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Reliant Bancorp, Inc. (RBNC)Â
Q4Â 2018 Earnings Conference Call
Jan. 24, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good morning, ladies and gentlemen and welcome to the Reliant Bancorp's Fourth Quarter 2018 Earnings Conference Call. Hosting today's call is DeVan Ard, Reliant's President and Chief Executive Officer. He is joined by Dan Dellinger, Chief Financial Officer; Louis Holloway, Chief Operating Officer; and Alan Mims, Chief Credit Officer, who will be available during the question-and-answer session. Please note Reliant Bancorp's earnings release and supplemental financial information are available on the Investor Relations page of the Company's website at www.reliantbank.com.
Today's call is being recorded and will be available for replay on Reliant Bancorp's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be opened for questions after the presentation.
During this call, Reliant Bancorp may make statements which constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of Reliant Bancorp to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond Reliant Bancorp's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. Additional factors which could affect the forward-looking statements can be found in Reliant Bancorp's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC.
Reliant Bancorp disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G . A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to be comparable GAAP measures is available on Reliant Bancorp's website again at www.reliantbank.com.
I will now turn the presentation over to DeVan Ard, Reliant Bancorp's President and CEO.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Thanks and good morning everyone. Thanks for joining us on this morning's call to review our results for the fourth quarter and full year 2018. We appreciate your continued interest in our Company. We had a very strong quarter and reported record net income, loans, deposits and assets for our fourth quarter and for the year ended December 31, 2018.
Our fourth quarter net income attributable to common shareholders was up 257% to $4.1 million, and EPS was up 177% to $0.36 per fully diluted share compared to the fourth quarter of last year. Our strong earnings growth was due to the contribution from the Community First merger completed at the beginning of the year, (inaudible) growth in loan volume and earning assets, higher noninterest income and improved asset quality.
A major contributor to our earnings growth in 2018 was consistent growth in loans and a shift and mix toward more profitable variable rate lending. Our loans grew 59.4% from December 2017 to a record $1.2 billion at year-end 2018.
Loan production remained strong in fourth quarter with $104 million in new loans, an increase of 23% over the same quarter last year. This was our 14th consecutive quarter of loan growth and that growth has been focused on building relationships with customers in Middle Tennessee and Chattanooga. We experienced loan growth across our markets including solid contributions from our new offices in Murfreesboro and Chattanooga. We opened our Murfreesboro office late in the third quarter, and our Chattanooga office opened midway through the fourth quarter. We're also starting 2019 with a strong and diverse pipeline for new loans and we expect sustained growth in the first quarter.
As I reported in last quarter, we continue to experience strong competition for loans across our markets. Our loan portfolio is built on solid underwriting and risk management practices. And we remain focused on lending to quality home builders, real estate developers, and small to midsize business customers.
At the end of the fourth quarter, we had branches in seven counties with Nashville-Davidson county at the core. (inaudible) well positioned to capture our share with the robust growth in our markets without reducing our focus on quality credits. Dan will provide more details about our superior credit metrics that are critical part of building our existing loan portfolio and a significant factor in maintaining our base for future earnings.
The economy in the greater Nashville area remained strong going into the new year. We have one of the lowest unemployment rates in the nation and our local market is growing by about a 100 net new persons per day. In recent months, Nashville was named as the new Operations Center of Excellence for Amazon that will add about (ph) 5,000 high-paying jobs and another 600 quality jobs are projected to be added by E&Y in Nashville.
E&Y will add about 200 technology-focused jobs and another 400 tax-related positions to their existing Nashville office that employs about 300. In January, Volkswagen AG announced that Chattanooga will be home to the company's first electric vehicle manufacturing facility in North America with an estimated investment of $800 million and the creation of 1,000 jobs. General Motors also announced that their plant in Middle Tennessee in the Spring Hill area will manufacture the Cadillac XT6, the company's first electric SUV, adding approximately 200 jobs and $300 million investment.
