Fulton Financial Corp (FULT) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Fulton Financial Fourth Quarter Results Call.

(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, Sydney.

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 p.m.

yesterday afternoon.

These documents can be found on our website at fult.com by clicking on Investor Relation, then on News.

The slides can also be found on Presentations page under Investor Relations on our website.

On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations and business.

These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors and actual results could differ materially.

Please refer to the safe harbor statement on forward-looking statements in our earnings release and on Slide 2 of today's presentation for additional information regarding these risks, uncertainties and other factors.

Fulton undertakes no obligation, other than as required by law, to update or revise any forward-looking statements.

In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures.

Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and Slides 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 McCollom, shares the details of our financial performance and discusses 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 prepayments, 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-end loan balances increased $241 million linked quarter.

We continue to grow in Philadelphia and Baltimore.

Both markets have a team of commercial and consumer lenders serving the markets to help us take advantage of what we view as tremendous long-term growth opportunities.

In Philadelphia, we opened a mortgage loan production office in May of 2018 and have plans to open another LPO in Camden, New Jersey, later this year.

We opened a full-service branch in the beginning of January and have 2 more targeted to open by the end of the first quarter.

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

Moving to credit.

Overall asset quality continues to be relatively stable despite an uptick in nonperforming loans, provision for credit losses and net charge-offs.

We had a large commercial relationship moved to nonperforming during the quarter, excluding this relationship nonperforming 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 a 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 suggestive of a -- of broader portfolio or macro trends.

Turning to fees.

Excluding a litigation settlement and security gains in 2017, noninterest 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 noninterest income.

Our commercial loan interest rate swap business tends to track with commercial originations, which were down year-over-year.

In addition, evolving consumer behaviors and preferences continue to put pressure on noninterest income, particularly overdraft fees.

On a positive note, our investment management 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.

Noninterest expenses increased 3.9% year-over-year and was slightly higher than our 2018 outlook.

Excluding amortization of a tax credit investment in the fourth quarter of 2018, our noninterest 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 have reached its lowest level since 2013.

Expense management is a top priority, and we continually look for ways to make our organization more efficient while continuing to invest in our company to support a larger organization that can benefit from economies of scale.

Opportunities exist to become more efficient as we continue to optimize our delivery channels, upgrade our origination and servicing platforms, consolidate our bank charters and 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 8 more branches by the end of the first quarter.

We incurred approximately $930,000 of expenses in the fourth quarter related to these planned branch consolidations.

We believe there will be more opportunities to optimize our branch network over time as we continue to react to changing customer preferences and behaviors.

Strategically, the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities.

In 2018, we increased our quarterly common dividend by $0.01 to $0.12, paid a $0.04 special dividend in the fourth quarter.

To date, we 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 hit several milestones during the year.

First, as you saw in our 8-K filing last night, I'm happy to announce that the BSA/AML consent orders issued to our subsidiary bank in Maryland were terminated.

This follows the terminations in 2017 and 2018 of the consent orders issued to 4 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 into our 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 over the third quarter of 2018 and annual comparisons over 2017.

Starting on Slide 6, earnings per diluted share this quarter were $0.33, on net income of $58.1 million.

Fourth quarter earnings in comparison to the third quarter reflect an increase in net interest income and a decrease in income taxes.

However, this positive comparison was more than offset by the impact of a higher provision for credit losses, lower noninterest income and higher noninterest 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 yields 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 the 25% year-to-date deposit beta through September 30, but it's in line with our previous expectations.

We anticipate that our net interest margin in the first quarter of 2019 should follow the macro themes of the last few quarters, and that we'll benefit from the December Fed funds rate increase but we also expect to see rising deposit betas.

Our balance sheet remains asset sensitive as 43% or approximately $6.9 million -- $6.9 billion of our loan portfolio is variable, 35% is adjustable and 22% is fixed rate.

Of our loans that are either variable or adjustable, the 2 most relevant indices are prime and 1-month LIBOR, which account for 33% and 30% of our total loan portfolio, respectively.

The 2 basis point increase in our net interest margin from last quarter was within the range we provided in our updated outlook during the third quarter of 2018.

Average loans increased linked quarter by $103 million or 0.7% while ending loans increased at a faster rate, $241 million linked quarter or 1.5%.

Average deposits grew $446 million or 2.8% linked quarter.

This increase was seen principally in money market accounts for both consumer and commercial customers.

For the year, our net interest income increased $55 million or 9.6% from 2017, driven by a 3.4% increase in average interest-earning assets and a 12 basis point increase in our net interest margin.

Yields on earning assets increased 29 basis points while our cost of funds increased at a lower rate of 18 basis points.

The increase in interest-earning asset 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 to 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 of this year.

For the fourth quarter, our provision for credit losses did increase at a higher rate than previous periods to $8.2 million, primarily driven by one commercial relationship that has shown signs of weakness and was placed on nonaccrual 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.

