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First Republic Bank  (NYSE:FRC)
Q4 2018 Earnings Conference Call
Jan. 15, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the First Republic Bank's Fourth Quarter and Full Year 2018 Earnings Conference Call. During today's call, the lines will be in a listen-only mode. Following the presentation, the conference will be opened for questions. I would 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, Chief Marketing and Communications Officer

Thank you and welcome to First Republic Bank's Fourth Quarter 2018 Conference Call. Speaking today will be Jim Herbert, 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

Thank you, Shannon, and thank everyone for joining us today. 2018 was an exceptionally strong year across the board. Indeed, it was our best year ever. The year culminated with the addition of First Republic to the S&P 500 Index. This also gave us a one-time opportunity to do small equity offerings, which Mike will speak more about in a moment.

For the benefit of new listeners, let me take just a moment to emphasize First Republic's uniquely successful client service model. This differentiated service model is the driver of our ability to consistently deliver safe, organic growth. The unique strength of First Republic is an extraordinary level of client satisfaction, delivered for over 30 years now. This is reflected in our high net promoter score. First Republic's client net promoter score is in the mid-70s, which is more than twice the banking industry's average. This level of standout service translates directly into a very stable client base with low attrition. Additionally, it translates into high client satisfaction turned into new client referrals on a very strong flow basis. Fully 75% of First Republic's growth every year comes from these two very related sources; satisfied clients, who do more with the bank, both in size and in complexity and new products, and their proactive direct referrals. This satisfied client base also expands each year and provides ever more referrals, in turn creating a compounding network effect leading to safe growth.

Put simply, the more happy clients we have who are active promoters of the bank, the more referrals we receive each year, the more new clients we acquire. This sustainable organic growth model is very unusual in banking. I would also note it works quite well somewhat respective of economic and market conditions. First Republic's very strong 2018 results are confirmation of this model's continuing strength.

Let me cover a few key metrics for the year. Total banking assets grew to nearly $100 billion, up 13% during the year. Net interest income was up 16.3%, net income was up 12.7% and earnings per share were up 11.6%. Our growth in net interest income clearly demonstrates the power of consistent earning asset growth. A key driver of this net interest income growth is our largest loan portfolio, single family home loans. This portfolio grew by 20.5% during the year. Total business loans outstanding grew very nicely at 33%. Business lending growth also powered -- was also powered primarily by referrals from existing satisfied clients. Student loan refinance and professional loan programs had a breakout year. These younger borrowing households grew by over 50% during the year.

Our overall millennial strategy has become quite successful as our younger under 40 households now represent fully 35% of all of our borrowing households. This growth in the millennial group also reflects a strong satisfied clients and is turning into its own compounding network effect. Importantly, while we have continued to grow our loan portfolio, our credit quality, which has been a hallmark of the bank since we started, remains excellent. In our $76 billion loan portfolio, we had only $3 million of charge-offs and our non-performing assets at the end of the year were less than 5 basis points.

Total wealth management assets also increased by 18% during the year despite challenging global market conditions. Wealth management fees grew very nicely and by 22%; again, a very high level of client satisfaction powered this growth. In short, it was a successful year, our best ever. The growth in '18 also sets a great foundation for a strong 2019.

Now, I'd like to turn the call over to Gaye Erkan, President.

Gaye Erkan -- President

Thank you, Jim. It was indeed an excellent quarter and a terrific year. We had a record year for loan originations. Total loan originations were $8.4 billion for the quarter and over $32 billion for the year, up 16% from 2017. Single-family residential volume was $2.7 billion for the quarter and $10.8 billion for the year. Home purchase volume accounted for 53% of originations during 2018.

Multi-family and commercial real estate lending also had a strong year, up 16% in outstanding. Importantly, we did not compromise our credit standards at all. For example, our weighted average loan-to-value ratios for all of our real estate loans originated during 2018 remain quite conservative; 59% for single-family residential, 51% for multi-family and commercial real estate.

Conservative credit remains a key pillar of First Republic at all time. Business banking also had a terrific year and continues to be a strong contributor to both loan and deposit growth. Business loans outstanding grew nicely during the year, driven by increased commitments and a higher line of credit utilization rates. At year-end, utilization was 37% compared to 34% a year ago. Headed into 2019, our total loan pipeline remains strong and is up from the same time a year ago.