GM plant is located in Murray County, a market we acquired with Community First, and is a major contributor to Williamson County as well. We believe this additional growth in high quality, high paying jobs in our primary markets will drive increased demand for loans in the commercial and residential sectors.
As we mentioned last quarter, we opened our first branch in Rutherford County in city of Murfreesboro. Rutherford County has a deposit base of $4.6 billion and it's home to a strong and diverse economy that includes one of the state's largest universities with about 22,000 students and Nissan's automotive assembly plant. We are very pleased with the community's positive response to our new branch in Murfreesboro and believe it will be a solid contributor to our loan and deposit growth in 2019.
Our new branch in Chattanooga also contributed to our growth since its opening. With almost $8 billion in deposits, Hamilton County presents us with a significant opportunity for growth in core deposits. We remain very positive about our future as we enter 2019. We have a robust and diverse loan pipeline. The economy across our markets remain strong and growing. We're delighted Reliant has additional opportunities to grow organically and through potential acquisitions within our footprint.
Our credit quality is sound. We have a strong capital position to support our continued growth. Also during 2018, our Board of Directors increased our cash dividend in recognition of our growth and record earnings performance. I want to thank the entire Reliant team for their continued contributions to our results. Our employees work with our customers everyday to meet their banking needs. During the past year, they played a very important role in building and cultivating customer relationships that have resulted in our exceptional loan and deposit growth and we have similar expectations going into 2019.
I'll now turn the call over to Dan Dellinger, our CFO to review our fourth quarter results in more details.
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
Good morning everyone and thanks DeVan. One of the key drivers of our solid earnings performance for the quarter and for the year is related to the growth in our loan portfolio. As we noted last quarter loan demand ramped up late in the third quarter and continued into the fourth quarter. With the expected seasonal slowing of the loan demand, our fourth quarter loan production remained strong at $104.1 million, 23% increase than the same quarter 2017.
Our loans were up 59.4% to $1.2 billion in the fourth quarter of 2018 compared with the fourth quarter of last year. Loans were up 3.1% or 12.4% on an annualized basis since the third quarter. As we have noted in the past, many of these new loans do not fully fund at the origination date. So they represent future growth in interest income as the projects are built out and the loans are funded. At December 31st, our Top 10 (inaudible) construction loans at $42 million left to fund.
Fourth quarter loan demand for new loans was led by CLD at 38%, C&I 28%, consumer and 1-4 family loans at 22% and CRE at 12%. The majority of our loan growth is driven by commercial construction activity and positive economic trends in Middle Tennessee and Chattanooga. Our organic loan growth has been in the low double digits over the past year and we expect similar growth over the next level quarters.
I want to pick up on DeVan's comments about asset quality and how it shaped our loan growth and our earnings performance in 2018. We experienced a solid improvement in our asset quality throughout this year. This was reflected in Reliant's nonperforming assets to total assets improving to 0.30% in the fourth quarter of 2018, down from the low of 0.46% in the fourth quarter of last year.
Total nonperforming loans declined 18.7% to $4.2 million at year-end 2018. In the fourth quarter, we had net charge-offs of $82,000 (inaudible) we had net recoveries of $125,000. Additionally, total assets declined 19% or $3.2 million in the third quarter with most of the decline coming in no loss to the bank. At year-end, we have one property at $1 million in other real estate owned.
Our allowance for loan losses increased over the past year from 189% of nonperforming loans at year-end 2017 to 259% at year-end 2018. Our credit term remains focused on high quality loans, while aggressively pursuing loans that demonstrate earning weaknesses.
On the deposit front, we were successful in expanding our deposit base through organic growth and the acquisition of Community First. Total deposits rose 62.7% for the year to a record $1.4 billion. Deposits grew 3% from the third quarter or 12.1% on an annualized basis. More importantly, our cost relationship deposits checking, saving and money market accounts grew 4% during the quarter or 16% annualized. Our continued success in growing deposits during the fourth quarter is partly attributable to starting regional branches in Murfreesboro and Chattanooga.
