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Fulton Financial Corp  (NASDAQ:FULT)
Q4 2018 Earnings Conference Call
Jan. 16, 2019, 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 Fourth Quarter Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Jason Weber. Sir, you may be begin.

Jason Weber -- Senior Vice President and Director of Corporate Development

Thanks, Sydney. Good morning. Thanks for joining us for the Fulton Financial's conference call and webcast to discuss our earnings for 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 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 two 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 in slides 13, 14 and 15 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.

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

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 financial performance and discusses our 2019 outlook. When he concludes, we will open the phone line for questions.

Overall, it was another solid year for our company as we hit a record level of net income. Our net income surpassed $200 million for the first time in our history. Our financial results in 2018 reflected continued progress in executing our growth strategies and the benefit of multiple interest rate increases by the Federal Reserve.

Our average loan portfolio increased 3.8% year-over-year, which was in line with our 2018 outlook and was driven by growth in most of our loan portfolios and spread across our footprint.

Average commercial loan growth lag to average consumer and mortgage loan growth year-over-year. Our commercial loan growth was impacted by higher prepayments, lower line utilization and slowing originations as the learning environment remained extremely competitive throughout 2018. However, loan growth accelerated toward the end of the fourth quarter and, as a result, period end loan balances increased $241 million linked quarter.

We continue to grow in Philadelphia and Baltimore. Both markets have a team of commercial and consumer lenders serving the markets to help us take advantage of what we view as tremendous long-term growth opportunities. In Philadelphia, we opened a mortgage loan production office in May of 2018 and have plans to open another LPO in Camden, New Jersey, later this year. We opened a full service branch in the beginning of January and have two more targeted to open by the end of the first quarter.

In Baltimore, we opened a mortgage loan production office in January and have plans to open full service branch offices in 2019 and beyond.

Moving to credit. Overall asset quality continues to be relatively stable, despite an uptick in non-performing loans, provision for credit losses and net charge-offs. We had a large commercial relationship moved to non-performing during the quarter. Excluding this relationship, non-performing loans would have declined linked quarter. The provision for credit losses for the fourth quarter was driven primarily by this one relationship and to a lesser extent by growth in the loan portfolio. The increase in net charge-offs was related to a handful of credits in unrelated industries.

As we've mentioned in the past, 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. We believe the uptick in these credit metrics this quarter is not suggested by a broader portfolio or macro trends.

Turning to fees. Excluding a litigation settlement and security gains in 2017, non-interest income increased by less than 1% year-over-year and was consistent with our revised 2018 outlook that we provided in the second quarter of 2018.

Our commercial loan interest rate swap and SBA businesses were the biggest drivers of slowing growth in non-interest income. Our commercial loan interest rate swap business tends to track with commercial originations, which were down year-over-year. In addition, evolving consumer behaviors and preferences continue to put pressure on non-interest income, particularly overdraft fees.

On a positive note, our investment management and trust services income grew at a nice pace year-over-year, due to both overall market performance and our continued asset gathering focus. Brokerage revenue grew 8% year-over-year and continues to be one of our fastest growing segments in the business.

Recently, we had the opportunity to broaden our reach to serve additional clients in Central Pennsylvania by purchasing a wealth management business located in Altoona, Pennsylvania, adding approximately $250 million of assets under management and administration to our brokerage platform. We continue to work at organic and inorganic opportunities to grow our investment management and trust business.

We saw notable increases in debit and credit card income, also merchant fees, which reflected continued customer growth and usage. Non-interest expenses increased 3.9% year-over-year, it was slightly higher than our 2018 outlook. Excluding amortization of a tax credit investment in the fourth quarter of 2018, our non-interest expenses increased 3% year-over-year, which was in line with our 2018 outlook. Our efficiency ratio improved year-over-year. The efficiency ratio for 2018 was 63.8%, within our goal of 60% to 65%, and it reached its lowest level since 2013.

Expense management is a top priority and we continually look for ways to make our organization more efficient, while continuing to invest in our company to support a larger organization that can benefit from economies of scale. Opportunities exist to become more efficient as we continue to optimize our delivery channels, upgrade our origination and servicing platforms, consolidate our bank charters and access our BSA/AML orders.

