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FIRST REPUBLIC BANK (FRC) Q2 2018 Earnings Conference Call Transcript

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FRC earnings call for the period ending June 30, 2018.

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FIRST REPUBLIC BANK (TSX: FRC)
Q2 2018 First Republic Bank Earnings Call
July 13, 2018, 2 p.m. EDT

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to First Republic Bank's Second-Quarter 2018 Earnings Conference Call. During today's call, the lines will be in listen-only mode. Following the presentation, the conference call will be opened for questions. I will now like to turn the call over to Shannon Houston, senior vice president and chief marketing and communications officer. Please go ahead.

Shannon Houston -- Senior Vice President and Chief Marketing and Communications Officer -- First Republic Bank

Thank you, and welcome to First Republic Bank's Second-Quarter 2018 Conference Call. Speaking today, will be Jim Herbert, the Bank's chairman and chief executive officer, Gaye Erkan, president, and Mike Roffler, chief financial officer. Before I hand the call over to Jim, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties, and assumptions.

For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see the Bank's FDIC filings ,including the Form 8-K filed today, all available on the bank's website. And now, I'd like to turn the call over to Jim Herbert.

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Thank you, Shannon. We continue to deliver safe, strong, and organic growth. It was another excellent quarter by virtually every measure. Let me share some highlights from the quarter. The year-over-year total revenue grew 16%, net interest income grew 15%, and tangible book value per share increased 11.4%. Our results were driven by strong growth across the franchise. Total loans were up 19.7%, total deposits grew 15%, and wealth management assets grew 27%, all year over year.

Our loan origination volume for the quarter totaled $9.4 billion, our strongest quarter ever. So single-family residential and business lending were quite strong. Importantly, credit quality remains excellent. Our nonperforming assets were a very low 5 basis points, while net charge-offs for the quarter were just 771,000, less than a single basis point. Our capital levels remain quite strong.

We're pleased to have successfully accessed the perpetual preferred market during the second quarter, and Mike will talk more about this in a moment. The quarter's results reflect continued, consistent execution of our intensely client-focused business model. We continue to deliver safe growth by maintaining the highest possible credit standards while delivering exceptional client service to our very strong urban coastal markets.

As we noted in our last call, our client satisfaction remains particularly high. This is reflected by our net promoter score, which is at an all-time high of 75, more than twice that of the banking industry on the average. Service delivery is our key to growing the relationships with our clients and to help us attract new households to the bank. Gaye will speak about this household growth in a moment.

The more satisfied our clients are, the less likely they are to leave us, and the more likely they are to refer their friends and colleagues. It's actually a very simple model. Also, quite importantly, the markets that we operate in continue to be very strong. Our recently completed Capgemini market study, which we do every other year, shows that our markets now contain fully 59% of all high-net-worth households in the United States, up from only 46% share in '03.

The number of such households that First Republic serves grew approximately 11% per annum between 2015 and 2017, obviously a very strong increase. There is tremendous opportunity still in front of us as well. Overall, we're very pleased with the quarter and the first half of 2018. Let me turn the call over to Gaye Erkan, president.

Gaye Erkan -- President -- First Republic Bank

Thank you, Jim. As Jim indicated, our very high level of client satisfaction and repeat business continues to drive our safe, strong, organic growth. Overall, economic conditions in our urban coastal markets continue to be strong, and our clients remain quite active. During the quarter, loan origination volume was exceptionally strong at $9.4 billion. As Jim noted, it was our best quarter ever. We are very pleased that single-family residential volume was three $3.1 billion during the quarter, representing the largest portion of our overall loan origination.

Importantly, the weighted average loan-to-value ratio on new single-family origination remains very conservative at at 59% in the second quarter. Single-family volume was 56% purchased and 44% refinanced. Business loan volume had an unusually strong origination quarter, up $1.4 billion from the second quarter a year ago. This was driven mainly by new and increased capital call-line commitments to private equity and venture capital clients, and will likely not repeat in the next quarter. The utilization rate on business lines of credit has remained at approximately 35%, consistent with the past few quarters.

Multifamily and commercial real estate loans also had a strong quarter. Importantly, our weighted average loan-to-value ratios on new multifamily and commercial real estate originations during the second quarter remain very conservative at 50% and 47%, respectively. We continue to maintain disciplined underwriting standards across the entire business. We have not and will not loosen our credit criteria in spite of the current, very considerable competitive pressures to do so. Turning to deposits, overall it was a good quarter.

Deposits were up 15% from a year ago. While balance sheet normalization by the Federal Reserve and rising rates present challenges to all banks, we remain pleased with the diversified deposit growth across all of our channels and geographies. Checking deposits represented over 60% of our total deposits at quarter end. Business-related deposits were 56% of total deposits consistent with last year. CDs represent 14% of deposits and continues to be a very effective way to attract new households, as well as to lengthen liabilities during this period of rising rates.