Turning to deposits, we are very pleased with the growth and diversification of our deposit base as well as our ability to lag the fed funds rate. Deposit growth was very strong, up over $10 billion in 2018. We grew deposits nearly 15% from a year ago and our average deposit rate year-over-year increased only 23 basis points while the fed funds rate increased 100 basis points.

Maintaining a diverse deposit franchise provides a strong base of stable, lower rate deposit funding. Checking continues to represent nearly 60% of total deposits at year-end, quite stable. This is a testament to the strength and the value of our relationship-based banking model. Business deposits continue to represent 56% of our total deposits at year-end. Through business banking, we deepen our existing relationships, acquire new households and diversify our deposit base. Our more than 70 retail offices also play a key role in client service, gathering deposits and acquiring new households. These offices are highly profitable, averaging more than $400 million in deposits. In 2018, we opened five new offices and will continue to selectively identify new locations in our existing footprint.

As Jim mentioned, private wealth management also continues to perform very well, both in gathering assets and increasing revenues. Additionally, we are pleased that we continue to attract new wealth managers to our full service open architecture platform. We hired 11 new teams during 2018 and one already in 2019.

Most importantly, we are very pleased that our clients remain satisfied and continue to provide strong word-of-mouth referrals, which feels the strong growth rate of the new client household acquisition. As we enter 2019, our successful business models remains the same, staying true to our client-centric culture and keeping First Republic safe and sound at all time. This enables us to maintain our unwavering focus on extraordinary service, one client at a time.

Now, I would like to turn the call over to Mike Roffler, Chief Financial Officer.

Mike Roffler -- Chief Financial Officer

Thank you, Gaye. Our capital position remains very strong. In late December, we retired our outstanding 7% Series E perpetual preferred stock, which will reduce our preferred dividend payment by approximately $3.5 million per quarter in 2019. As Jim mentioned, at the end of the year, in connection with the addition of our stock to the S&P 500, we completed a modest, at-the-market common stock offering, selling 2 million shares. We raised just over $170 million in equity, which further strengthens our capital base and supports our continued growth. Including this common stock offering, which settled in early January, we estimate that our diluted share count will be 169.2 million in the first quarter of 2019.

Liquidity also remains strong as high-quality liquid assets were 15.4% of total average assets in the fourth quarter. During the quarter earning asset yields outpaced our funding costs, which led to a modest expansion of our net interest margin. Net interest margin was strong for the quarter at 2.98%, which includes a positive impact of 2 basis points from the special FHLB dividend. Our net interest margin was quite steady throughout the year even in the face of rising rates and a flattening yield curve. For 2019, we continue our guidance for net interest margin in the range of 2.85% to 2.95%. As Jim said, growth in net interest income is a key driver of the franchise. Net interest income was up quite strongly in 2018 and grew fully 16.3% for the year. The growth in net interest income is a direct result of our average earning assets being up a very strong 16%. For 2019, we expect our loan growth to be in the mid-teens.

Our efficiency ratio was 61.5% for the fourth quarter and 63% for the full year. For the coming full year 2019, we continue to expect the efficiency ratio to be in the range of 63% to 64%. As a reminder, our first quarter efficiency ratio is typically higher due to the seasonal impact of payroll taxes and benefits. Our effective tax rate was 19.4% for the fourth quarter and 18.8% for the full year 2018. We expect the full 2019 tax rate to be between 19% and 20%. Overall, it was a very strong year that speaks to the sustainable power of our model.

Now, I'll turn the call back over to Jim.

Jim Herbert -- Chairman and Chief Executive Officer

Thank you, Mike and Gaye. It was a terrific year by every measure. For over 33 years our simple, straightforward, very client-centric business model has been consistently profitable. We continue to deliver safe, stable, strong organic growth because of our unwavering focus on exceptional client service, very conservative underwriting standards and strong capital levels at all times. We're looking forward to another good year in 2019 and are well positioned to pursue the many opportunities that exist in our markets. Now, we would be happy to take your questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Steven Alexopoulos -- JPMorgan -- Analyst

Hey, good morning, everybody.

Jim Herbert -- Chairman and Chief Executive Officer

Morning, Steve.

Steven Alexopoulos -- JPMorgan -- Analyst

I wanted to start with the NIM, maybe follow up of Mike Roffler's the NIM guidance to 2.85% to 2.95%. Given the very flat curve, Mike, how do you think we're position right now within that guidance, like what's the most reasonable outcome -- with the midpoint of the range, could we push down to the lower end of the range, how are you thinking about that?

