Fulton Financial Corp
NASDAQ:FULT
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Fulton Financial Corp
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Good day, ladies and gentlemen and welcome to the Fulton Financial Third Quarter Results Conference Call. [Operator Instructions]
It is now my pleasure to turn the conference over to Jason Weber. Please go ahead.
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 Web site at fulton.com by clicking on Investor Relations, then on News. The slides can also be found on the Presentations page relations under Investor Relations on our Web site.
On this call, representatives of Fulton may make forward-looking statements with respect to Fulton Financial'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 statements on forward-looking statements in our earnings release and 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 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 would like to turn the call over to your host, Phil Wenger.
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. When he concludes, we will open the phone line for questions.
Overall, we're very pleased with our financial performance for the third quarter. We continue 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 noninterest income and an improvement in our credit quality. Average loans increased .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 stabilize this quarter after noticeable declines in 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’ve generated over $160 million in net loan balances since 2017. In addition to Philadelphia, we’ve plans to grow in Baltimore and other market that represents a tremendous long-term growth opportunity for Fulton.
We’ve a team of commercial and consumer lenders already serving the market. However, Baltimore is a targeted area for growth in 2019 and beyond. We’ve plans to open a mortgage loan production office early next year and we’ve plan to open full service branches once 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 improvement during the quarter. That being said, we are mindful of where we are in the economic cycle and are continuing to assess and analyze loan portfolio for signs of weakness or stress.
Our agricultural portfolio is an area we’ve been monitoring close carefully due to compressed commodity prices. The portfolio saw a slight decrease in delinquencies linked quarter and net charge-offs were minimal.
Moving to fees, noninterest 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. Our efficiency ratio declined for second consecutive quarter. For the third quarter, our efficiency ratio was 62.5%, inside our stated goal of 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 31, 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 had 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 towards 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 the consolidation went well and we had hoped 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?
Thanks, Phil, and good morning, everyone. Turning to our earnings, unless noted otherwise, the quarterly comparisons I will discuss are with the second quarter 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.
I 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've seen in our interest-bearing deposit rates have resulted in year-to-date deposit beta of approximately 30%. This is higher than the 21% year-to-date deposit beta through June 30, but it 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 beta. 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 continue the trend of steady improvement. Nonperforming 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 nonperforming 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 noninterest 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, noninterest 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 plan 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 cost 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 level 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, I will now turn the call over to the operator for questions. Haley?
Thank you. [Operator Instructions] And our first question comes from Frank Schiraldi of Sandler O'Neill. Your line is now open.
Good morning.
Good morning, Frank.
Good morning, Frank.
I wondered -- I'm trying to figure out or think about how betas -- deposit betas were impacted by the muni inflows in the quarter. So I'm wondering if you had any ability to break out maybe the incremental cost of the muni deposits coming onboard versus other deposits in the quarter, something along those lines?
Yes, what I can say, Frank, that total book of business -- now I’m speaking here now to spot at kind of the end of the third quarter. At the end of the third quarter we were about $2.3 billion of deposits in that business. Of that, 58% of that is tied to an index and a lot of time that index is fed funds. It's -- of the total cost of deposit for that business is a 136 basis points. So, again, some of that is core deposit money that we really covered and in some of that is the higher rate index money that just has the kind of inflows and outflows throughout the year.
Okay. And I guess it was a -- was it -- the higher rate stuff was the -- is more of the seasonal? Is that what you are implying there?
Yes, correct. Correct. Throughout the year, I mean, the core operating accounts to 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.
Okay. So is it reasonable to think about that inflows and outflows as kind of 2% plus money?
I think that’s fair. For the -- for that bump that we see in the third quarter and then the drift off over the next subsequent couple of quarters.
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.
Well, we have a couple other customer related funding vehicles that we use, those are going to vary in costs, and those are going to vary in terms of features for the customers as to whether or not if a customer cares about FDIC insurance or not. If they care about FDIC insurance we could offer that product, but then that’s going to perhaps be a little bit lower cost to the customer because they are getting the insurance versus something that might not be FDIC insured, but they can carry a little bit higher rate to the customer to kind of pay them for taking that incremental risk.
Okay. I mean, 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?
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 will have gone up as a percentage of our short-term borrowings and our fed funds purchased would have gone down with the influx of that muni money.
Okay. 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, I mean, is your expectation that those levels should moderate, or how should we think about that line item?
We believe that will have strong swap fees again, but it's possible that they will moderate, so.
Okay. Okay, thank you.
Thank you. Our next question comes from the line of Chris McGratty of KBW. Your line is now open.
Hey, good morning. Thanks for the question.
Hi, Chris.
Phil or 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 1 to 4 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 are thinking about, broadly, the source of and the composition of loan growth entering 2019? Thanks.