Our Chattanooga deposits were up 43% since the second quarter of 2018, while our Murfreesboro deposits jumped 86% over the same period. Reliant posted record net income of $14.1 million for 2018 or 94.4% from $7.2 million in 2017. The key drivers for our growth in net income were the completion of Community First merger, growth in our net interest income and lower provision for loan losses, growth in noninterest income and lower income tax expense.
Fourth quarter net income was up almost 257% to $4.1 million compared with $1.2 million in the fourth quarter of last year. Our excellent performance compared with the fourth quarter last year is due to the same factors plus significantly lower merger-related expenses in 2018 compared to 2017, when we were finalizing Community First merger. We believe our solid performance since last year highlights our organic growth and strong economy that is driving our growth metrics.
With that overview of our growth in net income, loans and deposits, I want review in more detail from our -- few more details on our segments of operations and balance sheet. Net interest income rose 52.3% to $13.6 million up from $8.9 million in the fourth quarter of last year. Key drivers were solid growth in interest and fees on loans and high income from our investment portfolio. Majority of the increase is related to growth in average earning assets of 52.8% or $1.55 million. Most of this was due to organic loan growth and average loans are up 59% to $1.2 million through 2018.
The acceleration on our loan growth was highlighted by average loans growing 20.1% on an annualized basis since the third quarter compared with average earning assets growing to 11.6% on annualized basis for the same period. On a linked quarter basis interest income rose 5.1% to $18.5 million and was offset by 19.1% increase in interest expense. Over the past quarter funding costs increased due to the rising deposit rates, competition in our market for deposits and higher Federal home buying borrowing costs. We also added $11.6 million in subordinated debt as part of the Community First merger that contributed to our growth in interest expense compared to the fourth quarter of last year.
Our interest margin improved to 3.82% in the fourth quarter, up 5 basis points from 3.77% in the third quarter of this year -- of last year (ph) and up 2 basis points for the fourth quarter of last year. After removing the effect of purchase accounting adjustments, our net interest margin was 3.7% for the fourth quarter of 2018, up 3 basis points from prior quarter down 4 basis points from fourth quarter of 2017.
Loan yields, excluding fees, in the fourth quarter of 2018 were up 27 basis points from the third quarter of 2018 and up 72 basis points from the fourth quarter of 2017. (inaudible) as we began to see a rift and our fixed rate yields and our variable rate portfolios benefited from the increase in short term rates. Weighted average yield on loan production in the fourth quarter rose to 5.6%, an increase of 33 basis points from the third quarter 2018. Loan accretion, from the Community First merger added 13 basis points to our fourth quarter margin compared to 10 basis points in the third quarter.
In both the fourth quarter and the third quarter of 2018 we had (inaudible) state tax credits. These credits increased our margin by 22 basis points in the fourth quarter and 10 basis points in third quarter. One of these loans was originated in the fourth quarter and higher tax credit was realized in that quarter. On go forward basis, we expect this credit to influence our margin by approximately 8 basis points going forward (ph).
Deposit costs rose 23 basis points to 1.04% (ph) in the fourth quarter from 1.19% in the third quarter of 2018. They were up 48 basis points from the fourth quarter of 2017. Our deposit betas rose in fourth quarter as deposit rates continue to be pressured by competition. As we enter 2019, we believe that the deposit rates is slow as we get closer to normalization of rates in our local markets.
Our margin results have been affected by the increase in borrowing cost from the Federal Home Loan Bank, the (inaudible) of subordinated debt from the Community First merger and incremental cost of interest rate swaps that were added in the second and third quarter of 2018. Total funding cost increased to 1.54% for the fourth quarter of 2018, 20 basis points over the third quarter of 2018, 57 basis points over the fourth quarter of 2017.