Mike Roffler -- Chief Financial Officer

So -- it's a great question, Steve, because the curve has flattened a lot probably from mid-December till today. Towards the end of the year, we were operating at the higher end and that flatness is probably one of the reasons that we have the lower range of the guidance, because you just don't know and also how competition is going to play out for new, both lending and deposit opportunities, which is why that lower end is there.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. And then on the originations, you guys clearly had strong originations, really driven by the commercial side. When I look at single-family and HELOC, they were down around 10% year-over-year. Give some color around that decline, are you seeing the impact of SALT yet?

Mike Roffler -- Chief Financial Officer

It's -- SALT doesn't playing into adjust, Steve, although it might this year, as it becomes more self-evident to people, the tax impact. But we're not even hearing too much about it quite frankly. The one thing that's slowing at of course is refinance as rates went up. Although rates have softened back a little bit, but our purchase finance is pretty strong and we're not too worried about that; we don't have any indicators why we should be yet, although, we obviously think about it all the time, but it seems to be fairly strong. The other thing is that we had a bit of a slowdown on repayments -- because the refinance has a double-edged sword. We do have new volume, but we also get slower repayments.

Gaye Erkan -- President

And could -- just add, given the strong pipeline, we remain comfortable with the continued guidance in mid-teens.

Steven Alexopoulos -- JPMorgan -- Analyst

So just a final question. So Jim, we saw another common equity offering in the fourth quarter. Was you're thinking that -- I know you had the S&P 500, so there's demand there, but was this more of an offensive raise you just want more capital, because this could be a better growth year or given all of the macro, was this more defensive, you just want to have more years of excess capital to grow? How did you think about that ?

Jim Herbert -- Chairman and Chief Executive Officer

Actually, a little both, Steve, to be honest with you. And I would put on top of all that the opportunity. We did have a filing from 4 million shares, but we did 2 million because that was easy to formulate as opposed to the permit was 4 million, that was not necessarily our target. We would -- I would say, it was mostly offensive more than anything else. It is not defensive relative to the credit -- the credits -- touch wood, they are very strong. And -- but we are in the same conditions that others are, so we like to have more capital. And of course, it was coincident with the redemption of the $200 million of preferred. And so the 7% payment on the preferred has a nice impact on the dilution of all shares at the same time.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay, great. Thanks for taking my questions .

Jim Herbert -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Casey Haire with Jefferies. Please proceed with your question.

Casey Haire -- Jefferies -- Analyst

Thanks, good morning, guys. I guess follow up on the NIM outlook. Mike, you mentioned the flat yield curve is problematic for the NIM outlook. I was just wondering what was the blended loan yield at the new money yield on loan production in the fourth quarter and what is it here in the first quarter, just to get a better -- a finer point on the NIM outlook?

Mike Roffler -- Chief Financial Officer

Yes, no, I think what I'd say about the NIM outlook right, we're starting the quarter at a high point. And so we are actually really pleased with where it's been and sort of where it's trending. If I go to the production in the fourth quarter the real estate portfolio, which is a big part, was about 4% and the sort of new loan yields in the first quarter have been right around that, not really much different and so it's holding up pretty well in this environment.

Jim Herbert -- Chairman and Chief Executive Officer

The comment about problematic is actually incorrect. The flat yield curves are challenging, but they're not really that problematic when we have the amount of growth we have. The point is missed about us repetitively is that 10% or 12% or 15% growth rate above other banks gives you that much more repriced each time. And if you add that to the amount of repayments that are made everywhere, we repriced 25% to 30% of the balance sheet every year.

Casey Haire -- Jefferies -- Analyst

Okay, understood. I'm just -- so, -- I mean, are you seeing less competitive pressures, because I'm a little surprised to hear the production yields hold up given the flattening of the curve we've seen since the third quarter?

Gaye Erkan -- President

So just to add to Jim's comments, in addition to strong growth in earnings assets, it's third of our lending portfolio and a sizable amount of finance portfolio is also floating rate. And on the business lending side, we do have a fair amount of floating rate. So we are very pleased that our -- both the (inaudible) as well as the originations in the fourth quarter, as Mike mentioned, around 4% with single-family, a little less and business above that. And the -- in general, the balance sheet growth put together with a great checking mix put together with a third of our earning assets are floating gives us great leverage in a rising rate environment despite the curve flattening.

Casey Haire -- Jefferies -- Analyst

Okay, great. And just last one from me, I guess, switching to the efficiency outlook. I know you guys are in the sort of the middle innings of (Technical Difficulty) and that's keeping the efficiency at 63% to 64%. If you guys are able to make -- to bear -- if these efficiencies initiatives bear fruit, sorry these franchise investments bear fruit, could we see the efficiency ratio make an improvement as we look toward 2020?

