that -- loan prepayments or anything like that that really juiced (ph) margin in any material way from prior quarters. So I would say this is just fundamental asset-sensitive balance sheet that benefited from the 0.5 bp rate increase.

Austin Nicholas -- Stephens -- Analyst

Got it. That's helpful. And then maybe just one last one on CECL. I don't know if you have any commentary there, but any thoughts on if you are able to disclose it kind of what the impact could be and could you see some loan areas see reserve releases and some see reserve builds? Any thoughts there on CECL that you could share with us?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes, sure. We are heavily active and involved and we have a team of both internal and external parties working diligently. Right now, we are in the midst of model development and are on track to do some parallel testing throughout 2019 to be in position for the first quarter of '20 implementation. But we are not disclosing at this point -- I mean, we're not in a position, nor are we ready to disclose any kind of financial impact and will assess whether it makes sense to disclose on an early basis any financial impact as we continue with the implementation.

Austin Nicholas -- Stephens -- Analyst

Understood. Thanks for the questions. Appreciate it.

Operator

Our next question comes from the line of Russell Gunther of D.A. Davidson. Your line is now open.

Russell Gunther -- D.A. Davidson & Co -- Analyst

Just a follow-up on the provisioning line question there. Good result this quarter. Modest loss content, and (inaudible) delinquencies moving in the right direction. And then picked up on the $40 million of criticized, classified that paid down. Do you guys -- as we await CECL implementation and considering the sort of low-to-mid-single-digit loan growth guide you guys have put out there, where do you think the provision could trend from third quarter's results?

E. Philip Wenger -- Chairman and Chief Executive Officer

Well, third quarter's results were really good. So -- I can't sit here and tell we expect that level every quarter. But at same time our trends continue to be positive.

Russell Gunther -- D.A. Davidson & Co -- Analyst

Okay. Thanks. And then outside of the ag, which you flagged earlier that you've got your hang on, are there any earlier pockets of weakness you're seeing, be it an asset class or a geography in your footprint?

E. Philip Wenger -- Chairman and Chief Executive Officer

We have not seen any others, no.

Russell Gunther -- D.A. Davidson & Co -- Analyst

Okay. And then circling back to the M&A discussion. Earlier, you guys mentioned non-bank M&A is something you would consider as well. Could you kind of flesh out what would be appealing to you?

E. Philip Wenger -- Chairman and Chief Executive Officer

I think most appealing would be investment management trust.

Russell Gunther -- D.A. Davidson & Co -- Analyst

Okay. And then last one for me is on the loan growth side. You spoke about the single-family strength earlier. Consumer has also been a nice driver for you guys. Maybe just a little commentary on what's driving that strength and your thoughts on sustainability going forward (ph)?

E. Philip Wenger -- Chairman and Chief Executive Officer

So -- you know, most of that is in the indirect lending with auto. And just to give you some background, we were a pretty active indirect lender for years when the CFPB started to really look closely at the spreads that auto dealers could set through the dealer reserve. The markups used to vary. They encouraged folks to go to a flat markup, which we did. And really people like ourselves, but did that -- stopped being a player in the indirect market. In the last 18 months, I think they've backed away from that. So we have gone back to vary markup -- the dealer being able to set that markup within a range, but that's put us back in the business.

Russell Gunther -- D.A. Davidson & Co -- Analyst

Okay. That's very helpful color. Thanks for taking my questions, guys.

Operator

Our next question comes from the line of Joe Gladue of Merion Capital Group. Your line is now open.

Joe Gladue -- Merion Capital Group -- Analyst

I was interrupted briefly, so pardon me if you touched on this. But I guess in the second quarter call you talked about the competitive pricing and structures that you guys -- offered by competitors that you were reluctant to meet and that being a cause of slowing down loan growth a little bit. Just wondering if those competitive pressures have changed at all and what the competitive environment is.

E. Philip Wenger -- Chairman and Chief Executive Officer

I would say that they've changed some and they've become more competitive. So I just heard of a deal, commercial real estate deal, which we're not going to get, might be a payoff, but they've been offered 30-year amortization, 30-year rate -- I'm sorry, 10-year rate, but 15 years' interest only, non-recourse. We pretty much do not have the (inaudible).

Joe Gladue -- Merion Capital Group -- Analyst

All right. That is really all I had.

Operator

Our next question comes from the line of Matthew Breese of Piper Jaffray. Your line is now open.

Matthew Breese -- Piper Jaffray & Co -- Analyst

I just wanted to clarify on the M&A commentary. You do have to be out of all the BSA/AML orders in order to engage, correct?

E. Philip Wenger -- Chairman and Chief Executive Officer

Yes, we do.