The total notional value of the interest rate swaps was $60 million in third quarter of 2018 and $30 million in the second quarter of 2018, the remaining $60 million (ph) in the fourth quarter of 2018. Interest rate swaps reduced our NIM by 2 basis points in the fourth quarter and 3 basis points in the third quarter.
As of December 31, 2018, 37% of our loan portfolio (inaudible) adjustable rate interest rates, up from 35% (inaudible) of the third quarter. New loan production was more focused on variable rates with 68% of fourth quarter's production came in at adjustable rates. Competition for high quality-commercial fixed rate loans with peers in our market, although pricing -- assuming improvement for over the past quarter.
Construction loans will only float with prime and remain relatively profitable for us. In the fourth quarter, 31% of our loan production or $31.9 million was construction related. The outstanding balance of our book of construction loans was $146.7 million up with $110.8 million remaining to disbursed.
Additional drivers affecting our net interest margin since the fourth quarter of last year are the lower federal income tax rate that reduced the tax-equivalent yield in our municipal security portfolio. Our margin was negatively impacted by a reduction in tax-equivalent yield of 11 basis points, compared with the fourth quarter of 2017.
Non-interest income in our retail banking segment was now 8.2% over the third quarter. We experienced 9.8% increase in our service charges from the third quarter to the fourth quarter, that reported a gain of (inaudible). For the year, noninterest income from retail banking segment was up 60.8% from 2017 primarily due to higher service charge income and debit card fees. We benefited from an increase in service charges on deposits from Community First merger.
Noninterest expenses for our retail banking segment, excluding merger expenses, were up 7% from the third quarter of 2018. The increase was due to largely to higher expenses associated with the opening of new branches in Murfreesboro and Chattanooga, $233,000 increase in incentive compensation and stock option expense of $115,000 in non-recurring expenses.
Our tax expense for the fourth quarter of 2018 decreased 111.5% to benefit of $59,000 compared to the expense of $519,000 for the third quarter, while our tax expense for the year ended 2018 decreased 29.4% to $1.4 million compared to $1.9 million for the year-ended December '17. The main driver of the decreases was the addition of the two loans with distributed significant state tax credits, one of which was originated in the fourth quarter of 2018. Another item that contributed to the decrease compared to 2017 was the $620,000 revaluation of deferred tax asset that was recorded in December of last year -- of 2017.
Lastly, the bank formed an investment subsidiary and transferred its investment portfolio to it in the fourth quarter of 2018. This further reduced tax expenses by $88,000 in the fourth quarter. In 2019, we expect our effective tax rate to be around 14%. For purposes of GAAP (inaudible) mortgage operation's revenue and expenses were combined with the bank and the holding company and then netted out as a non-controlling interest of the subsidiary. For the fourth quarter of 2018, the mortgage subsidiary generated a net loss of $1.3 million compared with a net loss of $842,000 for the third quarter of '18 and net loss of $185,000 loans for the fourth quarter of 2017. As a reminder, our joint venture partner is solely responsible for funding losses in the mortgage operation. Gains on sale mortgage loans sold was down 74.4% from the third quarter and were down 51.3% compared to the fourth quarter of 2017.
Before turning the call back over to DeVan, I will comment on few additional balance sheet items. Investment securities available for sale rose $3.3 million or 1.1% from the third quarter. Our yield in investment securities was up 11 basis points from the third quarter to 3.94% (ph). Reliant's total deposits were up 12.1% on an annualized basis from the third quarter to $1.4 billion. Compared with the fourth quarter last year, total deposits were up 52.8% (ph) due to organic growth and the acquisition of Community First.
As we've noted in last call, the competition for deposits is intense in the greater Nashville market and this has put upward pressure on the rates what we pay to remain competitive. As I mentioned earlier, our cost of interest bearing deposits was up 20 basis points in the last quarter to 1.41%. Our cost for wholesale and deposit continues to increase at faster rates than other interest bearing accounts due to Fed rate increases. We are working hard to increase the percentage of noninterest bearing and low cost deposit with combination of incentive plans, treasury management enhancements (inaudible) branch opening and high growth markets.