Mike Roffler -- Chief Financial Officer

So I think we feel pretty comfortable operating this range because we are investing a lot in the different initiatives in the sort of the growth of the franchise that we covered on the call and so there's a lot of good tangible things we're doing to benefit service and we feel like we're striking the right mix to be in this range.

Gaye Erkan -- President

And let me just add, at a high level, we are very pleased with our take-off initiatives that is geared toward supercharging our bankers, increasing employee engagement and increasing client happiness and scaling our -- continuing to scale our service culture. In 2018, we are very pleased. We launched online and mobile banking. Our clients are seamlessly migrated and we're one of the first banks that deployed stealth mode for data privacy and external account aggregation just to provide these features to the clients.

And number two, we have implemented new mortgage loan origination system. Not only it went seamless, but also we are very pleased, our average loan closing times are down by 20% already. And we have also implemented robotic process automation to save time from pulling together tax documents, statements, loan documents both on the lending and PWM side, and giving that time back to our people to serve our clients and delight them further. So we are very pleased the way we have invested in the fruits of those investments.

Operator

Thank you. Your next question comes from the line of Jared Shaw with Wells Fargo Securities. Please proceed with your question.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, good morning.

Jim Herbert -- Chairman and Chief Executive Officer

Good morning, Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

Maybe with a bigger picture question. How should we compare today to a decade ago given the higher level of loan growth away from residential recently and how should we think about normalized credit losses in the next cycle?

Jim Herbert -- Chairman and Chief Executive Officer

Well, let me a minute. Obviously there's two different questions. so the comparison of the bank to a decade ago, or let's say at the moment we came back from BOA, it's a good clean cut point, which is about eight years ago. Business banking is a larger share of the bank, but not dramatically so. It's about 15% of our lending and probably back then it would have been half that. The deposit itself landed fairly stably as around 50% to 55% of our total deposits. The thing to remember is that our business banking significantly emanates from the fact that we have been personally banking many of the decision makers. And so, our business banking is probably between 60% and 80%, an outgrowth directly of the client satisfaction level that we're able to achieve in our preferred or private banking. And it's the CFO to CEO with the influence person, a member of the Board, our second biggest group of business banking clients are non-profits in the Bank for us, it's about 30% roughly. And it's a Board member of non-profit school, non-profit community or organization. And so it's directly linked. And so we didn't go into it as a new business. It grew out of the one we're in. And that's important because it also has a feedback loop because as we bank businesses we then also end up banking more of the principles, which is our core business; our philosophical base has always been there are no businesses, there are only people. And so we bank them at the personal level. And so it's a circular activity.

In terms of credit losses, I would think that -- we've been through this bank since '85, has been through some very difficult ups and downs in the economy generally and has actually, touch wood, we've done quite well. You can look at the '08 experience that's in our deck, we go back and think -- even though the -- through '01 experience, I think we go back to 2000 in the deck and see losses, there are both in the .com meltdown and in '08 or '09, was actually our worst year where I think we topped out at slightly less than 50 basis points, about one-fifth of banking in general.

And I would say that somewhat simultaneously '08, '09 were very strong lending years, and the reason was that others were out of the market and we were not, because we went into all well capitalized and strong. So, I would -- if you are looking for a range of downturn, I'd look at the '01, '02 and the '08 experiences, we all obviously hope it doesn't happen again. It certainly doesn't feel to us like it will at this point, but you never know.

Jared Shaw -- Wells Fargo Securities -- Analyst

That's very helpful color. Thanks. And then just following up on the capital question, do you think I guess now with this raise, do you have that full capital cushion that you've looked for in the past that two years or do you think that you would still be opportunistic going through '19 with potential additional capital raises?

Jim Herbert -- Chairman and Chief Executive Officer

We have. We are adequately capitalized for the next couple of years. We're in good shape. And we would expect to be through. If we needed anything, we would probably be a perpetual preferred round, but we don't at this point foresee that at all. And that was another reason for taking the opportunity because it's good to be ahead of all times. If difficult times occur, which they could easily, we generally want to be able to go right through it and in fact take advantage of the opportunity, because usually the competition diminishes and we'd like that; I wouldn't like the bad times obviously, but we want to be ready to take advantage of them. I would point out one other point, which is, if you go back eight or nine years ago, checking as a percentage of our deposit base was about 30%, now it's about 60% and that's obviously a very big difference as well. That's to a large extent driven by the business banking segment.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great. Thank you.