Matthew Breese -- Piper Jaffray & Co -- Analyst

And so reading the cue (inaudible) leaves you feel like you're comfortable by year-end '19, that you will be in fact in a position to be out of the orders and able to engage in M&A.

E. Philip Wenger -- Chairman and Chief Executive Officer

We are optimistic that we are progressing to getting the orders released.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Understood. Okay. And then on the expense commentary, you noted there were opportunities to gain efficiencies. And one area you said was in fact from the charter consolidation and exiting the orders. That sounds a little bit different than prior comments, and I was just hoping you could go into that a little bit and let us know where those opportunities are and to what extent they exist.

E. Philip Wenger -- Chairman and Chief Executive Officer

So let me clarify. The expense level prior to the consolidations happening compared to the expense level after they occur, we should have a reduction but we don't think that it's going to be significant. But while we're going through them, including this year, we are incurring expenses. So as we move forward, those will be going away. So in the third quarter --

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

In the third quarter, Matt, we had about (ph) $1.8 million of charter consolidation costs. We would expect that number, and maybe even a few hundred thousand more than that, to actually be in our fourth quarter numbers because (inaudible) planning that occurred in the third quarter, the actual conversion of our two subsidiary banks has happened this past weekend, so then you have a lot of costs incurred actually in October related to those conversions as well. But as we push through and ultimately are able to take our four remaining banks and consolidate them down to one, we would anticipate in the back half of 2019 that some of this expense lift that we've seen with consultancy cost and one-time costs over an extended number of quarters will go.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Okay. So the way to think about it is 4Q will have roughly $2 million to $2.1 million charter consolidation costs. You may have one or two more of those in the first half of '19 and then it kind of fades away toward the back half of the year, right?

E. Philip Wenger -- Chairman and Chief Executive Officer

That's right.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

That's right.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Okay. Understood. Another question I had was you do have a presence in New Jersey. The tax laws there have changed. And so I was wondering what the impact might be for 2019 and beyond with your early estimates.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes. We think that for the fourth quarter, we think that our effective tax rate is going to drift to the higher end of our 11% to 14% range. And one of the reasons for that, as you pointed out, we have -- it varies obviously from quarter to quarter, how much of our pre-tax earnings are generated from New Jersey, but it falls in the range of 15% to 20%. So you have a 2.5% increase as you're aware of from 9% to 11.5% for your corporate business tax, and with a 15% to 20% of your earnings generated from that state, that translates to about roughly 0.5 percentage point increase in your effective tax rate related to New Jersey. And I'm sure you're aware as well, the way that rule is going to work, it's two years at the higher rate, then it steps down 1% for two years and then four years forward, we'd be back to a 9% range.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Okay. But for the fourth quarter of this year until the '19, you're looking for 50 basis points or half a point higher from --

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes, that's the impact of New Jersey. Now our ultimate effective tax rate is a variety of factors, obviously including what our level of pre-tax earnings are. We have other tax planning vehicles, tax credit investments and otherwise, which impact that ratio as well. But for the discrete effect of New Jersey, it's in the ballpark of 0.5 percentage point increase to our effective tax rate.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Okay. My other question, it was tied to capital. Obviously, with slow growth, good profitability it will be building, will there be any sort of change or increase in the size of the securities portfolio? Is that one lever you could pull?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

We view our securities portfolio principally for liquidity purposes. It's averaged around 13% of our assets, give or take, and our expectation for the future is the -- it would grow commensurate with overall balance sheet and earning asset growth.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Okay, understood. My last one, it just -- for the fourth quarter, the margin guides you're at 3 basis points higher. Could you just give us some idea of the dynamics that would have to take place for you to get the 3 versus basically remain flat?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes, I mean, the principal variable there would be deposit betas. If you look in the most recent quarter, our interest-bearing deposit cost was up 12 basis points on a 25 basis point rate move, so that's about 48% beta. I think depending on where we need to move that IBD cost in the fourth quarter would be one factor that would play into that. And just to be clear to our margin guidance in the fourth quarter is 0 to 3, with the 0 being if our deposit betas end up being higher than we expect and the 3 being if they're on the low end of what we expect.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Do you include a December rate hike in that?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

We do assume one. I think right now the market consensus is somewhere between 75% and 80%, but the effect of that -- I mean, it's about a 40 day time frame after a rate increase until it really cycles through all of our lending products. So you would really feel the impact of that as much as obviously getting a full quarter effect from the one that's (inaudible).

Matthew Breese -- Piper Jaffray & Co -- Analyst

Understood. Okay. That's all I had. Thanks for taking my questions.

Operator

(Operator Instructions) Our next question comes from the line of Matthew Keating of Barclays. Your line is now open.