So we do expect our mortgage volume to be down fourth quarter, combination of seasonality and demand when rates have gone over 5% which they have from time-to-time, demand slows down. We are still getting on the commercial side being impacted largely by prepayments and some of its good. We had 40 -- another $40 million of criticized in the classified loans payoff during the quarter. So that helps us from a provisioning standpoint. So, yes, I mean, loan growth is a challenge and I -- we expect to see that in the fourth quarter again.
Okay. Thanks for that. Maybe kind of pivoting to the implications on capital return, Phil, you talked about the buyback that's still out for another couple months. I think last quarter you said, if loan growth doesn’t materialize you would really consider potentially returning 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 think about that M&A is probably a top priority for 2019?
Yes, 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 a -- if they do, and a strategic acquisition comes our way, we would like to be part of it, whether we actually would be the acquirer, it would depend on an awful lot of things including price. So its -- I mean, it's something we want to be involved in, but it's really hard to say that in 2019 we are going to have an acquisition.
Okay. Thanks for that color. Just a clarifying point, in terms of targeted institutions that you would like to look at, could you just remind us geography, size, balance sheet profile? Thanks.
Yes. So, in our current five state footprint, we operate in 52 counties. And in 15 of the 52 counties, we’ve a market share position that’s first, second, third, fourth, or fifth. That’s where we -- in those markets is where we generate our growth and our profits. So we will be looking at institutions within our footprint that give us mass in counties that we're in, but we really don't have much and then also counties that are kind of holes, if you will. And $1 billion to $7 billion I think we said is in our primary target, I think as we venture into the acquisition mode. In an ideal world, we would like to do a couple at the smaller end, but it really depends on the opportunity.
Great. Thanks a lot for taking the questions.
You bet.
Thank you. Our next question comes from the line of Austin Nicholas of Stephens. Your line is now open.
Hey, guys. Good morning.
Good morning.
Good morning.
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 give some color there, that would be helpful.
Yes. This is Mark. Good morning. The -- on 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 of that even comes in during the third quarter and then immediately starts to bleed off a little bit. And the time period that we see sort of see the low water mark of our muni business is about six months from now.
Got it. Thanks, Mark. That’s really helpful. And then maybe just on 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?
No, it was pretty much across the board. I mean there's nothing unusual in terms of nonaccrual interest or loan fees or anything like that that loan prepayments or anything like that that really juice margin in any material way from prior quarters. So I would say this is just fundamental asset sensitive balance sheet that benefited from the .5 bps rate increase.
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 built? Any thoughts there on CECL that you could share with us?
Yes, sure. We are heavily active and involved, and we’ve a team of both internal and external parties working diligently. Right now we're 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 are not in a position nor are we ready to disclose any kind of financial impact and we will assess whether it makes sense to disclose on an early basis any financial impact as we continue with the implementation.
Understood. Thanks for the questions. Appreciate it. Bye.
Sure. Thank you.
Thank you. Our next question comes from the line of Russell Gunther of D.A. Davidson. Your line is now open.
Hey, good morning guys.
Good morning, Russell.
Good morning, Russell.
Just a follow-up on the provisioning line of question there. Good result this quarter; modest loss content, NPLs, delinquencies moving in the right direction and then picked up on the $40 million of criticized classified that paid down. But 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?
Well, third quarter results were really good. So, I can't sit here and tell you we expect that level every quarter. But at the same time, our trends continue to be positive.
Okay. Thanks. And then sort of outside of the ag, which you flagged earlier that you got your eye on, are there any kind of earlier pockets of weakness you are seeing, be it an asset class or geography in your footprint?
We’ve not seen any others now.
Okay. And then circling back to the M&A discussion earlier, you guys mentioned non-bank M&A as something you would consider, as well. Could you kind of flesh out what would be appealing to you?
I think most appealing would be investment management trust.
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.
So, 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 are 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 ourselves that did that stop being a player in the indirect market. They -- in the last 18 months, I think they’ve backed away from that. So we have gone back to varied markup -- the dealer being able to set that markup within the range, but that’s put us back in the business.
Okay. That’s very helpful color. Thanks for taking my questions, guys.
Thank you. Our next question comes from the line of Joe Gladue of Merion Capital Group. Your line is now open.
Hi. Yes, good morning.
Hi, Joe.
Hey, good morning, Joe.
I was interrupted briefly, so pardon me if you touched on this, but I guess in the second quarter call, you talked about 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.
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 or likely a payoff. But they’ve been offered a 30-year amortization, 30 year rate -- I’m sorry, 10-year rate, but 15 years interest-only, nonrecourse. We pretty much do not have the -- those things.
Right. All right. That’s really all I had.
All right. Thanks.
Thank you. Our next question comes from the line of Matthew Breese of Piper Jaffray. Your line is now open.
Good morning, everybody.