I'll wrap up my review with a few key comments about our strong capital position. Reliant's total stockholders' equity was up $68.3 million to $208.4 million since the fourth quarter of last year. Our capital ratios continue to remain very strong with our Tier 1 leverage ratio of 10.17% and our total risk-based ratio at 13.2%.
I'll now turn the call back over to DeVan.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Thanks, Dan. Before opening the call for questions, I want to highlight our strategy for growth, our focus on loan quality and our outlook for the first half of 2019. As I noted in our third quarter call, our Board of Directors approved an updated strategic plan in the mid-year 2018 that focused on growing Reliant Bank by developing our existing markets to enhance our organic growth potential.
Our new banking centers in Murfreesboro and Chattanooga were part of this plan. We've ramped up our call activity, expanded our direct marketing programs, and added new lenders in key markets. We're already benefiting from these activities based on the acceleration of loan and deposit growth that we experienced in the second half of 2018. We're also continuing to pursue the M&A opportunities. Our focus will be on banks in our existing footprint that can provide scale, growth, core funding, and that are a good cultural fit with our Company.
Dan highlighted the progress that we made over the past year in improving asset quality. We're in a dynamic growth market and our team has the opportunity to land at higher levels. However, we're not chasing higher loan volume by lowering our credit standards. We passed on potential deals that did not meet our underwriting standards and have increased due diligence for many potential credits, evaluating not only the credit qualities of deal, but the overall market for new projects that are coming on line that might have a future impact on borrowing.
Last quarter I reviewed our loan due diligence process for the Community First merger. As part of that process, we identified about $2 million in non-accrual loans net of purchase discounts, $461,000 in loans 90 days pass through and $1.7 million in ORE. Over the past year, we focused on remediation of those non-performing assets. Since the first quarter of this year, we've experienced a 34.7% decrease in non-accrual loans, ORE is down 39.4% from Community First merger date; non-performing assets to total assets improved by 20 basis points, all without experiencing significant losses. Our credit team led is by Alan Mims, is on the call with us today and will be available to answer your questions.
Another part of our strategic plan relates to the culture of Reliant Bank and how organizational structure affects our profitability. We have embraced the culture within Reliant that ties our employees to our great success. We believe this program will drive future profits as we work together as a team and serve our customers and to build shareholder value. We remain optimistic about the outlook for our company in the coming months, all of our primary markets are strong and the addition of new jobs, low employment rates and low income taxes in the state are very favorable for future growth. Based on the current trends, we expect continued growth in 2019.
Operator, that concludes my remarks for this morning's call and we'll now open the call for questions.
Questions and Answers:
Operator
Thank you, sir. (Operator Instructions) First, we'll hear from Kevin Fitzsimmons with FIG Partners.
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Hey, good morning.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Good morning, Kevin.
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
Good morning, Kevin.
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Dan it was a little difficult to hear you on some of the details. Did you say the ongoing sustainable tax rate to assume for 2019 was about 14%?
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
Yes it is.
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
And is that consolidated? Is that bank segment only?
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
That is consolidated.
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Can you, is it what would you call it on a bank segment only, if we're pulling out the mortgage sub?
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
It's the same here. (inaudible) the bank -- the retail segment would be 14%.
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
For the retail? Okay. Okay.
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
(inaudible) the mortgage fees does contribute to that.
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Yes. I strip out the mortgage fees all together. So I just wanted to be sure on the same basis. So looking back to this past quarter, can you give a little more detail on you know, pulling out one timers and looking at banks -- the retail bank segment only, it looks like the tax rate was less than 1%. How should we look at -- how much benefit -- was something permanent that we should be factoring in? And was there any -- if this is coming from the state tax credits, was there any linkage over in NII? So in other words was benefit that would normally be coming from NII flowing to the tax line in fourth quarter?