Since 2012, we've consolidated 33 branches or approximately 12% of our branch network and we have plans to consolidate eight more branches by the end of the first quarter. We incurred approximately $930,000 of expenses in the fourth quarter related to these planned branch consolidations. We believe there will be more opportunities to optimize our branch network over time, as we continue to react to changing customer preferences and behaviors.

Strategically, the deployment of capital for the enhancement of long term shareholder value remains one of our highest priorities. In 2018, we increased our quarterly common dividend by $0.01 to $0.12, paid a $0.04 special dividend in the fourth quarter. To-date, we've repurchased approximately $100 million of common stock. In all, we distributed nearly 90% of our net income to shareholders in 2018. We have approximately $5 million left in our current share repurchase program, which is authorized through December 31, 2019.

On the corporate front, we had several milestones during the year. First, as you saw in our 8-K filing last night, I'm happy to announce that the BSA/AML consent orders issued to our subsidiary bank at Maryland were terminated. This follows the terminations in 2017 and 2018 of the consent orders issued to four of our other subsidiary banks. With respect to the remaining BSA/AML consent order, we are confident that we are progressing toward achieving a similar resolution. Once that order is terminated, we can fully pursue our strategic priority of consolidating our subsidiary banks into our flagship bank, Fulton Bank.

Second, toward that end, in October of last year, we consolidated our subsidiary banks FNB Bank and Swineford National Bank into our largest banking subsidiary, Fulton Bank. That consolidation went well and we are finalizing plans for the consolidation of the remaining subsidiary banks into Fulton Bank.

And, now, I'd like to turn the call over to Mark to discuss our financial results in more detail. Mark?

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

Thanks, Phil, and good morning to everyone on the call. And unless I note otherwise, the quarterly comparisons I will discuss are with the third quarter 2018 and annual comparisons are with 2017.

Starting on slide six, earnings per diluted share this quarter were $0.33, or net income of $58.1 million. Fourth quarter earnings in comparison to the third quarter reflect an increase in net interest income and a decrease in income taxes. However, this positive comparison was more than offset by the impact of a higher provision for credit losses, lower non-interest income and higher non-interest expense, and we'll step through each of these components in a moment.

Moving to slide seven, our net interest income in the fourth quarter improved by $2.8 million, or 2% linked quarter, driven by a 2 basis point expansion in our net interest margin to 3.44%, and a $230 million or 1% increase in our average interest earning assets. In the fourth quarter, our interest earning asset yields grew 9 basis points, principally driven by 10 basis point increase in average loan yields.

On the funding side, deposit cost increased 9 basis points, but short and long term borrowing costs remained fairly stable. Our overall cost of funds increased 8 basis points, which was slightly lower than the yield increase on average interest earning assets. The 25 basis point Fed Funds rate increases in each quarter of 2018 coupled with the increases we've seen in our interest bearing deposit rates have resulted in a year-to-date deposit beta of approximately 28%. This is slightly higher than the 25% year-to-date deposit beta through September 30th, but it's still in line with our previous expectations. We anticipate that our net interest margin in the first quarter of 2019 should follow the macro themes of the last few quarters and that we'll benefit from the December Fed Funds rate increase, but we also expect to see rising deposit betas.

Our balance sheet remains asset sensitive as 43% or approximately $6.9 million -- $6.9 billion of our own portfolio is variable, 35% is adjustable and 22% is fixed rate. Of our loans that are either variable or adjustable, the two most relevant indices are prime and one-month LIBOR, which account for 33% and 30% of our total loan portfolio, respectively. The 2 basis point increase in our net interest margin from last quarter was within the range we provided in our updated outlook during the third quarter of 2018.

Average loans increased linked quarter by $103 million, or 0.7%, while ending loans increased at a faster rate, $241 million linked quarter, or 1.5%. Average deposits grew $446 million or 2.8% linked quarter. This increase was seen principally in money market accounts for both consumer and commercial customers.

For the year, our net interest income increased $55 million or 9.6% from 2017, driven by a 3.4% increase in average interest earning assets and a 12 basis point increase in our net interest margin. Yields on earning assets increased 29 basis points, while our costs of funds increased at a lower rate of 18 basis points. The increase in interest earning asset yields was realized principally in loans, we saw a 31 basis point increase. The increase in cost of funds was driven primarily by our deposits.