Jim Herbert -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.

Samuel Ross -- Evercore ISI -- Analyst

Good morning, this is Sam Ross on for John Pancari. Just had a couple of questions about your -- the loan growth outlook. You guys provided -- I mean, loan growth is coming in pretty strong, I guess, stronger than the mid-teens guidance for 2018 that you discussed. For 2019, I know you're still comfortable with that mid-teens, maybe can you just talk about some of the drivers of that guidance and what you're seeing particularly maybe within CRE and also maybe in the private equity and venture capital businesses that would be really helpful?

Mike Roffler -- Chief Financial Officer

Sure. We are guiding the mid-teens because although this year was 20% that was unusually strong and as Gaye said to some extent, it was stronger than we -- we slightly somewhat expected because the drawdown of the lines of credit that we have outstanding in the business section. But the single-family loan business, which I think maybe Steve pointed out earlier, will be a little slower this year probably because the refinance slowed down and purchase -- purchases are slowing down. They are nowhere near stalled or anything of that nature, but they are slower, and so we're a little cautious. We don't anticipate however any issue with mid-teens.

Samuel Ross -- Evercore ISI -- Analyst

Got it, and then on the other side of the balance sheet, deposits have also been running in pretty healthy. I'm just wondering what your thoughts are about maybe what some of the drivers have been in deposit generation as well as what your expectations are for 2019?

Gaye Erkan -- President

Sure. We are very pleased with the 15% growth rate year-over-year at a 23% beta -- 23% beta year-over-year. The drivers have been quite diversified. It was a healthy mix -- when you look at year-over-year, it was a healthy mix between business deposits and consumer deposits. In terms of product mix, while we grew some money market checking, money market savings, by and large the barbell strategy we talked about in the prior calls between checkings and certificate of deposits, while acquiring new households and deepening relationships that worked really well, and our funding strategy is going to remain the same albeit as markets move and the curve shape changes. We translate that to our CDs strategy as well. We are very flexible and agile in that regard, but we are very pleased with the stability of our checkings, as well as with the betas and ability to lag the fed funds rate, which speaks to our relationship-based, service-based model.

Samuel Ross -- Evercore ISI -- Analyst

Great. Thanks for taking the questions.

Operator

Thank you. Our next question comes from the line of Lana Chan with BMO Capital Markets. Please proceed with your question.

Lana Chan -- BMO Capital Markets -- Analyst

Thanks, good morning. Just around your deposits, you sort of a pretty big pickup it seem like relative to the mid-quarter update that you gave with your common equity raise. Was there anything driving that that, that was potentially temporary or is that just, you know, sort of year-end seasonality?

Gaye Erkan -- President

It is the latter, Lana. It's -- the second half of the year historically tends to be a lot stronger than the first half. On the consumer side, the average account sizes are getting larger in the second half compared to the first half. And on the businesses, there are settles, there are gathering, there are net income and the first half of the year is mostly tax outflows as we had discussed. So in that regard, it's the seasonality of deposits, income came in very diversified given the diversification of our businesses.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. And I was also pleased to see the incremental deposit beta come down quarter-over-quarter, are you starting to see less sort of competition on deposit pricing in your specific markets and -- I don't know if you gave the spot rate on deposit costs at the end of the year, Gaye?

Gaye Erkan -- President

Our spot rates will be around mid-to-high 50s -- is around mid-to-high 50s. The competition remains fierce. There are pricing pressures on the deposit side for sure. We have been very pleased. Again, our checking deposits 60%, they are stable at 5 basis points, so almost no rate attached to it. That really has been translating nicely into the lower betas, which given our businesses and sticky, stable relationships, we would expect that to become -- to stay as a tailwind going forward into 2019.

Lana Chan -- BMO Capital Markets -- Analyst

Okay, and just one last question from me, are you baking in further rate hikes on your margin guidance?

Mike Roffler -- Chief Financial Officer

Yes, just one at this point.

Lana Chan -- BMO Capital Markets -- Analyst

Sort of mid year or --

Mike Roffler -- Chief Financial Officer

Yes.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. Thanks, Mike.