Turning to private wealth management, the business continues to perform very well. Year-over-year, wealth management assets were up 27%, and now total over $121 billion. Private wealth management continues to grow by doing more with our satisfied clients and attracting referrals. We are also pleased to have hired four new teams this quarter which has contributed to the growth in assets. Wealth management fee revenues were up 22% compared to a year ago. Overall, it was a strong quarter. Now I would like to turn the call over to Mike Roffler, Chief Financial Officer

Mike Roffler -- Chief Financial Officer -- First Republic Bank

I'll cover capital, net interest margin, our efficiency ratio, the tax rate, and earnings per share. Overall, our capital position remains strong. In June, we completed a perpetual noncumulative and preferred stock offering of $300 million at a fixed rate of 5.5% for life. This offering will increase our preferred stock dividends by approximately $9 million in total for the second half of 2018. Subject to regulatory approval, we currently intend to use $200 million of capital to retire our outstanding 7% perpetual preferred stock at the end of December 2018.

Our liquidity also remained strong. At June 30, HQLA, as a percentage of average quarterly assets, was 12.3%. Turning to our net interest margin, we are pleased that the margin was 2.95% during the second quarter. Our earning asset yields were up 7 basis points, while our total funding costs were up 9 basis points during the quarter. For perspective, the average cost of our total liabilities was 61 basis points, and the beta on this overall liabilities compared to the change in the federal funds rate has been approximately 18% since the third quarter of 2015.

We continue to expect net interest margin to be in the range of 2.85% to 2.95% for the rest of 2018. Our efficiency ratio for the second quarter was 63.5%. We're pleased to maintain a stable efficiency ratio while delivering strong revenue growth and investing in the franchise for long-term opportunity. We continue to expect the efficiency ratio to be in the range of 63% to 64% for the full-year 2018. Turning to our tax rate, our effective tax rate for the second quarter was 16.8%.

Our second-quarter tax rate is typically a bit lower due to incremental tax benefits resulting from the majority of our outstanding result stock awards vesting during the second quarter. We continue to expect the bank's effective tax rate to be approximately 19% for the full-year 2018. Finally, earnings per share were $1.20, up 13% from a year ago, reflecting our safe, strong organic growth. Thank you. Now, I will turn the call back over to Jim.

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Thank you, both Mike and Gaye. We're quite pleased with the strong and consistent performance delivered during the second quarter and for the first half 2018. The client service model continues to work very well, quality of credit is strong, and our acquisition of new households is at all-time high. Thank you, and we'd be happy to take questions.

Questions and Answers:

Operator

Thank you. I'll now be conducting a question-and-answer session. If you want to ask a question, please press star one from your telephone keypad, and a confirmation tone indicates your line is the question queue. You may press star two if you'd like to remove your question from the queue. For participants that are using speaker equipment, it maybe necessary to pick up your handset before pressing the star keys. Our first question is coming from the line of Dave Rochester with Deutsche Bank. Please proceed with your questions.

Dave Rochester -- Analyst -- Deutsche Bank

Hey, good morning, guys.

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Good morning, Dave.

Dave Rochester -- Analyst -- Deutsche Bank

You guys had mentioned the strong capital call-line growth; I was just curious where that portfolio sits now in terms of total balance?

Mike Roffler -- Chief Financial Officer -- First Republic Bank

In terms of total balance, it's been about 40% of our business banking outstanding. The commitments are obviously a bit larger and, as Gaye had mentioned, we're at roughly at 35% business utilization rate. So, 40% of $9.5 billion is about just under $4 billion.

Dave Rochester -- Analyst -- Deutsche Bank

Okay, great. And Gaye, I think you'd mentioned competitive pressures on loans, and you gave all of the LTVs on your originations. Are you guys seeing more banks compete on LTV this quarter or other structure?

Gaye Erkan -- President -- First Republic Bank

It's more we're seeing other competitors stretching in the LTVs. As you know, we're very conservative when it comes to credit; we will compete for strong credit, but we won't stretch in credit terms, which other banks are seeing to do so.

Dave Rochester -- Analyst -- Deutsche Bank

Okay. Are you seeing any kind of increase in the incidence of that this quarter?

Gaye Erkan -- President -- First Republic Bank

Yes.

Dave Rochester -- Analyst -- Deutsche Bank

Are you seeing that primarily from the bigger banks?

Gaye Erkan -- President -- First Republic Bank

Yes, indeed.

Dave Rochester -- Analyst -- Deutsche Bank

Okay, great. And then just switching to the NIM, I suppose the June hike. Are you seeing any movement on deposit rates among competitors at this point?

