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 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 begin.
Thanks, Sidney. Good morning. Thanks for joining us for 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 Statements on forward-looking statements in our earnings release and on slide 2 of today's presentation for additional information regarding these risks, uncertainties, and other factors.
Fulton undertakes no obligation other than as required by law to update or revise any forward-looking statements. In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and slides 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.
Thanks Jason and good morning everyone. Thank you for joining us. I have a few prepared remarks before our CFO Mark McCollum shares the details of our financial performance and discuss our 2019 outlook. When he concludes we will open the phone lines 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 lagged average consumer and mortgage loan growth year-over-year. Our commercial loan growth was impacted by higher repayments, lower line utilization, and slowing originations as the lending environment remained extremely competitive throughout 2018. However, loan growth accelerated towards the end of the fourth quarter and as a result period in 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 our plan is 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 a 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 move 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 of all the 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 look 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 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 large 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 to consolidate our bank charters and exit our BSA AML orders. Since 2012 we have 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 overtime 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 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 versus you saw in our 8K filing last night, I'm happy to announce that the BSA/AML consent orders issued to our subsidiary bank in Maryland were terminated. This follows the terminations in 2017 or in 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 towards achieving a similar resolution. Once that order is terminated we can fully pursue our strategic priority of consolidating our subsidiary banks and/or flagship bank Fulton Bank.
Second, towards 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. The 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.
Thanks Phil and good morning to everyone on the call. Unless I note otherwise the quarterly comparisons I will discuss are with the third quarter of 2018 and annual comparisons over 2017. Starting on slide 6 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 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 7 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 average interest earning assets. In the fourth quarter our interest earning asset yield grew 9 basis points principally driven by a 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 25% year-to-date deposit beta through September 30th but 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 will 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 billion [ph] of our loan portfolio is variable, 35% is adjustable, and 22% is fixed rate. Of our loans they 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 to $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 and 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 cost of funds increased at a lower rate of 18 basis points. The increase in interest earning assets yields was realized principally in loans which saw a 31 basis point increase. The increase in cost of funds was driven primarily by our deposits.
Turning a credit on slide 8, in 2018 the provision for credit losses increased $23.6 million in 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 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 total loans increased slightly to 86 basis points as compared to 85 basis points at the end of last year. In comparison to the start of quarter non-performing loans increased $19.6 million attributable to the aforementioned commercial relationship. Excluding this one relationship remainder of our non-performing loans declined approximately $15 [ph] 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 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 9, non-interest income excluding securities dealings decreased $1.5 million or 3% in comparison to the third quarter of 2018. This decrease resulted mainly from lower commercial loan interest rate swaps 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 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 approx $1 million or 8%. These increases were partially offset by lower commercial loan interest rate swap fees, SBA gains, and overdraft fees.
Moving to banking, income was down $900,000 year-over-year mainly due to a gain recognized in 2017 upon 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 certain investments 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 cost associated with branch consolidations 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 a $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 with most of this year-over-year increase increasing by 13.1 million.
We also absorbed $3.6 million of charter consolidation cost during the year as we continued to simplify our franchise and unify our brand. Income tax expense decreased $3 million link quarter due to the tax credits associated with the aforementioned tax credit investment and lower pretax 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 to $38.1 million mainly due to 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 our 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 and in 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 a 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 asset quality measures as well as the pace of loan 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 levels 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 will now turn the call over to the operator for questions. Sidney go ahead.
Thank you. [Operator Instructions]. And our first question comes from Austin Nicholas from Stephens Inc. You may proceed with your question.
Hey guys, good morning. 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?
Yes sure. Good morning Austin. It's -- in our assumptions we assume an increase in June and we assume one in December of 2019. Now the one in December 2019 obviously had very little impact on 2019. The one in June we actually you know 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.
Got it, okay, that's very helpful. And then maybe just on the expense guidance, I guess does that include the I guess 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?
No, it includes the tax credit and amortization as the tax credit that occurred this quarter, you know a lot of our tax credits are either low income housing tax credits or their 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 is 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 and amortization. That number is included in that expense guidance that we give and also included in that expense guidance is we generated this year between the third and the fourth quarter about $1.3 million of cost related to a branch closing that happened and we closed two in the fourth quarter, eight coming here in the first quarter. There's going to be some additional costs on that next year which are in our expense guidance but then there's also going to be savings unrelated to that and the earn back or those branch closures in terms of the one-time cost versus the savings are less than one year. That's about 10 months to invest.