Turning to credit on slide eight. In 2018, the provision for credit losses increased $23.6 million from 2017. This increase included a $36.8 million provision for credit losses in the second quarter of 2018 related to a customer fraud. Excluding this, our provision for credit losses would have decreased $13.2 million from 2017, reflecting relatively stable credit conditions, and this year-over-year decrease is inclusive of our higher provision for credit losses that we saw in the fourth quarter of this year.

For the fourth quarter, our provision for credit losses did increase at a higher rate than previous periods to $8.2 million, primarily driven by one commercial relationship that has shown signs of weakness and was placed on non-accrual status, despite remaining current in its payments as of year-end.

Net charge-offs for the year, as a percent of average loans, were 34 basis points compared to 12 basis points in 2017. Adjusting for a $33.9 million charge-off related to the customer fraud, net charge-offs for the year would have been 12 basis points, unchanged from 2017. For the quarter, net charge-offs on an annualized basis were 17 basis points as compared to 8 basis points in the third quarter of 2018 with the increase attributable to a handful of credits, and I believe it was 5, in unrelated industries.

Non-performing loans at December 31, 2018, increased $4.9 million or 3.7% in comparison to year-end 2017. Non-performing loans as a percentage of the total loans increased slightly to 86 basis points as compared to 85 basis points at the end of last year. In comparison to the third quarter, non-performing loans increased $19.6 million attributable to the aforementioned commercial relationship. Excluding this one relationship, remaining of our non-performing loans declined approximately $15 million linked quarter.

The allowance for credit losses to loans at December 31, 2018, was 1.05%, a 7 basis point decrease from 2017 and unchanged from the third quarter of 2018. The allowance for credit losses coverage ratio, as a percent of non-performing loans, decreased to 121% at year-end 2018 as compared to 131% in year-end 2017 and 140% at the end of the third quarter.

Moving to slide nine. Non-interest income, excluding securities gains, decreased $1.5 million or 3% in comparison to the third quarter of 2018. This decrease resulted mainly from lower commercial loan interest rate swap fees and lower merchant fee income. For the year, non-interest income, excluding securities gains, decreased $3.4 million from 2017, in part because 2017 non-interest income included a $5.1 million gain from a favorable settlement of litigation matter.

During 2018, our investment management and trust services income grew $2.9 million or 6%. Merchant fee revenues increased $1.6 million or 9%, and credit card income increased approximately $1 million or 8%. These increases were partially offset by lower commercial loan interest rate swap fees, SBA gains and overdraft fees. Mortgage banking income was down $900,000 year-over-year, mainly due to a gain recognized in 2017 upon a reversal of a mortgage servicing rights allowance of $1.3 million. Mortgage sale gains were flat as the 14% increase in volumes during 2018 was offset by lower spreads on gain on sale.

Moving to slide 10. Our non-interest expenses increased $5.3 million in the fourth quarter. Included in this, our expenses were inflated by $4.9 million of tax credit investment amortization for a certain investment which generated a corresponding Income tax benefit during the quarter. Adjusting for this item, our operating expenses increased only $372,000 linked quarter. The other expense category increased $2.4 million linked quarter, due to costs associated with brands consolidation expected to occur in the first quarter of 2019, which Phil mentioned earlier, as well as higher other real estate owned expenses. This increase was largely offset by our $1 million decrease in salary and benefits expenses, driven by lower incentive compensation expense.

For the year, non-interest expense increased $20.5 million, or 3.9%. Excluding the aforementioned tax credit investment amortization, non-interest expenses were up $15.6 million, or 3%. Salaries and benefits expense was most of this year-over-year increase, increasing by $13.1 million. We also absorbed $3.6 million of charter consolidation costs during the year, as we continue to simplify our franchise and unify our brand.

Income tax expense decreased $3 million linked quarter due to the tax credits associated with the aforementioned tax credit investment and lower pre-tax income. Absent this tax credit realization in the fourth quarter, our effective tax rate would have been 14.6%, just slightly above our guidance range. For the year, income tax expense decreased $38.1 million, mainly due to our Federal Tax Reform, which lowered the statutory federal income tax rate.