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
Yes, let me address it this way. So for the calculation of our margin, we do include the effect of the state tax credits. So that's why I commented that for the quarter it impacted our margin by about 23 basis points. However, as you just noticed, it doesn't flow through the NII in dollars, it flows through the taxes only on the income statement. So what happened in the fourth quarter? We originated another CDFI (ph) loan for $9 million. We had one that was already on there for $13 million. The $9 million gives a 5% credit so we took $450,000 tax benefit for that loan in the fourth quarter. That $450,000 is added to the net interest income for calculations of margin. Does that make sense?
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Yes.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
So Kevin, this DeVan, kind of how this works, it's not real obvious, but what we have today is basically three of these loans that we're receiving tax credits on, they total about $45 million. Dan just mentioned the one that was booked in the fourth quarter. All three of those loans carry a note rate of 0%. What we get is we get a tax credit annually on the outstanding balance that's equivalent to 5% of the loan amount. That's obviously after tax so it basically yields us a loan yield pre-tax of little over 6%. And so there's no net interest income -- there's no impact from having these three loans with tax credits on. If you impute an interest rate to that, it's about $1.250 million in a year. So, the trade off is no revenue comes through our margin, which you'll get an effective yield of about 6% from a tax standpoint. You understand that?
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Got it. I do. So now -- but now looking forward, is there any this trade off between taxes and NII? Is this same sort of thing going to be playing out in coming quarters? Is it factored into the 14% or is it not? Is it was a some we just saw this quarter?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
It will play out in coming quarters. The tax benefit is an annual number. So, we will basically get a 5% tax credit in 2019 on the balance of those loans.
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
So, Kevin. Yes, I factored it into the 14% on a go forward basis for taxes. As far as the margin is concerned on a reported basis, it will represent about 8 basis points per quarter. (Technical Difficulty) so our nominal margin on a go forward basis should be somewhere around 3.6%.
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Got it. Okay. That's very helpful, guys. Thanks. And -- could I just -- one quick follow up, can I ask? I know you guys announced a while back the buyback plan and all the bank stocks have been hit since then. Can you say whether you guys have been out actively buying back or we not at a trigger point yet where you guys would be contemplating that? Thanks.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Today Kevin, we're kind of at that trigger point, might be a little bit below that. We went into a blackout period, while the stock was still trading above our trigger points. So depending on what happens over the next few days, we may be in the market buying shares back. We were ready to do it, we have everything set up, but until the stock dropped to below $22 a share last week, we just didn't have an opportunity to do.
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Don't you, maybe I'm wrong DeVan, but wasn't it a 10b-5 plan which you're not subject to the blackout periods or am I wrong on that?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
You're not wrong on it. We actually just put the 10b-5 employees.
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Got it. Okay. Thank you guys.
Operator
And next we'll hear from Katherine Miller with KBW.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Good morning, Katherine.
Katherine Miller -- Keefe, Bruyette & Woods Inc. -- Analyst
Good morning. I'm going to -- one more question on the margin conversation. So just to be clear, the margin this quarter was 3.82% and so you're saying that the impacts from this tax benefit is going from 22 bps this past quarter to about 8 bps next quarter. And so all in you kind of -- outside of other adjustments the margin is basically going from 3.82% to 3.60% just with the impact of the tax rate and -- I mean tax credit kind of normalizing, is that right?
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
(Multiple Speakers) 3.60%, 3.61%
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
I'm sorry say that again.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
3.60% to 3.61% (inaudible)
Katherine Miller -- Keefe, Bruyette & Woods Inc. -- Analyst
Okay. Got it. So, the margin goes from 3.80% to 3.60% and the tax rates goes from sub 1% to 14% and that both kind of nets out?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Yes.
Katherine Miller -- Keefe, Bruyette & Woods Inc. -- Analyst
Okay. All right, great. And then what have you thought about the expense growth rate going into this year? I feel like we had higher expense growth this year just with Murfreesboro and Chattanooga. What are you thinking about an appropriate expense rate for 2019?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Yeah, let me try to address that, Katherine since this is always a little bit confusing with the segment report in our earnings release and just kind of focused on the retail bank segment report part of that since the mortgage company non-interest expenses is going to pass around a good bid depending on net of volume that they do with lending.