Gaye Erkan -- President -- First Republic Bank

The competitive pressure on deposits remains. So far just to take a step back we're very pleased with 15% year-over-year growth rate with a 24% beta compared to what has been disclosed in the earnings so far. The banks, the larger banks are around mid -30s of beta since inception. Just to take a step back, we're looking just at total cost of total liabilities, which is a better measure in a rising rate environment to take all the diversification of funding into account. And the beta on our total cost of liabilities has been less than 20% since the first Fed hike, since the end of third quarter of '15.

Dave Rochester -- Analyst -- Deutsche Bank

Yes.

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Hey Dave, it's Jim. Let me just weigh in on that point for a second, because this is something that we actually hear about a lot, and we're a little surprised. The total liability, for instance, for the bank in the last quarter went up 9 basis points. The other four banks that have reported so far today went up 15 basis points. Our deposits went up 6, and those four banks went up 8. I'm not sure where this is coming from, to be honest with you. I think people should pay a little more careful attention to the actual facts.

Dave Rochester -- Analyst -- Deutsche Bank

Yes, OK. Great. I guess on the funding side, I noticed you added some term funding this quarter. I was just curious as to what the rates were and the duration of that. I know you typically do that in 2Q, but was just curious if we get an update on that front?

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Sure. So, yes Dave, we have used the Federal Home Loan Bank as a good source of funding. It helps us lengthen our liabilities in the second quarter, given some of the seasonality with deposits is a time when we use it more. We typically go out two years, three years, and right now those rates are 2.75, 2.80.

Dave Rochester -- Analyst -- Deutsche Bank

Okay, and then just one more real quick one on CDs. Just saw that you had a 2% or out there and one that was a little bit higher,  that was longer duration. Are you seeing -- are you actually getting new money on those products, or are you just seeing more of a shift from some of your other products into those CDs?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Let me just comment for a second then turn it over to Gaye. To state the obvious, I've been leading the organization for quite a while. CDs come and go, a lot of people are not very used to them because we've had low rates for so long but in fact historically at First Republic, they've been a very key product for us. We have a 72 office system and the size of the office is north of 350 million on the average. So the CD tools in fact when we understand very well, it comes in on the retail side as a driver of traffic and as an accommodation to mostly somewhat more mature savings clients but we also cross-sell checking very heavily off it and other products. At any moment in time, we'll have a special, but that generally is sort of milk in the back of the store and we will negotiate and cross sale, offer that lead product.

Gaye Erkan -- President -- First Republic Bank

Just to add to Jim's comments. Over 50% of our CD clients have other deposit relationships with us, and most of our CD when you look at the snapshot of our CD balances. Over 80% of consumer CDs and the average consumer checking balance of consumer CD clients per household is over a $100,000. The weighted average original term is over 18 months. In a rising rate environment, not only is it a great diversification of funding, but it's also helping us lengthen the duration of the liabilities.

Dave Rochester -- Analyst -- Deutsche Bank

So, it sounds like its a combination of the two in terms of new money versus clients moving funds, is that a fair statement?

Gaye Erkan -- President -- First Republic Bank

Correct.

Dave Rochester -- Analyst -- Deutsche Bank

Okay, great. All right. Thank you very much guys, appreciate it.

Gaye Erkan -- President -- First Republic Bank

Thank you.

Operator

The next question comes from the line of Steven Alexopoulos with J. P. Morgan. Please proceed with your questions.

Steven Alexopoulos -- Analyst -- J.P. Morgan

Hey, good morning everybody.

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Hey, Steve.

Steven Alexopoulos -- Analyst -- J.P. Morgan

I wanted to first start follow up on Gaye's comments. So you don't expect the 2Q commercial volumes to repeat in the third quarter? Are you actually seeing a reduction and the pipeline for capital calls or you're just being conservative with the guidance?

Gaye Erkan -- President -- First Republic Bank

There has been significant client activity given the health markets and private equity and venture capital space. So, those draw, it was a combination of existing client as well as new activity coming in because of that one-off that we don't expect that to continue at that high level.

Steven Alexopoulos -- Analyst -- J.P. Morgan

Okay. Gaye, given that these are typically short-term loans, very short-term, how do you think about loan growth in the second-half?

Gaye Erkan -- President -- First Republic Bank

In general, we'll stick to mid-teens loan growth. Obviously, we have seen the first-half to be stronger or you would expect them to look at our pipeline it remains strong. So, we would still stick to the mid-teens loan guidance Steve.

Steven Alexopoulos -- Analyst -- J.P. Morgan

Okay. Then, just to switch over to the margin, with the loan to deposit ratio moving up quite a bit in the quarter at 95%, you talked about the funding strategy. Do you plan to increase promotions further to fund loan growth?

Gaye Erkan -- President -- First Republic Bank

So, we have two Fed hikes models for the remainder of the year. Based on that, we expected 285 to 295 mean range given those two Fed hikes. And will be opportunistic in terms of diversification of our funding strategy, but seeing the term funding that Mike mentioned earlier, the CDs, and the organic growth. As you know, the second-half tends to be a lot better in terms of the deposits surge and the increase in average account balances. I will like to note that the tax outflows we have seen in the second quarter has been 45% higher and mostly driven by consumer compared to the last year and despite that the average balances grew nicely.