Matthew Keating -- Barclays -- Analyst

Phil, it's been a pretty long time since Fulton's acquisition. I think it was back in 2006. So maybe you could discuss -- it seems like there is a greater institutional imperative to look at M&A, and I'm just curious about why you feel that way. And then also if you could add some of the, I guess, tangible book value dilution and tangible book earnback (inaudible) to reassessing the parameters that you'll have to look at in any potential transactions.

E. Philip Wenger -- Chairman and Chief Executive Officer

I don't know that there is any greater imperative for us to acquire banks, but as there are strategic opportunities within our footprint, we do believe it's a way for us to grow our earnings and our assets and grow the value of the Company for our investors. And I'll let Mark to answer the rest.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes. In terms of earnback, I mean, instead of giving you a discrete number, I think a lot of that's going to depend on the size of the acquisition because people can talk about a tangible book value earnback and it could be a really, really short tangible book value earnback but it will be a deal that's got a low IRR, but just be really small relative to the overall organization. So I think we care most about deploying our capital in an effective and prudent manner for our shareholders, whether it's a whole bank acquisition or whether it's maybe an ancillary financial services deal like an investment management deal that (inaudible) interested, we mentioned we also have interest in. Those are going to have different IRR targets attached to them because there's different levels of risk and we would make sure that our deals (inaudible) from a risk perspective as well as we are mindful of what the market expectations are for TBV earnbacks and we'd make sure that those numbers make sense as well.

Matthew Keating -- Barclays -- Analyst

Okay. That's very helpful. And I know you talked earlier about some of the longer-term potential for additional efficiency gains, but we think (inaudible) you talked about either some additional costs in Q4 for the charter consolidation. Do you expect sort of this core expense run rate of $134 million last quarter move up meaningfully in the fourth? And then, I guess you've given sort of low-single-digit full year expense guidance, but anything else we should be thinking about on a sequential basis from the expense standpoint beyond those additional non-recurring charter consolidation costs?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

No. We were -- as you pointed out, Matt, we were about 5.26 (ph) last year in total OpEx and we have given guidance of low single digits. If you put 3% to -- roughly 3% or so growth on that, it takes you up to where -- you can run the math. You could be anywhere under 1.37 (ph). I think it's still probably be a kind of low-single-digit growth for the year. I don't think there's anything else unusual that you need to be thinking about from a sequential standpoint.

Matthew Keating -- Barclays -- Analyst

Okay, great. And, Mark, did I hear correctly that in Q4 your total effective tax rate would run toward the high end of the full year guidance or somewhere closer to that 14% level? Because if you look, I guess, last quarter 11.5%, 30 basis points from New Jersey, but I guess there are some moving parts, right, and so is that just a conservative viewpoint or do you really think that you could be close to 14% in Q4?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

No. We think it will move up a little bit in the fourth quarter because also in the third quarter, there were a couple of discrete items, specifically when companies file their tax returns here in the quarter, you do true up to some estimates that you make at the end of last year, and we have some true-ups relating to the tax charge that we took for the writedown of our DTA (ph) in the fourth quarter of last year. So that's a discrete item. So when you pull out those discrete items for this quarter and then also add any impact of New Jersey, we think that you'd be closer to the higher end of that range of guidance, which is why that's where we think we're going to be in the fourth quarter.

Matthew Keating -- Barclays -- Analyst

Okay. And just lastly on capital return, I understand (inaudible) might be a potential at some point if stars align for M&A at the organization, but doesn't it make sense to deploy some of your excess capital today in share buybacks and increase your total payout ratio given the growth profile? And to the extent that the right deal comes about I think you potentially -- obviously, if the deal is right you could raise additional capital if you needed to. And maybe you could just talk about the Bank's thought process here as it does seem like given the Bank's risk profile, there is a fair amount of excess capital today and likely to be generated going forward.

E. Philip Wenger -- Chairman and Chief Executive Officer

Our Board considers all of those things every time we meet, and we'll continue to consider them.

Operator

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the call back to Phil Wenger, CEO, for any closing remarks.

E. Philip Wenger -- Chairman and Chief Executive Officer

Thank you, all, for joining us today and we hope you'll be able to be with us when we discuss fourth quarter results in January.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Have a great day.

Duration: 47 minutes

Call participants:

Jason Weber -- Investor Relations

E. Philip Wenger -- Chairman and Chief Executive Officer

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Frank Schiraldi -- Sandler O'Neill & Partners LP -- Analyst

Chris McGratty -- Keefe, Bruyette & Woods Inc. -- Analyst

Austin Nicholas -- Stephens -- Analyst

Russell Gunther -- D.A. Davidson & Co -- Analyst

Joe Gladue -- Merion Capital Group -- Analyst

Matthew Breese -- Piper Jaffray & Co -- Analyst

Matthew Keating -- Barclays -- Analyst

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