Nonperforming loans at December 31, 2018, increased $4.9 million or 3.7% in comparison to year-end 2017.

Nonperforming 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 third quarter, nonperforming loans increased $19.6 million, attributable to the aforementioned commercial relationship.

Excluding this one relationship, the remainder of our nonperforming loans declined approximately $15 million linked quarter.

The allowance for credit losses to loans at December 31, 2018, was 1.05%, a 7 basis point decrease from 2017 and unchanged from the third quarter of 2018.

The allowance for credit losses' coverage ratio as a percent of nonperforming loans decreased to 121% at year-end 2018 as compared to 131% in year-end 2017 and 140% at the end of the third quarter.

Moving to Slide 9, noninterest income, excluding securities gains, decreased $1.5 million or 3% in comparison to the third quarter of 2018.

This decrease resulted mainly from lower commercial loan interest rate swap fees and lower merchant fee income.

For the year, noninterest income, excluding securities gains, decreased $3.4 million from 2017, in part because 2017 noninterest income included a $5.1 million gain from a favorable settlement on a litigation matter.

During 2018, our investment management and trust services income grew $2.9 million or 6%.

Merchant fee revenues increased $1.6 million or 9% and credit card income increased approximately $1 million or 8%.

These increases were partially offset by lower commercial loan interest rate swap fees, SBA gains and overdraft fees.

Mortgage banking income was down $900,000 year-over-year, mainly due to a gain recognized in 2017 upon the reversal of a mortgage servicing rights allowance of $1.3 million.

Mortgage sale gains were flat, as a 14% increase in volumes during 2018 was offset by lower spreads on gain on sale.

Moving to Slide 10, our noninterest expenses increased $5.3 million in the fourth quarter.

Included in this, our expenses were inflated by $4.9 million of tax credit investment amortization for a certain investment which generated a corresponding income tax benefit during the quarter.

Adjusting for this item, our operating expenses increased only $372,000 linked quarter.

The other expense category increased $2.4 million linked quarter are due to costs 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 a lower incentive compensation expense.

For the year, noninterest expense increased $20.5 million or 3.9%.

Excluding the aforementioned tax credit investment amortization, noninterest expenses were up $15.6 million or 3%.

Salaries and benefits expense was most of this year-over-year increase, increasing by $13.1 million.

We also absorbed $3.6 million of charter consolidation cost during the year as we continue to simplify our franchise and unify our brand.

Income tax expense decreased $3 million linked quarter, due to the tax credits associated with the aforementioned tax credit investment and lower 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 $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 4 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 in a mid- to high single-digit range.

We expect our net interest margin to grow 0 to 3 basis points per quarter during 2019.

Our margin is influenced by a number of factors, including our loan and deposit mix, loan and deposit betas and overall interest rate levels.

We expect our noninterest income to increase year-over-year in a low to mid-single-digit range.

Excluding our remaining charter consolidation cost, we expect our noninterest 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'll now turn the call over to the operator for questions.

Sydney, go ahead.

(Operator Instructions) And our first question comes from Austin Nicholas from Stephens Inc.

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.

It's -- in our assumptions, we assume an increase in June and we assume one in December of 2019.

Now the one in December of 2019, obviously, has very little impact on 2019.

The one in June, we actually ran our forecast internally with and without it, and if we assume 0 rate increases, it would impact our internal forecast by about 2 basis points.

So said another way, whether we see these rate increases or not, we think we're still comfortable with the guidance of 0 to 3 basis points per quarter.

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 8 branches that are expected to close this quarter?

And then additionally, that excluding the tax credit amortization expense or is that including that number?

Yes, no, it includes the tax credit amortization.

I mean, the tax credit that occurred this quarter, a lot of our tax credits are either low-income housing tax credits or they're new markets tax credits, which are amortized where 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 onetime credit and a onetime 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 amortization.

That number's 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 closure that either happened -- well, we closed 2 in the fourth quarter, 8 coming here in the first quarter.

There's going to be some additional cost on that in next year, which are in our expense guidance but then there's also going to be savings related to that.

And the earnback on those branch closures in terms of the onetime cost versus the savings has less than 1 year, that's about 10 months for the earnback.

Got it.

Okay.

And then, maybe just last one, I think that you spoke about the kind of the provisioning for a specific credit this quarter and I believe it was in the agribusiness kind of vertical.

I guess could you maybe speak about that overall -- the overall agriculture portfolio and how you'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 declined and if I look at your C&I or your commercial delinquencies, they continue to come down.

So maybe any commentary on your comfort of that on the portfolio outside of the kind of downgrade that you saw this quarter?

Yes, so we think it's still stabilizing.

You exclude this credit and delinquencies and our ag portfolio actually would have been down for the quarter.