Good morning.
Good morning, Matt.
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?
Yes, we do.
And so, reading the tea leaves, do you feel like you are comfortable by year-end 2019 that you will be, in fact, in a position to be out of the orders and able to engage in M&A?
We are optimistic that we are progressing to getting the orders released.
Understood, okay. And then on the expense commentary, you noted there were opportunities to gain efficiencies, and in 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.
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 …
In the third quarter, Matt, we had $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 they were planning that occurred in the third quarter, the actual conversion of our two subsidiary banks just happened this past weekend, so then you have a lot of cost incurred actually in October related to those conversions as well. But as we feel pushed 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 costs and one-time costs over an extended number of quarters will go away.
Okay. So the way to think about it is 4Q will have roughly $2 million to $2.1 million in charter consolidation costs. You might have one or two more of those in the first half of 2019 and then it kind of fades away towards the back half of the year, right?
That’s right.
That’s right.
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, what the early estimate is.
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 call it in the range of 15% to 20%. So you have a 2.5% increases 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 a -- roughly .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 would be back to a 9% rate.
Okay. But for the fourth quarter this year and 2019, you are looking for 50 basis points, or 0.5 point higher from that [multiple speakers]?
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 just for the discrete effect of New Jersey, it's in the ballpark of the 0.5 percentage point increase to our effective tax rate.
Okay. My other question it was tied to capital, obviously with slow growth, good profitability you 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?
We view our securities portfolio principally for liquidity purposes. Its averaged around 13% of our assets give or take. And our expectation for the future would be, it would grow commensurate with overall balance sheet and earning asset growth.
Okay, understood. My last one is just for the fourth quarter, the margin guide, 0 to 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?
Yes, I mean, 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 IVD 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.
Do you include a December rate hike in that?
We do assume one. I think, right now the market consensus is somewhere between 75% and 80%, but that the effect of that -- I mean, it's about a 40-day timeframe after a rate increase until it really cycles through all of our lending products. So you wouldn’t really feel the impact of that as much as obviously getting the full quarter effect from the one that just occurred.
Understood. Okay. That’s all I had. Thank you for taking my questions.
Sure. Absolutely.
Thank you. [Operator Instructions] Our next question comes from the line of Matthew Keating of Barclays. Your line is now open.
Great. Thank you.
Hi, Matt.
Phil, really -- how are you? It's been a pretty long time since Fulton's last acquisition. I think it was back in 2006. So maybe you could discuss -- it seems like there's a greater institutional imperative to look at M&A. And I am 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 period from the parameters to look at in any potential transactions? Thanks.
So I don't know that there is a greater imperative for us to acquire banks. But as there are strategic opportunities within our footprint, we do believe that 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 will let Mark answer the rest.
Yes, in terms of our 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 our tangible value earnback and it could be a really, really short tangible book value earnback, but it would be a deal that’s got a low IRR, but just be really small relative to the overall organization. So I think we -- we care most about deploying our capital in an effective and prudent manner for our shareholders and whether it's a whole bank acquisition or whether it's maybe an ancillary financial services deal like a investment management deal that Phil interested we -- mentioned we would also have interest in. Those are going to have different IRR targets attached to them, because they’re at different levels of risks. And we would make sure that our deals both hurdle from a risk perspective as well as we are mindful of what the market expectations are for TBV earnbacks, and we would make sure that those numbers make sense as well.
Okay. That’s very helpful. Thank you. And I know you talked earlier about some of the longer term potential for additional efficiency gains. But as we think near-term, you talked about there's some additional costs in Q4 for the charter consolidation. Do you expect sort of this core expense run rate of $134 million last quarter to move up meaningfully in the fourth? I mean, 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 sort of additional, sort of nonrecurring charter consolidation costs. Thanks.
No, we were as you pointed out, Matt, we were about 526 last year in total OpEx, and we’ve given guidance of low single digits at -- 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 137, I think it's still probably be at kind of low single-digit growth for the year. I don't think there's anything else unusual activity that need to be thinking about from a sequential standpoint.
Okay, great. And Mark, did I hear correctly that in Q4 you thought the effective tax rate would run towards the high-end of the full-year guidance, so somewhere closer to that 14% level, because if you look, I guess, last quarter 11.5%, 30 [ph] 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? Thanks.
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-ups estimates that you make at the end of last year and we’ve some true-ups relating to the tax charge that we took for the write-down of our DTAs 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 that 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.
Okay. And then just lastly on capital return, I understand, hey, there 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 your 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's a fair amount of excess capital today and likely to be generated going forward. Thanks.
Our Board considers all of those things every time we meet, and we will continue to consider them.
Okay. Thank you.
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.
Thank you all for joining us today and we hope you will be able to be with us when we discuss fourth quarter results in January.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Have a great day.