And we did have, you know -- the fourth quarter was up in -- at the bank level anyway. And this includes holding company expenses, we're talking about $670,000 over the third quarter and about $350,000 of that was was non-recurring. So, (inaudible) some of it in our earnings release and we had some marketing and promotional and supplies expense related to the new branches. We had a true up in some of our comp plans for bonuses and incentive pay that occurred based on the bank's performance. And then we had about $115,000 in non-recurring expenses that were related to a couple of M&A opportunities that we looked at. So that gave you about $350,000 in non-recurring. That was about half of that $670,000 increase in fourth quarter.
We're modeling about $10.4 million in non-interest expense in the first quarter of this year. So, you'll have kind of a full load of all the expenses; occupancy and personnel related to Chattanooga and Murfreesboro in there. And then we've made some technology investments as we moved into 2019 as well. So, that's $10.4 million in the first quarter, and then it'll be relatively flat from there on out through the rest of the year.
Katherine Miller -- Keefe, Bruyette & Woods Inc. -- Analyst
Okay. Got it. And then maybe one follow-up on the margin at the FTE adjustment?
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
To get back to FTE adjustment?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
What was your question Katherine --
Katherine Miller -- Keefe, Bruyette & Woods Inc. -- Analyst
I feel like it, yes, just -- with FTE adjustment I feel like bounces around a lot. Just curious or (inaudible) increasing lot these year. So, how should we think about what that -- what level of the FTE adjustment we should be looking at next year?
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
Katherine, I think that's probably going to range around 10 basis points to 11 basis points just based on our portfolio yields.
Katherine Miller -- Keefe, Bruyette & Woods Inc. -- Analyst
Okay. Great. Thank you.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Bye Katherine.
Operator
(Operator Instructions) Next we have to Joe Fenech with Hovde Group.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Good morning Joe.
Joseph Anthony Fenech -- Hovde Group, LLC -- Analyst
Good morning guys. Hey, DeVan. I guess on the loan growth outlook, some management teams are getting on fourth quarter calls and just cautioning on loan growth for this year, but not really based on what they're seeing in the market just on headlines they're reading about the potential slowdown in GDP growth. It sounds like you feel like your markets are still very well insulated from the projected trends in the economy more broadly continue to deliver on that growth we've seen in the past few years. Any -- is that a fair assumption? Any caveat to that or you feel like you can deliver on what you have done the past few years this year?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
I think we can. The economy in the Middle Tennessee area and in Chattanooga looks like it is still got a good bit of momentum. We had a good year in 2018 and we're kind of looking at, somewhere between 12% and 13% growth that's point-to-point growth. Look at our average outstandings from the third and the fourth quarter, you saw a big -- we were up about 5% in terms of average outstandings in our loan portfolio.
I think part of that Joe was -- just was good -- new production, but we've also seen in the last I'd say three to six months kind of a slowdown in some of the payoff activity that we experienced in 2017 and part of 2018. As rates have moved -- it's just -- it's less and less attractive to refinance loans. So, that activity has slowed down as well. We hired some new lenders. We're getting good traction in Chattanooga and Murfreesboro. We really didn't have last year. Without having a full service banking center. So, I think that 12% to 13% increase on point-to-point basis in 2019 is attainable.
Joseph Anthony Fenech -- Hovde Group, LLC -- Analyst
Okay, and then how much of that projection, DeVan is that constraints it all?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
I got some static. (Multiple Speakers)
Joseph Anthony Fenech -- Hovde Group, LLC -- Analyst
Can you hear me?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Yes. I can hear you.