And so I think we continue to watch it closely but are pretty comfortable with it.

Our follow-on question comes from Chris McGratty with KBW.

Question on the buyback, it's -- the slide deck suggested capital levels at these levels through the next year.

I know you got a sub of, what, $5 million left.

Is it fair to assume that you're not looking to come back to the buyback, given where stocks are trading?

Or is -- because you were fairly aggressive in the fourth quarter, I'm 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 just 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 got another -- one of the MOUs lifted.

Can you speak to kind of desire to do a deal in 2019?

Your stock has held up on a relative basis a little bit better than peers and just kind of interested if deals would be kind of climbing the ranks of priority for '19?

Well, we still have orders against the holding company in our subsidiary bank Lafayette Ambassador.

So until they go away, a deal is still not possible.

But if the right strategic deal came along after those were lifted and it would work from a financial standpoint, we would have interest.

Okay.

Great.

And then, maybe a last one, if I could, on credit.

Understanding the second quarter was kind of a idiosyncratic event and this quarter you had the inflow.

I'm wondering why -- it seems like you set a reasonably high bar for yourself for '19 on the provision.

And just given the concerns that are kind of permeating in the market from the credit and economy, wondering why it seems to be a little bit of an aggressive guide on the provision?

Maybe you could speak to your confidence on what you're seeing that we may not be able to see from the outside.

So overall, our -- we do not see softening in our overall portfolio.

And this past quarter, even with that one large credit, we were -- would have been very close to this guidance.

So we have confidence that the range that we gave should hold up for now anyway.

Our next question comes from Joe Gladue from Merion Capital Group.

Maybe just a follow-up on one of the earlier questions on interest rate expectations.

You talked about what you're expecting to rate hikes.

But just wondering, what your thoughts are on the slope of the yield curve and how that might be affecting your investment portfolio strategy and such?

Yes, I wouldn't say it's having a lot of impact on our investment portfolio strategy.

We have -- I mean, our investment portfolio, Joe, has cash flows 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 CMOs 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 we're buying on.

And there's, obviously, a significant yield pick up on that.

Okay.

And just wondering, I guess, you did mentioned earlier in the prepared remarks about the higher prepayments, just wondering if you could quantify that a little bit, what you saw in the fourth quarter that you've not already.

Yes, sure.

We had highlighted each of the past, in the second quarter and third quarter, we had emphasized that our prepayment, specifically in our commercial business, were 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 quarter.

So you take from the beginning of the year to now, our prepayments have actually increased in the commercial space by $160 million.

Now when you're going to look at our overall growth we had in the fourth quarter, what it means is that we had a solid -- really solid quarter relative to the last 3 linked quarters for commercial originations.

But we continue to see very high prepayment activity.

Amortization in just kind of normal loan book, that's relatively flat, that's somewhere in the $650 million per quarter range.

But the prepayments have accelerated.

Our following question comes from Russell Gunther with Davidson.

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?

Yes, we do.

And I believe we'd even said maybe on the last call, we had said that we expected to be somewhere in the range of $2 million to $3 million per quarter and the timing of that is likely going to be heavier in the second and third quarter of next year.

We would hope -- by the time we're into the fourth quarter of next year, we should see those charter consolidation costs behind us.

Okay.

I appreciate that, Mark.

And then you'd also said earlier that as part of some of the efficiency initiatives you'd 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 in some of those efficiencies you had talked about earlier?

Yes, we have -- again, we continue to look at a whole bunch of different ways to make ourselves more efficient.

Obviously, we just announced between 2 this quarter and 8 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'll continue to see us shrink in markets that aren't as desirable or where we have too many branches for changing customer preferences.

But you're going to see us open branches in markets where we see a market opportunity.

As we've mentioned in prior calls, much of the consolidation of our company despite running the separate bank charters, we've had a largely consolidated back office for some time.

And while we see there could still be some incremental savings, as we get further past the charter consolidations and the BSA orders, we're not quantifying that as a hard dollar number at this time.

I think -- but certainly, the expectation is for a long-term positive operating leverage.

And with that, we are really pleased with where we brought our efficiency ratio to for both this year and for the fourth quarter but we are 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 agribusiness credit.

Is there any kind of further detail you could share on the specific credit, why that would -- why even with that you still feel 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 negative.

The shutdown of the government has had an impact on -- for us with our SBA lending and it has some impact in the mortgage area.

But to date, we have not seen any impact in the agricultural portfolio.

Okay.

Sorry, I'll just sneak one more in here, please, on the loan growth outlook at the low to mid-single digits on average, how do you expect that kind of mix to look?

Should we expect sort of similar drivers to 2018?

Or as you look out this year, any particular loan bucket showing more restraint than others?

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 in exactly what's going to happen so if that strengthens a little, I think we'll be more to the high end of the guidance.