Steven Alexopoulos -- Analyst -- J.P. Morgan

Okay. Overall, margin pressure was fairly modest this quarter, but the curve continues to flatten and you're keeping the low end of the guidance on them. Are you anticipating margin pressure to intensify in the second-half?

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Yes. So, I think from here Steven, it does trend down a little bit on. The Fed did just move in June obviously and guys said we have a couple of more hikes planned and you hit on one of the important points. The curve continues to be very flat. Then, competition for lending is challenging. So, I think we're migrating toward the middle of that range here in the next couple of quarters.

Steven Alexopoulos -- Analyst -- J.P. Morgan

Okay. Mike, while I have you on the expenses, we look at the first-half expenses are up about 20% versus the first-half of 17, do we still think mid to high-teens guidance is reasonable this year or do you think it will be closer to 20%? Thanks.

Mike Roffler -- Chief Financial Officer -- First Republic Bank

So, probably high-teens is probably better number. I think that we were pleased that we were 19% in the second quarter year-over-year, and so that's helpful. I might think about as we look at efficiency in sort of how we think about it, we've really don't know what to invest in the franchise to be at this range of 63% to 64%. We talked about in the past investing in wealth management, next-generation of clients, and then a lot of the technology.

I mean, just a couple of the technology things that we've talked about, successfully completed a full migration of digital mobile, new origination system per home loans, the way we on-board clients, and we really kept in this range of efficiency while we actually increased net promoter, also which is twice the banking industry. If we think about the future, this is a good range for us to be in. We do have some activity that we're in the preliminary stage, which is around replacing the core legacy banking system. This is going to be a servery or project.

We're very confident in our ability to execute, because of the experiences we had especially with next-generation and will be very methodical about it. So, that investment will take over the next couple of years, but importantly, a few people have touched on this, the FDIC assessments are right now elevated that they have in the last couple of years. They're going to come down starting in 2019, because the surcharge that the larger banks pay, will go away.

So, we're really pleased that this investment we need to make, can fit sort of right into that savings that we have coming, to keep this efficiency ratio of sort of 63 to 64 as we go out over a longer horizon.

Steven Alexopoulos -- Analyst -- J.P. Morgan

Okay, so that the 63 to 64 you saying, extends beyond 2018, and includes all the cost to operate the core system.

Mike Roffler -- Chief Financial Officer -- First Republic Bank

That is correct.

Steven Alexopoulos -- Analyst -- J.P. Morgan

Okay, great. Thanks, for all the color.

Operator

The next question, comes from the line of Ken Zerbe with Morgan Stanley. Please, excuse your questions.

Ken Zerbe -- Analyst -- Morgan Stanley

Great. Thanks, good morning. Just want to really, really make sure that we get the name commentary down right. So I guess, Mike you mentioned that you're trending toward the midpoint that range, but I guess that would imply, or sort of over the next two quarters. But that would imply, that's on a full-year basis, you end up in sort of the high end of your 285 to 295 range? I just want to make sure that that's right because otherwise, preserve building in 285 for the next two quarters, just hit the midpoint.

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Yes, so if I think of third quarter down several basis points maybe four and fourth quarter around that range maybe a little lower. If you're thinking 295, is not going to be down for the year. I'd come down from there toward the middle or slightly above the level.

Gaye Erkan -- President -- First Republic Bank

Just to add, it also depends on how the curve it's going to play itself. The flattening of the curve from outside we felt comfortable that the 285 to 295 range. We assume about two said hikes with a 50 bit steepness. If it weren't to flatten more obviously, would impact the two [inaudible] end of the range.

Ken Zerbe -- Analyst -- Morgan Stanley

Got it, understood. I guess more of a detailed question on the NII piece of the impact there. You mentioned deposit inflows, I think I heard that right, was stronger like a half. Obviously, you could have an NIM compression, just because you have more deposits, which is actually a positive for NII. But that versus, having NIM compression due to the flattening of the yield curve which is, I'm going to say, a negative to NII. Is the NIM compression weighted more toward the inflows, or the flattening curve?

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Probably more toward the curve, Ken, which is one of the reasons you actually hit on a good thing. What matters a lot is net interest income growth because that's what allows us to make the investments and to grow the franchise. So, you could have a slightly lower near from growth, but the curve is probably more of a driver today than that.

Gaye Erkan -- President -- First Republic Bank

Just to add, that's a great question actually. I'm glad that you're raising that. The net interest income is what pays the bills. So, the growth of the balance sheet especially compared to the banking sector when you compare First Republic, the growth of the balance sheet, the safe and organic growth is a great lever and mitigant, risk mitigant when it comes to a rising rate environment. So, the NII is the multiplication of the growth and the margin. While the margin may see pressure, the growth is actually as a bigger driver of the NII growth.