Slide 11 displays our profitability and capital levels over the past four years. We continue to see increases in both our returns on average assets and returns on tangible equity over the periods presented. As Phil mentioned, to-date, we have repurchased approximately $100 million of our common stock completing the existing $50 million repurchase plan which had $31.5 million remaining at the beginning of the quarter. We have also repurchased $70 million under our new $75 million plan, which was approved during the fourth quarter. A total of 6.4 million shares have been repurchased at an average cost of approximately $15.88 per share. As a result of these share repurchases, our tangible common equity ratio decreased from 8.83% at September to 8.52% at year-end. We remain well capitalized with significant capital cushions to both regulatory guidelines and on more stringent internal thresholds.

Lastly, we would like to provide our initial guidance for 2019, which is shown on page 12. We are expecting average annual loan and deposit growth rates to be in the low- to mid-single digit range. We expect our net interest income to increase year-over-year in a mid- to high-single digit range. We expect our net interest margin to grow 0 to 3 basis points per quarter, during 2019. Our margin is influenced by number of factors, including our loan and deposit mix, loan and deposit betas, and overall interest rate levels. We expect our non-interest income to increase year-over-year in a low- to mid-single digit range. Excluding all remaining charter consolidation costs, we expect our non-interest expense to increase year-over-year in a low-single digit range.

Our provision for credit losses will reflect changes in the asset quality measures, as well as the pace of long growth and economic factors among other factors. Given this inherent volatility, we would expect our provision for credit losses in 2019 to be between $3 million and $8 million per quarter. We expect our effective tax rate to be between 13% and 16%. Our capital level should remain consistent with December 31, 2018, and our capital will be utilized to support growth and to provide appropriate returns to our shareholders.

And, with that, I'll now turn the call over to the operator for questions. Sydney, go ahead.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Austin Nicholas from Stephens Inc. You may proceed with your question.

Austin Nicholas -- Stephens Inc. -- Analyst

Hey, guys.

Philip Wenger -- Chairman and Chief Executive Officer

Good morning, Austin.

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

Good morning, Austin.

Austin Nicholas -- Stephens Inc. -- Analyst

Good morning, guys. Could you maybe talk about what kind of assumptions for Fed Rate hike moves are embedded in that 0 to 3 basis points a quarter guide? And, maybe, what drives you to the high-end versus the low-end there?

Philip Wenger -- Chairman and Chief Executive Officer

Yeah, sure. Good morning, Austin. It's -- in our assumptions, we assume an increase in June and we assume one in December of 2019. The one in December of 2019, obviously, has very little impact on 2019. The one in June -- we actually ran our forecast internally with and without it. And if we assume 0 rate increases, it would impact our internal forecast by about 2 basis points. So said another way, whether we see these rate increases or not, we think we're still comfortable with the guidance of 0 to 3 basis points per quarter.

Austin Nicholas -- Stephens Inc. -- Analyst

Got it. Okay. That's very helpful. And then maybe just on the expense guidance, I guess, does that include the -- I guess the cost saves from the eight branches that are expected to close this quarter? And then, additionally, is that excluding the tax credit amortization expense, or is that including that number?

Philip Wenger -- Chairman and Chief Executive Officer

No, it includes the tax credit amortization. The tax credits that occurred this quarter, a lot of our tax credits are either low income housing tax credits or they're new markets tax credits, which are amortized when you get that benefit and the amortization is over multiple years. The credit we realized in the fourth quarter is an energy credit, where it's a one time credit and a one time expense. So, going forward, what you should expect to see next year as us getting back a little bit below even what the current run rate is, expect about $1.3 million to $1.4 million per quarter in 2019 in that tax credit amortization. That number is included in that expense guidance that we give.

And also included an added expense guidance is, we generated this year between the third and the fourth quarter about $1.3 million of cost related to a branch closer that happened. Well, we closed two in the fourth quarter, eight coming here in the first quarter. There's going to be some additional costs on that in next year, which are in our expense guidance, but then there's also going to be savings related to that. And the earn back on those branch closures in terms of the one-time cost versus the savings less than one year, that's about 10 months for the earn back.

Austin Nicholas -- Stephens Inc. -- Analyst

Got it. Okay. And then maybe just one last one. I think that you spoke about the, kind of, the provisioning for that specific credit this quarter and I believe it was in the agribusiness, kind of vertical. I guess, could you maybe speak about that overall -- the overall agriculture portfolio and how you are thinking it? I think in past quarters, it's been brought up as stressed, but that delinquencies have more or less stabilized to kind of declined. And if I look at your C&I or your commercial delinquencies, they continue to come down. So maybe any commentary on your comfort of that -- on that portfolio outside of the kind of downgrade that you saw this quarter?