Got it, okay and then maybe just one last one, I think that you spoke about the kind of provisioning for a specific credit this quarter and I believe it was in the agro business kind of vertical. I guess could you maybe speak about that overall agriculture portfolio and how you're thinking about it. I think in past quarters it's been brought up as stressed but that delinquencies have more or less stabilized to kind of decline. And if I look at your CNI 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?
Yeah, so we think it's still stabilizing. You exclude discredit and delinquencies and the right 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.
Okay, great, thanks for taking my questions.
Thank you. Our following question comes from Chris McGratty with KBW. Your line is now open.
Hey good morning. Question on the buyback, the slide deck she suggested capital levels you know at the levels through the next year. You got a stub of $5 million left, is it fair to assume that you're not looking to come back to the buyback given where stocks are trading because you are fairly aggressive so I am just trying to get a sense of whether the expectation is that you will go back to the Board and ask for more or is this kind of it for now?
So Chris, we talk with our Board every quarter about the uses of capital and it's possible that we could put another plan in place as we go through the year. I think a lot will depend on growth and other opportunities that we might see.
And then on the kind of alternative uses, so you've got another one of them lifted. Can you speak to kind of desire to do a deal in 2019, your stock has held up on a relative basis little better than the peers and just kind of interested if deals would be kind of climbing the ranks a priority for 2019?
Well we still have orders against the holding company and our subsidiary bank Lafayette Ambassador. So until they go away our deals are still impossible. But if the right strategic deal came along after those were lifted and it would work from a financial standpoint, we would have interest.
Okay, great and then maybe a last one if I could on credit, your understanding that second quarter was kind of idiosyncratic event and this quarter you had the inflow, I am wondering why -- it seems like you set a reasonably high bar for yourself for 2019 on the provision. And just given the concerns that are kind of permeating the market from a credit and economy, wondering why it seems to be a little of an aggressive guide on the provision, maybe you could speak to your confidence and what you're seeing that we may not be able to see from the outside? Thanks.
So overall we do not see softening in our overall portfolio and this past quarter even with that one large credit we would have been very close to this guidance. So we have confidence that the range that we again should hold up for now anyway.
Okay, thanks a lot. Appreciate it.
Thank you our next question comes from Joe Gladue from Merion Capital Group. Your line is open.
Hi, good morning.
Well good morning Joe.
Let me just follow up on one of the earlier questions on the interstate expectations, talked about what you're expecting for rate hikes to be. I was just wondering what your thoughts are on the slower yield curve and how that might be affecting your investment portfolio strategy and such?
Yeah, I would say it's having a lot of impact on our investment portfolio strategy. We have -- I mean our investment portfolio realize cash flows of 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 CMO's and occasional municipal investments as we have in the past. And -- but we're also have hit a pretty wide inflection point there where we see the yield on investments that are going off versus the investments that will buy on. I mean there's obviously a significant yield pick up on that.
Okay and just wondering I guess, you did get in early [indiscernible] stopped our prepayments just wondering if you could quantify that a little bit what you saw in the fourth quarter?
Yes, sure. We had highlighted each of the paths in the second quarter and the third quarter where we had emphasized there are prepayments specifically on our commercial business for about $100 million higher in 2Q and 3Q relative to what we saw in the first quarter of 2018. In the fourth quarter the numbers were $80 million higher than what we saw in the second and third quarters. 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 have in the fourth quarter what it means is that we had a solid, really solid quarter relative to the last three link quarters for commercial originations. But we continue to see very high prepayment activity. You know amortization and just kind of normal loan book that's relatively flat, that's somewhere in $650 million per quarter range. But the prepayments have accelerated.
Alright, thank you.
Thank you. Our following question comes from Russell Gunther with Davidson. Your line is now open.
Hey, good morning guys. 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?
Yeah, we do. And I believe we've even said maybe in the last call, we have said that we expect it 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 cost behind us.
Okay, I appreciate that Mark and then you had also said earlier that as part of some of the efficiency initiatives you 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 some of those efficiencies you had talked about earlier?