Ken Zerbe -- Analyst -- Morgan Stanley.

Got you. Understood. Then, just last question. When you think about the balance sheet or how you're supporting that loan growth, given higher short-term rates, given the deposit pressures or be it small, are you thinking in terms of changing or driving or supporting more than loan growth from the securities portfolio or that we can ease off on paying up on new deposits or is it still very much deposit growth? Thanks.

Gaye Erkan -- President -- First Republic Bank

Sure. Maybe let me take a step back for a second. So, we are service organization, so we are driven by our consumer repeat business, that existing clients and the consumer household growth. So, we have seen they're very pleased that the consumer households have grown 20% year-over-year compared to when you look at the prior five years, our consumer household growth has been at 9%.

So we are very pleased with that and obviously the Net Promoter Score plays into that. So that's no. 1. When we look at the lending relationship, we don't set goals. It is a client-driven and credit-driven decision. When it comes to securities portfolio, the yields have seen in the securities portfolio for the amount of duration that we are taking when compared to lending, for the first time the securities did not look as attractive.

They were on top of the lending yields with similar duration and yet with lending, we actually acquired relationships or we delight our relationship. So, that's what has been driving the securities purchases or the lack thereof.

Ken Zerbe -- Analyst -- Morgan Stanley.

All right. Great, thank you.

Operator

Our next question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.

Jared Shaw -- Analyst -- Wells Fargo

Hi good morning?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Morning, Jared.

Jared Shaw -- Analyst -- Wells Fargo

Maybe just on the deposit side. Are you seeing any geographic pressure differential maybe between your markets, your East Coast and West Coast markets or is it fairly standard across the platform?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

It's a pretty standard across the platform.

Jared Shaw -- Analyst -- Wells Fargo

Okay. Then, shifting I guess, following up on the capital call lines, as we've seen the higher rate environments all come through, have you been able to maintain the spreads on that or is the competitive environment? Have you actually seen spread contraction on incremental capital call lines?

Mike Roffler -- Chief Financial Officer -- First Republic Bank

No, they've been pretty stable. I mean, it's competitive so you've always got to have a quality pricing for the business, but it seems like they're consistent with where they've been spread wise.

Jared Shaw -- Analyst -- Wells Fargo

Okay. I guess just finally for me just following up a little bit on the margin question, should we expect to see some of that cash position be deployed as we move through this higher rate environment or do you feel comfortable keeping cash fairly stable there?

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Well, we always want to maintain a strong liquidity position and one of the things that happens, Gaye mentioned that the early part of the second quarter has some tax outflows from our deposit base. So, our average cash is actually a bit lower during the quarter and as deposits start to pick up following tax flows, you start to see a build of liquidity position. We will put that to work methodically as we always do.

Jared Shaw -- Analyst -- Wells Fargo

Great, thank you.

Operator

Our next question is from the line of Arren Cyganovich with Citi. Please proceed with your question.

Arren Cyganovich -- Analyst -- Citi

I wonder if you could just touch on the competitive environment for mortgage. [inaudible] pretty strong production for the quarter. Just thinking about how you're doing that geographically, for the rest of the year?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Hi, Arren. The competition is pretty tough. As was mentioned earlier and in two respects: One, pricing is still very tight and that's probably the place we're getting the greatest pressure from the curve, so to speak. The other one is standards are going down. I don't think they're bad necessarily yet, but they're not where we like them and so we're backing away from an increasing number of transactions.

The biggest constrain on loan volume is actually supply of homes for sale in our urban coastal markets. Almost without exception there is a supply shortage. New York would be the exception, but it's mostly it's a high-end. And so volume is really pretty strong across the markets but the competition is more aggressive than it would have been even a year ago.

Arren Cyganovich -- Analyst -- Citi

Okay. And you mentioned multi-family was fairly strong, is that kind of playing into that supply shortage as we're getting some more supply of multi-family in the different markets?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Yes. Well, the supply is not going up very much in the coastal urban markets. It's pretty hard to build new multi-family housing. You see a little bit of it in New York again, but not too much anywhere else. The cash flows on our multi-family properties are probably at an all-time high cash flow coverage on debt.

Arren Cyganovich -- Analyst -- Citi

Okay. And then just lastly on the student loan refinance and maybe you could talk a little bit about how that's progressing, how many households you've been adding, kind of at a more annualized rate and just your thoughts for a continued growth there?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Sure. We're actually very pleased with the results of that. The last 12 months was probably about an 8000 household rate. We add about another 1000 for professional loan program so we're running between 8,500 and 9,000 annual rate on that younger household acquisition rate.

Arren Cyganovich -- Analyst -- Citi

Great. Thanks a lot.

Operator

The next question is from the line of Casey Haire with Jefferies. Please proceed with your questions.