Philip Wenger -- Chairman and Chief Executive Officer

Yeah. So, we think it's still stabilizing. You exclude discredit and delinquencies in our ag portfolio actually, would have been down for the quarter. And so, I think we continue to watch it closely, but are pretty comfortable with it.

Austin Nicholas -- Stephens Inc. -- Analyst

Okay. Great. Thanks for taking my questions.

Operator

Thank you. Our following question comes from Chris McGratty with KBW. Your line is now open.

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

Hey, good morning.

Philip Wenger -- Chairman and Chief Executive Officer

Hi, Chris.

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

Question on the buyback. The slide deck suggested capital levels at the levels through the next year. You've got a sub of about $5 million left. Is it fair to assume that you're not looking to come back to the buyback given where stocks are trading? Or could you be fairly aggressive in the fourth quarter. I'm just trying to get a sense of whether the expectation is that, you'll go back to the Board and ask for more, or is this kind of it for now?

Philip Wenger -- Chairman and Chief Executive Officer

So, Chris, we talk with our Board every quarter about the uses of capital, and you know it's possible that we could put another plan in place as we go through the year. I think a lot will depend on our growth than other opportunities that we might see.

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

And then on the kind of alternative uses, so you've got another -- one of that might use lifted, can you speak to kind of desire to do a deal in 2019? Your stock has held up on a relative basis a little bit better than peers, and just kind of interested if deals would be kind of climbing the ranks of priority for '19?

Philip Wenger -- Chairman and Chief Executive Officer

Well, we still have orders against the holding company in our subsidiary bank Lafayette Ambassador. So until they go away, our deals still aren't possible. But if the right strategic deal came along after those were lifted and it would work from a financial standpoint, we would have interest.

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

Okay, great. And then maybe a last one, if I could, on credit. Your understanding in the second quarter was kind of an idiosyncratic event and this quarter you had the inflow and I'm wondering why -- it seems like you've set a reasonably high bar for yourself for 2019 on the provision. And just given the concerns that are kind of permeating in the market from a credit economy, wondering wondering why -- it seems to be a little bit of an aggressive guide on the provision. Maybe you could speak to your confidence in what you're seeing that we may not be able to see from the outside? Thanks.

Philip Wenger -- Chairman and Chief Executive Officer

So, overall, our -- we do not see softening in our overall portfolio. And this past quarter even with that one large credit, we were -- would have been very close to this guidance, so we have confidence that the range that we gave should hold up for now anyway.

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

Okay. Thanks a lot. I appreciate it.

Operator

Thank you. Our next question comes from Joe Gladue from Merion Capital Group. Your line is open.

Joe Gladue -- Merion Capital Group -- Analyst

Good morning.

Philip Wenger -- Chairman and Chief Executive Officer

Hi, Joe.

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

Hi, Joe.

Joe Gladue -- Merion Capital Group -- Analyst

Let me just follow-up on one of the earlier questions on the interest rate expectations. You talked about the -- what you're expecting toward rate hikes, but I was just wondering what your thoughts are on the slope of the yield curve and how that might be affecting your investment portfolio strategy and such?

Philip Wenger -- Chairman and Chief Executive Officer

Yeah. I wouldn't say it's having a lot of impact on our investment portfolio strategy. We have -- I mean, our investment portfolio, July's cash flow is around $23 million to $25 million a month. And -- I mean, we continue -- our investment portfolio is not used for earnings. I mean, our investment portfolio is there for liquidity. And so with the size of that portfolio, I would say that we're going to continue to buy relatively conservative mortgage backs and the CMOs and occasional municipal investments as we have in the past. And -- but we're also have paid our -- a pretty wide inflection point there, where we see the yield on investments sort of rolling off versus the investments that we are buying on. I mean, there is obviously a significant yield pickup on that.