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 in selected markets where we see good market opportunities growing branches as well. So, on a net basis you will 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 of our company despite running a separate bank charters we've had a largely consolidated back office for some time. And while we see there is going to be still 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're 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.
Okay, I appreciate that and then last one for me was just circling back to the agro business 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 okay 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?
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 and any trend that we see in that portfolio is positive as compared to a negative. The shutdown on the government has had an impact 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.
Okay, thank you Phil. And then sorry sneak one more in there please. On the loan growth outlook, the low to mid single digits on average how do you expect that kind of mix still up, should we expect sort of similar drivers to 2018 or as you look out this year any particular loan bucket showing more restraint than others?
Well, I think you're going to see the same type of growth rates on the consumer side. And then I'd say on the commercial side we don't have quite as much confidence on exactly what's going to happen. So if that strengthens a little I think we will 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.
Okay, thanks very much guys.
Thank you. Our next question comes from Matt Schultheis, Boenning. Your line is now open.
Hi, good morning. So just a quick follow up to Russell's question regarding the government shutdown, aside from ag or SBA. Have you seen any customer requests particularly on the retail side regarding delinquency or any sort of reach out from mortgage borrowers in Maryland or Virginia to sort of work with them as their full load or any increase in early stage delinquencies?
So, we've 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 work 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 for the overdraft protection. To date we have not seen any weakness and have not had a lot of inquiries into those programs.
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 am going to ask, was there -- did this order 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?
No, it was borrower specific and it's been a credit that we've been watching for some time.
Okay, thank you for your time today.
Thank you. Our following question comes from Matthew Breese with Piper Jaffray. Your line is now open.
Good morning everybody. 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 what was the nature of the agribusiness, was it poultry or dairy or other?
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 was it a syndicated loan or were you the only bank involved?
We were the only bank.
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, 19 million increase and I wanted to get a sense for…?
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.
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?
So, we've looked at the collateral and net credit and we do not -- if the credit would continue to go south which we 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.
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? Lot of the farm bill only got passed later in the year than expected that would be one thing I was thinking?
I would say no, it is the easy answer to that question.
Okay, and then changing subjects a little bit, the tax rate guide 13% to 16% seems a little high versus what we saw this year, can you just give me an idea of what 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 state tax laws that you might have a firmer grasp of now?
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 have capped that portfolio a little bit. And that's why you've seen the glide pass from 16 to 17 to 18 to 19 amortization absent this kind of one solar credit transaction that happened in the fourth quarter. You have seen glide path downward in the amortization on these tax credit deals. So, it's really as simple Matthew, when you have a constant level of tax preference items but you expect to see your pretax earnings going higher every year that's going to increase your effective tax rate. So, that's the reason.
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?
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 internal 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 working on it.
Understood. Just last one from me is on the branch closing effort, it sounded like there's more to go there beyond first quarter of 2019. As you think about potential branch closure costs and the expense run rate is that baked into your guidance?
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 onetime costs are baked into the guidance we give.
Understood, that's all I had. Thanks for taking my questions.
Thank you. [Operator Instructions]. Our next question from Chris McGratty with KBW. Your line is open.
Thanks for the follow-up. Mark, I just want to make sure I got the expense. I know you got a lot of questions about it. The branch consolidation and the conversion cost what -- I guess what an aggregate should we expect in 2019. I understand that the low single digit growth rate off of 2018 but what -- can you just spell it out I think -- second and third quarter having but what's the total amount because I would imagine some of these are kind of deemed one point in time?
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 sort of $7 million and $9 million range, the majority of that we anticipate would be in the second and third quarters. And in terms of the branch consolidation costs we expense $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 total, so there is $2.9 million to cost. The annualized savings on those we think should be $3.5 million so it is an earn back of about 9 to 10 months.
Okay, I appreciate it and then just in terms of the size just a follow up on the credit the -- did you minus the size like the internal limits on credits. I mean $35 is a little bit higher than I would've thought on a standalone basis post a club deal but could you remind us kind of internal limits on single relationship that you have in place.
Our internal limit is $55 million and I think that's a pretty conservative number.
Okay and so in terms of bank -- credits of this size of 30 to 40, I mean are we talking a couple handfuls or is it more than that in terms of just granularity?
Couple of handfuls.
Alright, thanks a lot. I appreciate it.
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.
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.
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.