Casey Haire -- Analyst -- Jefferies

Thanks. Good morning guys. Wanted to touch on the loan yields. You guys had a very nice uptick, one of the largest you've had since the Fed began to tighten. Just some color there, was that positive mix shift from capital [inaudible] or are you just starting to see relief, just given the move and along out of the curve?

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Yes, Casey, I think, well one, obviously we do benefit a little bit from the rate hike in March and just a fair amount from June, so that's part of it. Second is the volume and the rates that new business is coming about on has improved. We hit sort of a bottom in what I'll call the third and fourth quarter of last year and it's steadily crept up and so the new yields are coming in a bit better, which is also contributing incrementally to the overall loan yield.

Casey Haire -- Analyst -- Jefferies

Okay. Any color on what the new money yield is today versus the 351 in the second quarter?

Gaye Erkan -- President -- First Republic Bank

Yes, just to add on that, so for a single-family residential to give you some idea, the second quarter originations were at 3.7%. For multi-family, the second quarter originations were at 3.9% and CRE at at 4.35%. And for single-family they're trending slightly higher, and for the rest around that level.

Casey Haire -- Analyst -- Jefferies

Okay. Great. And then Mike, just switching to capital management. I know you guys have been, you guys are above your targets, but obviously, a very strong growth quarter and pipelines are strong. Can you just give us some updated thoughts on capital management, not just the Tier 1 common, but also the Tier 1 leverage ratio as well?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

It's Jim. We've always tried to stay pretty well-capitalized, as you know. As we see growth coming, we tend to go to the Capital Markets. We did that with the preferred. As Mike noted, we raised 300 million. We're going to use 200 if you track the money which we don't necessarily, but the point is, we would subject to regulatory approval of redeemed 200 million. We'll need to keep our capital topped up here, and I would expect that we will be back to market it sometime in the next few quarters.

Casey Haire -- Analyst -- Jefferies

Okay, great, thank you.

Operator

The next question is in the line of Lana Chan with BMO. Please proceed with your question.

Lana Chan -- Analyst -- BMO

Hi, good morning. I just want to follow up on Gaye's comments earlier on the securities yields now versus the loan portfolio. Should we take that to mean that you're not going to really build the securities growth going forward?

Gaye Erkan -- President -- First Republic Bank

We will make sure to maintain our HQLA ratio at or above 12%, and anything beyond that on the yield and has some portfolio will be opportunistic.

Lana Chan -- Analyst -- BMO

Okay. Any color in terms of I guess the recent deregulation around the Muni inclusion, potential inclusion on the HQLA?

Gaye Erkan -- President -- First Republic Bank

Yes. Great question. As you know, we do hold a sizable amount of municipal bonds in our portfolio, and it's likely that there will be some positive impact to our HQLA. As a result, HQLA ratio is a result of this bill. Yet, we will work with our regulators in the coming months to determine the appropriate treatment of these Muni bonds in our portfolio on a go-forward basis.

Lana Chan -- Analyst -- BMO

Okay, thanks. Just last question, I don't know if I missed it, but did you give the spot rate for deposits at the end of the quarter this time around?

Gaye Erkan -- President -- First Republic Bank

We did not yet, but we would expect it to be again taking into account. We just had a Fed hike in June and another one expected on September. It'll be around mid 40s.

Lana Chan -- Analyst -- BMO

Forty's you said?

Gaye Erkan -- President -- First Republic Bank

Mid 40s.

Lana Chan -- Analyst -- BMO

Okay, thank you.

Gaye Erkan -- President -- First Republic Bank

Thank you.

Operator

The next question is from the line of Aaron Deer with Sandler O'Neill. Please proceed with your questions.

Aaron Deer -- Analyst -- Sandler O'Neill

Hi, good morning everyone. It's curious, I guess, just kind of ties into some of the margin discussion, but the loan-to-deposit ratio came up some and I'm just curious with respect to the extent that you're managing toward any specific ratio there? If you're not seeing the normal seasonal deposit inflows that you typically would expect during the back half. Would you go out and pay up more on the CD side to keep that loan-to-deposit ratio where it is or even push it down summer? Any thoughts on that front about what the appropriate level is there?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Aaron, no not necessarily. It's a ratio we're aware of, but it's not a driver for how we run the business. It fluctuates over the years, lower 80s to a high 90s, I mean. But, that's one of the reasons we're focusing entirely now on the total liability costs as well. having said that, I think the second half of the earned deposits should be pretty good. We will use the CD tools I said earlier, but we've used that over decades very effectively. But, our full deposits actually is pretty strong.

The biggest thing that happened was on the negative side, the [inaudible] as Gaye indicated, the outflow of tax payments was unusually high this year. Which it was not as much of a surprise as all that given the tax planning of people did in the face of the tax bill that happened, particularly our client base if you think about it. But, the driver is always net interest income on the enterprise because of the growth in nature.