Joseph Anthony Fenech -- Hovde Group, LLC -- Analyst
Is that long growth projection constrained at all by expectations on the funding side? In other words, like if the funding environment where -- what it was two to three years ago, where do you think you could kind of comfortably grow loans? I'm just trying to get a sense for where the economy -- just from a demand standpoint where things stand relative two years ago taking the funding component out of it for a second. If that makes sense?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Yes, it does make sense. I think the forecasted growth rates that we have at least for the next 12 months anyway is not constrained by the funding side. If you look at our earnings release and look how it broke out the deposit categories. One of the more encouraging things to me was that the low cost deposit accounts what I always talked about is relationship accounts. We actually grew at a faster pace in the fourth quarter than we grew loans. Now, it's not as cheap as it has been, but I think we've got a-- I think we've still got an opportunity to grow deposits.
We are in markets in 2019 that we just really kind of barely scratched in 2018. I talked about Murfreesboro and Chattanooga combined, they have about $11 billion in deposits in those markets and we've been pretty aggressive in doing some advertising and direct marketing and doing some deposit specials in those markets and received some good results from that. So I don't anticipate funding in 2019 to be a constraint on our ability to meet our loan targets.
Joseph Anthony Fenech -- Hovde Group, LLC -- Analyst
Okay. So it's not like you'd be growing 15%, 16%, 17% if -- because of funding, 12% to 13% is what you see is sort of a legitimate growth rate the market is offering you within the credit standards that you have?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Yes, that's, that's correct. That's right.
Joseph Anthony Fenech -- Hovde Group, LLC -- Analyst
Okay. And then I guess lastly for me just on the margin, fair to say that for the faster growers like yourself that a pause by the Fed could kind of have a disproportionate benefit to you all, as the asset side maybe catches up a bit and the funding side slows a bit, are you really seeing 2019 as -- if the Fed does take a pause here to -- as the year-over-year able to show some decent margin expansion?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Yeah, I think that's a fair assessment. We still saw deposit rates going up in the fourth quarter, and we're remodeling higher rates in the first quarter this year. But when I look at -- when I look at just a -- let's say a comparison between December and January so I know it's just one month, but we -- typically through 2018, we saw increases every month in January to December, excuse me, December to January, it's been pretty flat.
So, I'd say as in a rate increase, I would expect to see deposit increases moderate some. On the other hand, you know, when I look at our loan yields, they have been moving up that's a combination of new loan production at higher rates and you know maturing term loans that we have a chance to reprice up, we've got a quite a few of those coming up in 2019 as well.
But you know we get -- our loan production in the first quarter of 2018 was at an average -- weighted average rate of 5.12% and we move that up to 5.60% in fourth quarter. So that's a significant increase in production. A lot of that fourth quarter production has not actually hit our books yet in terms of funding, because it was construction related. So, I think there's an opportunity if rates stay stable for us to see some expansion in our margin. I don't know that I would see it much in the first quarter Joe, but certainly second quarter maybe going forward.
Joseph Anthony Fenech -- Hovde Group, LLC -- Analyst
Yeah, I was going to suggest. So, maybe first quarter looks a bit like the fourth quarter and then if there's a pause in March second, third quarter is where you start to see that pick up?
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
I think that's right.
Joseph Anthony Fenech -- Hovde Group, LLC -- Analyst
Okay. All right. Thank you guys.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
Thank you.
Operator
And at this time, it doesn't appear that we have any further questions from the audience. I'd like to turn the floor back to management for any additional or closing remarks.
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
I appreciate everybody's support. Thanks for joining us today.
Operator
All right ladies and gentlemen, that does conclude our conference for today. Thanks for joining us. You may now disconnect.
Duration: 45 minutes
Call participants:
DeVan D. Ard Jr. -- Chairman and Chief Executive Officer
James Daniel Dellinger -- Executive Vice President and Chief Financial Officer
Kevin Patrick Fitzsimmons -- FIG Partners, LLC -- Analyst
Katherine Miller -- Keefe, Bruyette & Woods Inc. -- Analyst
Joseph Anthony Fenech -- Hovde Group, LLC -- Analyst
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