Joe Gladue -- Merion Capital Group -- Analyst

Okay. And just wondering, I guess, you did mention earlier in the prepared remarks about the higher prepayments. Just wondering if you could quantify that a little bit? What you saw in the fourth quarter that you can (technical difficulty)

Philip Wenger -- Chairman and Chief Executive Officer

Yeah, sure. We had highlighted each of the past in the second quarter and third quarter, where we had emphasized that our prepayments, specifically in our commercial business, we're about a $100 million higher in 2Q and 3Q relative to what we saw on the first quarter of 2018. In the fourth quarter, the numbers were $80 million higher than what we saw in the second and third quarter. So you take from the beginning of the year to now, our prepayments have actually increased in the commercial space by $160 million.

Now, when you then look at our overall growth we had in the fourth quarter, what it means is that, we had a solid, really solid quarter relative to the last three linked quarters for commercial originations, but we continue to see very high prepayment activity. Amortization in just kind of normal loan book, that's relatively flat, that's somewhere in the $650 million per quarter range, but the prepayments have accelerated.

Joe Gladue -- Merion Capital Group -- Analyst

All right. Thank you. That's it for me.

Operator

Thank you. Our following question comes from Russell Gunther with Davidson. Your line is now open.

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

Hey. Good morning, guys.

Philip Wenger -- Chairman and Chief Executive Officer

Hi, Russell.

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

I wanted to follow-up on some of the expense comments earlier. You made the remark that you had about $3.6 million in charter consolidation expense recognized in 2018, do you guys have a sense for what that could look like as you look ahead to 2019?

Philip Wenger -- Chairman and Chief Executive Officer

Yeah, we do, and I believe we even said maybe on the last call. We have said that, we expected to be somewhere in the range of $2 million to $3 million per quarter, and the timing of that is likely going to be heavier in the second and third quarter of next year. We would hope -- by the time we're into the fourth quarter of next year, we should see those charter consolidation costs behind us.

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

Okay. I appreciate that, Mark. And then, you had also said earlier that as part of some of the efficiency initiatives you would see, you mentioned the consolidation of the bank charters and kind of exiting the BSA/AML orders. So how should we think about what would fall to the bottom line between incremental charter consolidation expense and then some of those efficiencies you had talked about earlier?

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

Yeah. We have -- again, we continue to look at a whole bunch of different ways to make ourselves more efficient. Obviously, we just announced between two this quarter and eight in the first quarter, 10 store closings, but we're also announcing that in the selected markets, where we see good market opportunities, growing branches as well. So on a net basis, you'll continue to see us shrink in markets that aren't as desirable or where we have too many branches for changing customer preferences, but you're going to see us open branches in markets where we see a market opportunity.

As we've mentioned in prior calls, much of the consolidation in our company, despite running a separate bank charters, we've had a largely consolidated back office for some time. And while we see, there have been still be some incremental savings as we get further past the charter consolidations and the BSA orders, we're not quantifying that as a hard dollar number at this time. I think -- but certainly the expectation is for a long-term positive operating leverage. And, with that, we are really pleased with where we brought our efficiency ratio to for both this year and for the fourth quarter, but we're certainly aiming for further improvements in that going forward.

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

Okay. I appreciate that. And then a last one for me was just on -- circling back to the agribusiness credit. Is there any kind of further detail you could share on the specific credit? Why that would -- why even with that, you still feel OK with the rest of the portfolio? And then, should the current government shutdown kind of continue to carry on for a longer period of time, does that potentially change your view or add any risk in that portfolio?

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

So I don't think we want to provide any more specifics in regard to the one credit, but overall on the ag portfolio, we spend a lot of time analyzing it, looking for trends, and it's definitely stabilized in any trend that we see in that portfolio is positive as compared to a negative. The shutdown on the government has had impact on -- for us with our SBA lending and it has some impact in the mortgage area, but to-date we have not seen any impact in the agricultural portfolio.

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

Okay. Thank you. So -- I mean, sorry to sneak one more in here, please. On the loan growth outlook, the low- to mid-single digits on average, how do you expect that kind of mix to look? Should we expect sort of similar drivers to 2018? Or as you look out this year, any particular loan buckets showing more strength than others?

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

Well, I think you are going to see the same type of growth rates on the consumer side. And then, I would say on the commercial side, we don't have quite as much confidence and exactly what's going to happen. So, if that strengthens a little, I think we'll be more to the high-end of the guidance and if it doesn't, we'll be more in the middle to the low-end.