Aaron Deer -- Analyst -- Sandler O'Neill

Okay, Jim you've mentioned, possibly come back to the capital markets kind of given where the capital stock is now, and sort of preference in terms of what type of capital we'd be looking in the next round?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

No, not really, only two. We Have some term sub-debt as you know but the drivers really our preferred and common and we tend to toggle back and forth a little bit. It's important to everybody should remember we do very small transactions. We try to be very systematic about it.

Aaron Deer -- Analyst -- Sandler O'Neill

Okay. Then just one last one for Mike you mentioned kind of a longer term basis still hoping to stick with that 63% to 64% efficiency ratio guidance. Is that inclusive of kind of an expected ongoing shift toward wealth management being a kind of a bigger part of the franchise or what are your thoughts there?

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Yeah. No, that's right in addition to the things that I talked about earlier, it is a part of that as wealth revenues continue to grow as a part of our total revenue base which they're now over 14%. That does have an impact, a little bit up on your efficiency ratio going forward.

Aaron Deer -- Analyst -- Sandler O'Neill

Okay. Thanks for taking my question.

Operator

Our next question is from the line of Geoffrey Elliott with Autonomous Research. Please proceed with your question.

Geoffrey Elliott -- Analyst -- Autonomous Research

Good morning. Thank you for taking the question. Do you think there is a point with rising rates where you start to see more of a shift ounce in checking and into like a savings or CDs? Customers just run with lower checking balances because the opportunity costs is getting higher.

Gaye Erkan -- President -- First Republic Bank

What you just said actually that's how we model the NII simulation in our 10-Qs. We do assume some shifts from checking to be conservative. Having said that, our internal liquidity stress test, we always look at what deposits are off operational nature, and thus are there for the service not for the yield necessarily. That percentage seems to overlap the checking percentage and on an average basis our checking percentage remained at 63%, just to note.

Geoffrey Elliott -- Analyst -- Autonomous Research

Great. Thank you.

Gaye Erkan -- President -- First Republic Bank

Thanks.

Operator

The next question is from the line of Chris McGratty with Keefe, Bruyette Woods. Please proceed with your questions.

Chris McGratty -- Analayst -- Keefe, Bruyette Woods

Hey, good morning. Thanks for the question. Jim or Mike Winters one more on deposits apologize. Based on your business mix between consumer, commercial and wealth, interested in kind of kind of how the conversations are growing within each and where the pressure points are within the portfolios. I think last year midyear you had a reset in the wealth deposit rates and kind of sit in conversations that are happening now that we've had more successive rates. Thanks.

Gaye Erkan -- President -- First Republic Bank

Our checking as you know has remained over 60% in terms of ending balance and the rate on that has not really moved except five basis points. CDs, we try to keep it competitive. Having said that over 50% of these clients do have other deposit relationship including a sizable average checking balance on the consumer side, which brings down the total cost of those. The diversification also come send by the consumer household growth, which I mentioned, that we have increased our number of consumer households by 20% year-over-year which have been mainly on the deposit side.

So, while we're seeing competitive pressures obviously on the money market checking and money market savings and CDs which is what's repricing it up quarter-over-quarter. So far we have been pleased with the lag in terms of beta.

Chris McGratty -- Analayst -- Keefe, Bruyette Woods

Thank you.

Operator

Our next question is from the line of Brock Vandervliet with UBS. Please proceed with your questions.

Brock Vandervliet -- Analyst -- UBS

Good morning, everyone. I can't possibly think of more spread income question. So Mike, I guess if you could just take a deeper dive on some of the expense trends, particularly the professional fees, advertising, and marketing, those two areas were a little off from our model. I'm just trying to get a sense of whether those levels we saw this quarter are levels we should see going forward?

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Sure. So advertising and marketing, we are continuing to, as Jim mentioned, acquire households in our next generation strategy, that does lead to some marketing spending. The other thing is we did run some TV time for gratify again in the second quarter, and so that pushed us up a little bit along with a few more client events. On professional fees, it's sort of a mix of combination of legal fees a little bit higher and then some professional fees around different projects we have going on. You know, $15, $16 million on the professional fees is not about run rate, in advertising it's probably not a bad run-rate there either.

Brock Vandervliet -- Analyst -- UBS

Okay. Great. And just in terms of an operational update on gratify. Clearly, the client acquisition funnel is working well. Any updates on when you believe they may be become profitable or range around that, that we should be thinking about?

Gaye Erkan -- President -- First Republic Bank

So probably it would be in the year 2020 because we have been expanding the platform. Some exciting updates on that. So we have added the 529 college saveup product expanding the platform in April 2018, and we have quite a few number of employers who already have signed to launch this product for their employees. And we'll also be adding a tuition reimbursement component in 2019 as well. So we would expect that to be in 2020. Just the loss, as you know, gratify refi is also another solution on the platform, on the HR benefit platform that comes with gratify. The pickup in employers on gratify refi has been very exciting compared to the pay down. We have significant number of employers on that platform as well. So right now, we have paid down college saveup and the gratify refi already ready on the platform tuition reimbursement to come in 2019.