And if it doesn't, we'll be more in the middle to the low end.

Our next question comes from Matt Schultheis with Boenning.

So just a quick follow-up to Russell's question regarding the government's shutdown.

Aside from ag or SBA, have you seen any customer request particularly on the retail side regarding delinquency or any sort of reach out from mortgage borrowers in Maryland or Virginia to sort of work with them as they are furloughed 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'll offer a secured line of credit at 0% for up to 3 months.

We're willing to allow deferment of payments on consumer loans, and we're offering some relief on overdraft protection.

To date, we have not seen any weakness and have had -- have not had a lot of inquiries into those programs.

Okay.

And just, I know you don't want to give a lot of detail on this particular credit, so I understand that you may not answer this but I'm still obligated to ask.

Was there a -- did this sort of come to the surface through any change to your policies and procedures regarding loan review following the fraud or was this something more borrower-specific?

No, it was borrower-specific.

And it's been a credit that we've been watching for some time.

Our following question comes from Matthew Breese with Piper Jaffray.

Just to follow that thread there.

Just curious, what was the total size of the relationship that went sideways this quarter?

How long have you had that relationship and was the nature -- what was the nature of the agribusiness?

Was it poultry, or dairy or other?

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 3 or 4 years is how long we've had that credit.

And, yes.

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

We're the only bank.

Okay.

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

And I wanted to get a sense for...

So approximately half of that credit is a C&I loan and half are leases.

So the increase that you see in the leasing category is related to that credit.

Right, right.

And following that thread, there was -- there is 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 on that credit, and we do not -- if, the credit would continue to go south, which we're certainly all hopeful that it doesn't.

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?

The -- the farm bill only got passed later in the year than expected, that would be one thing I was thinking.

I would say, no is the answer to that question.

Okay.

And then changing subject a little bit.

The tax rate guide, 13% to 16%, seems a little high versus what we saw this year.

Could you just give me an idea of what would end you up on the low end versus the high end?

Is there anything in there that's tied to some of the New Jersey state tax laws that you might have a firmer grasp of now?

Yes, there's a little bit of that in there but that's really de minimis.

I mean, what it really comes down to is that post-Federal tax reform, we have historically been having investors and participants and low-income housing tax credit transactions.

Post tax reform, we've capped that portfolio a little bit and that's why you've seen the glide path from '16 to '17 to '18 to '19, the amortization absent this kind of one solar credit transaction that happened in the fourth quarter, you've seen a glide path downward in the amortization on these tax credit deals.

So it's really as simple as, Matthew, when you have a constant level of tax preference items, but you expect to see your 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 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 are not really disclosing a lot yet other than to tell you that we have been working very, very hard internally on it.

We are fully confident of our ability to comply with the new standard in the first quarter of 2020.

And that we are, again, working very, very hard on model development and our methodologies throughout 2019.

And if we get to a point that we think it's appropriate to disclose, we'll certainly make a disclosure at that time.

But until then I can just assure you that we're spending a lot of time and effort and energy around this and have a great team working on it.

Understood.

Just last one for me is on the branch closing effort, it sounded like there's more to go there beyond just the first quarter of '19.

As we think about potential branch closures cost and the expense run rate, is that baked into your guidance?

It is, it is.

Yes, so the 2 in the fourth quarter and the 8 in the first quarter, both the cost savings as well as the onetime costs are baked into the guidance we gave.

(Operator Instructions) Our next question is from Chris McGratty with KBW.

Mark, I just had a -- just want to make sure I got in these things, I know you got a lot of questions on it.

The branch consolidation and the conversion cost, I guess what an aggregator should we expect in 2019?

I understand that the low single-digit growth rate off of '18, but what's -- can you just spell it out for I think -- second and third quarter are heavy, but what's the total amount, because I would imagine that some of these are kind of deemed onetime?

Yes, total amount.

We have $3.6 million of charter consolidation cost in 2018.

In 2019, we think that, that number could be $4 million to $5 million higher.

So you could 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 then in terms of the branch consolidation cost, we expense $1.3 million of that in '18 related to either branches that closed in '18 or branches to close in '19 because once you reach that trigger point, you start accelerating leasehold amortization and such.

There is 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 earnback from that total, so there's $2.9 million of cost.

The annualized savings on those we think should be $3.5 million.

So it's an earnback of about 9 or 10 months.

Okay.

I appreciate that.

And then just in terms of the size, just to follow-up on the credit, can you remind us the size like the internal limits on credits.

I mean, the $35 million is a little bit higher than I would have thought on a kind of standalone basis as opposed to like a club deal.

But could you remind us kind of internal limits on single relationship that you have in place?

Yes, our internal limit is $55 million, and we, I think, think that's pretty conservative number.

Okay.

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

A couple of handfuls.

I'm showing no further questions at this time.

I would now like to turn the call back to 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.