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

Okay. Thanks very much, guys.

Operator

Thank you. Our next question comes from Matt Schultheis with Boenning. Your line is now open.

Matthew Schultheis -- Boenning & Scattergood Inc. -- Analyst

Hi. Good morning.

Philip Wenger -- Chairman and Chief Executive Officer

Good morning.

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

Good morning, Matt.

Matthew Schultheis -- Boenning & Scattergood Inc. -- Analyst

So just a quick follow up to Russell's question regarding the government shutdown aside from ag or SBA. Have you seen any customer request, particularly on the retail side, regarding delinquency or any sort of reach out from the mortgage borrowers in Maryland or Virginia to sort of work with them as they are furloughed or any increase in early stage delinquencies?

Philip Wenger -- Chairman and Chief Executive Officer

So, we put a program in place for any of our customers that are impacted by the shutdown. So we do have a -- on our credit card, we've worked with our provider there and we have card specials at 0% for a period of months. We will offer a unsecured line of credit at 0% for up to three months. We're going to allow deferment of payments on consumer loans and we're offering some relief on the overdraft protection. To-date, we have not seen any weakness and have had -- have not had a lot of inquiries into those programs.

Matthew Schultheis -- Boenning & Scattergood Inc. -- Analyst

Okay. Thanks for that. And just -- I know, you don't want to give a lot of detail on this particular credit, so I understand that you may not answer this, but I'm obligated to ask. Was there a -- did this sort of come to the surface through any change to your policies and procedures regarding loan review following the fraud or was this something more borrower specific?

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

No, it was borrower specific and it's been a credit that we've been watching for some time.

Matthew Schultheis -- Boenning & Scattergood Inc. -- Analyst

Okay. Thank you for your time, today.

Operator

Thank you. Our following question comes from Matthew Breese with Piper Jaffray. Your line is now open.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Good morning, everybody.

Philip Wenger -- Chairman and Chief Executive Officer

Good morning.

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

Good morning.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Just to follow that thread there, just curious, what was the total size of the relationship that went sideways this quarter? How long have you had that relationship? And was the nature -- what was the nature of the agribusiness? Was it poultry or dairy or other?

Philip Wenger -- Chairman and Chief Executive Officer

Well, we're not going to get into any more specifics in regards to the credit for confidentiality reasons, but the size of the credit was about $35 million and three or four years is how long we've had that credit, and yeah.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Was is it a syndicated loan or were you the only bank involved?

Philip Wenger -- Chairman and Chief Executive Officer

We're the only bank.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Okay. And I guess the other thing that was surprising or I wanted to learn more about was the increase in non-performing for the leases, the $19 million increase. And I wanted the percent for...

Philip Wenger -- Chairman and Chief Executive Officer

So approximately half of that credit is a C&I loan and the half are leases. So the increase that you see in the leasing category is related to that credit.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Right, right. And following that thread, there was very little or not a huge increase in lease charge-offs. So can you help me just get comfortable with the size of the NPA increase versus the lack of any charge-off there. And so when you looked at the collateral, how did you get comfortable with that outcome?

Philip Wenger -- Chairman and Chief Executive Officer

So, we looked at the collateral in that credit, and we do not -- if the credit would continue to go south, which we're certainly are hopeful that it does. We don't see a large charge-off and we didn't think it was appropriate to charge anything off at this time.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Okay. The last one on this subject was, aside from the government shutdown, there were some other things trade related this year that could impact the ag business, did that play a role here? The farm bill only got passed later in the year than expected that would be one thing I was thinking.

Philip Wenger -- Chairman and Chief Executive Officer

I would say no. It's the easy answer to that question.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Okay. And then changing subject a little bit, the tax rate guide 13% to 16% seems a little high versus what we saw this year, could you just give me an idea of what would end you up on the low-end versus the high-end? Is there anything in there that's tied to some of the New Jersey's state tax laws that you might have a firmer grasp as of now?