Brock Vandervliet -- Analyst -- UBS

Great. Thanks for taking my questions.

Gaye Erkan -- President -- First Republic Bank

Thank you.

Operator

Our next question is from the line of David Chiaverini with Wedbush. Please proceed with your question.

David Chiaverini -- Analyst -- Wedbush

Hi, thanks. It was mentioned that the supply shortage is one of the biggest headwinds in mortgage, but I was wondering is the cap on the state and local tax deduction impacting your clients and mortgage demand?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

It's interesting, we keep looking for that but so far it hasn't been a noticeable impact, just a personal opinion that we don't have any even evidence of this, but I don't think that is going to happen until people actually pay the difference in taxes next year. This year, it's currently theoretical. The only people feeling it right now are the people who have the estimate for withholding quarterly, but that may be coming. But as of now, no, I would say it isn't impacting.

David Chiaverini -- Analyst -- Wedbush

That's it for me. Thanks very much.

Operator

Our next question is from the line of Matthew Keating with Barclays. Please proceed with your questions.

Matthew Keating -- Analyst -- Barclays

Yes. Thank you. I just had a question with the updated Capgemini study out. If you could maybe talk about any differences you saw among your markets in terms of the bank's market penetration rate of high net worth households. Are those details available yet or should we expect those later in the year? Thanks.

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Sure, thanks. Well, in the new deck that's out this morning, we did update their page on the market penetration numbers that come from Capgemini. So, that's updated and that's page No. 5, I think, right, in our deck.

Matthew Keating -- Analyst -- Barclays

I guess maybe my understanding was that in San Francisco, you guys used to have a penetration rate in the low teens, right? But then, in markets like New York and Boston, it was significantly lower. So, I guess my question is more around did you see any variation, I guess, in the trends? While, certainly, the market penetration rate has picked up a bit versus 2015, have any markets performed better or worse within the footprint?

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

There's variation among all the markets but they're all performing well. Our share are a number of households is up in every market. Our share growth rate is different from market to market. Generally speaking, it aligns somewhat with the markets in which we are already the strongest, which is one of the interesting anomalies of the model. If you think about why that happens, it's the net promoter score. If you have a high net promoter score, the more people that are in a market that are net promoters, the more likely you have compounding. That's the reason we stick to the markets we're in. It's a very simple but overlooked concept.

The other thing about this study, which is fascinating, is that, in fact, on page five, you'll see in our new deck that our share of market has not actually gone up very much. It's gone up from 4.02 to 4.21 in 15 and it went up from 02 to 21 from 15 to 70. Our growth rate of households, however, is 11.6% compounded annually. If you think about that, what it means is the market's growing at a very rapid rate.

Matthew Keating -- Analyst -- Barclays

Got you. Maybe just the last question along those lines. So, we read earlier this year that the bank has doubled its office space in New York are about double its office space in sort of the Rockefeller Center location. I guess, is that relate to any near-term growth initiatives in the New York City market or maybe you can provide some color around that move? Thanks.

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Yeah. It was slightly misleading in a sense that it's accurate, but it's over time. Our commitment is a forward commitments. So, over about a five-year period, we're going to double.

Matthew Keating -- Analyst -- Barclays

Got you. Thank you.

Operator

Thank you. At this time, I will turn the floor back to Jim Herbert for closing remarks.

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Thank you all very much for being on the call today. Have a good day.

Operator

This concludes today's teleconference. Thank you for your participation. You may now disconnect your lines this time.

Duration: 51 minutes

Call participants:

Shannon Houston -- Senior Vice President and Chief Marketing and Communications Officer -- First Republic Bank

Jim Herbert -- Chairman and Chief Executive Officer -- First Republic Bank

Gaye Erkan -- President -- First Republic Bank

Mike Roffler -- Chief Financial Officer -- First Republic Bank

Dave Rochester -- Analyst -- Deutsche Bank

Steven Alexopoulos -- Analyst -- J.P. Morgan

Ken Zerbe -- Analyst -- Morgan Stanley

Jared Shaw -- Analyst -- Wells Fargo

Arren Cyganovich -- Analyst -- Citi

Casey Haire -- Analyst -- Jefferies

Lana Chan -- Analyst -- BMO

Aaron Deer -- Analyst -- Sandler O'Neill

Geoffrey Elliott -- Analyst -- Autonomous Research

Chris McGratty -- Analayst -- Keefe, Bruyette Woods

Brock Vandervliet -- Analyst -- UBS

David Chiaverini -- Analyst -- Wedbush

Matthew Keating -- Analyst -- Barclays

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