Philip Wenger -- Chairman and Chief Executive Officer

Yeah. There's a little bit of that in there, but that's really de minimis. I mean, what it really comes down to is the post-federal tax reform, we've historically been having investors and participants in low income housing tax credit transactions. Post tax reform, we've capped that portfolio a little bit and that's why you've seen the glide path from '16 to '17 to '18 to '19, the amortization absent is kind of one solar credit transaction that happened in the fourth quarter. You have seen the glide path downward in the amortization on these tax credit deals. So, it's really as simple as, Matthew, when you have a constant level of tax preference items, but you expect to see your pre-tax earnings going higher every year, that's going to increase your effective tax rate. So, that's the reason.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Okay. Understood. Can you share with us any of your early findings from CCIL? And then as a follow up to that, I know there's going to be some reliance on quantitative versus qualitative factors to get to your true up reserve. Can you just help us better understand some of the qualitative factors that you'll use and to what extent you'll use them to come to that true up reserve level?

Philip Wenger -- Chairman and Chief Executive Officer

We are -- we and I think the whole industry is not really disclosing a lot yet other than to tell you that we've been working very, very hard on internally on it. We are fully confident of our ability to comply with the new standard in the first quarter of 2020 and that we are, again, working very, very hard on model development and our methodologies throughout 2018. And if we get to a point that we think it's appropriate to disclose, we will certainly make a disclosure at that time, but until then I can just assure you that we are spending a lot of time and effort and energy around this and have a great team work.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Understood. Just last one for me is on the branch closing effort, it sounded like there's more to go there beyond first quarter of 2019. As we think about potential branch closure costs and the expense run rate, is that baked into your guidance?

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

It is. It is, yes. So the two in the fourth quarter and the eight in the first quarter, both the cost savings as well as the one-time costs are baked into the guidance we give.

Matthew Breese -- Piper Jaffray & Co -- Analyst

Understood. That's all I had. Thank you for taking my questions.

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

Yep, thanks.

Operator

Thank you. (Operator Instructions) Our next question comes from Chris McGratty with KBW. Your line is open.

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

Well, thanks for the follow-up. Mark, I just want to make sure I got those expense. I know you got a lot of questions about it. The branch consolidation and the conversion costs, what -- I guess, what an aggregatable should we expect in 2019? I understand that the low single digit growth rate off of 2018, but what's -- can you just talk about for any reason second and third quarter having, but what's the total amount? Because I would imagine some of these are kind of deemed one-time?

Philip Wenger -- Chairman and Chief Executive Officer

Yeah. Total amount, we have $3.6 million of charter consolidation cost in 2018. In 2019, we think that, that number could be you know $4 million to $5 million higher. So you can be somewhere in the $7 million to $9 million range. The majority of that we anticipate would be in the second and third quarters. And then in terms of the branch consolidation costs, we expensed $1.3 million of that in 2018 related to either branches that closed in 2018 or branches to close in 2019, because once you reach that trigger point you start accelerating leasehold amortizations and such.

There's going to be another $1.6 million that we're not carving out, that's just -- that's in our run rate on expenses, $1.6 million in 2019 related to those branch closures, but then we anticipate that the earn back from that, the total, so there is $2.9 million to cost. The annualized savings on those we think should be $3.5 million, so an earn back of about 9 or 10 months.

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

Okay. I appreciate that. And then just in terms of the size, just a follow up on the credit. Can you remind us the size like the internal limits on credits. I mean the $35 million is a little bit higher than I would've thought on a stand-alone basis as opposed to like a club deal, but could you remind us kind of internal limits on single relationship that you have in place?

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

Yeah. Our internal limit is $55 million and we -- I think that's a pretty conservative number.

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

Okay. And so in terms of credits of this size, of $30 million to $40 million, I mean, are we talking a couple of handfuls or is it more than that in terms of just -- some granularity?

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

Couple of handfuls.

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

Okay. All right. Thanks a lot for the color. I appreciate it.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn the call back to the Phil Wenger for closing remarks.

Philip Wenger -- Chairman and Chief Executive Officer

Well, thank you all for joining us today. We hope you'll be able to be with us when we discuss first quarter results in April. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

Duration: 52 minutes

Call participants:

Jason Weber -- Senior Vice President and Director of Corporate Development

Philip Wenger -- Chairman and Chief Executive Officer

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

Austin Nicholas -- Stephens Inc. -- Analyst

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

Joe Gladue -- Merion Capital Group -- Analyst

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

Matthew Schultheis -- Boenning & Scattergood Inc. -- Analyst

Matthew Breese -- Piper Jaffray & Co -- Analyst

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