Operator

Your next question comes from the line of Chris McGratty with Keefe, Bruyette & Woods. Please proceed with your question.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

Hi, good morning. Maybe a question for -- Hi, just quick question on the balance sheet growth targets -- on the mid-teens, I wished, if you could speak to kind of earning asset growth given the remix that's occurring between the reclass and the HQLA last quarter, should we assume that 2019 earning asset growth might trail loan growth little bit because of this dynamic?

Gaye Erkan -- President

So let me comment on the investment side. We are very pleased that our HQLA ratio, including the HQLA munis is at 15.4%, well above the 12% target that we had talked about in the prior calls. In the fourth quarter, we have seen opportunities in HQLA munis and the purchase that we have made was it above 4.5% TY. So we will be opportunistic, but we would expect the -- given the strong pipeline and the mid-teens loan growth guidance that we are giving to grow into the additional HQLA and let it come down to 12% as we have guided before. That's an opportunistic trade.

Mike Roffler -- Chief Financial Officer

Yes, so I think when you sort of put that together, the balance sheet grows a little bit less than what the loan growth guidance we talked to.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

Got it, OK. That makes sense. Maybe a quick one on the capital call lending business, in the past quarters, I think you've given some updates on utilization rates, any color that you could provide there would be great? Thanks.

Gaye Erkan -- President

It continues to be strong in mid-to-high 30%s and what we're seeing is that the deal activity is strong. Strong valuations means each investment requires more dollars. Companies are staying private longer thus attracting more funds. And again just to remind, we are pretty short term in those type of capital call lines 90 to 180 days; we don't tend to do the longer-term one.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

Great , thank you very much.

Gaye Erkan -- President

Thanks.

Operator

Thank you and our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

Ken Zerbe -- Morgan Stanley -- Analyst

HI, thanks. Maybe, my first question is for Mike, can you talk about like what surprised you with the NIM this quarter? I think your guidance for -- as of third quarter conference call is, it should be your call at the middle of the 2.85% to 2.95% range. And it certainly was well in excess of that even ex the FHLB dividend?

Mike Roffler -- Chief Financial Officer

Yes, I think I'd say at the, we're pretty much right at the top of the range. If you take out the FHLB dividend and is -- I think one of the questions earlier, our deposit beta actually was little bit less this quarter than it had been. And I think we were plus 9 (ph) from Q2 to Q3 and this time we're plus 6 (ph). So I think that was a really good, great job of serving clients and deepening relationships because, as Gaye mentioned, our checking mix has stayed on average in the low 60%s and if you think that a normal rising rate that does come down, you would expect, and it's been very resilient and so we're very pleased with that, which led to a little bit better funding costs.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Okay, that helps. And then if we take out one rate hike expectation that you have built in and just simply put in the fed funds futures curve, which is basically flat at this point, how does that change your 2019 NIM guidance?

Mike Roffler -- Chief Financial Officer

I wouldn't -- it wouldn't change, we'd still think that range is the right range.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay. And sorry, just to clarify little bit more, the 2.85% we heard in response to a prior question, the 2.85% part of that NIM was in sort of a -- sort of I might say the bare case. Was that the right way to think about it or is -- if I say the midpoint of 2.90%, is that the most reasonable normal expectation or could you still be at the high end, over the course of the year?

Mike Roffler -- Chief Financial Officer

I think what you said at the end, there is of all right. I think that's a good reasonable sort of -- if you put the year together --

Ken Zerbe -- Morgan Stanley -- Analyst

That it should be at the high end.

Mike Roffler -- Chief Financial Officer

But latter part of what you said the 2.90% part of what you said.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay. All right. Got it. Thank you.

Operator

Thank you, your next question comes from the line of Dave Rochester with Deutsche Bank. Please proceed with your question.

David Rochester -- Deutsche Bank -- Analyst

Hi, good morning guys. I'm going to try to ask another one on the NIM if that's possible? Just -- you talked about the rate hike you got in the middle of the year, was just curious what your thoughts are on longer-term interest rates? What you're baking into that NIM assumption on that front? Are you expecting to flat curve to persist? Do you get any lift later on in the year, how do you think about it?

Mike Roffler -- Chief Financial Officer

I think, as we all look at that curve (ph) I think pretty flat like it is. I don't see a lot of change.

Gaye Erkan -- President

If I may -- if I may just chime in, as you know, as we value stability and consistency a lot as a service organization and the 2.85%, 2.95%, we feel comfortable with the range, we don't take bets on interest rates and we run slightly asset sensitive, neutral to interest rates. And it's very important that we provide that stability to use our clients into all of our constituents. So given the uncertainty in -- if and when the fed hikes are going to be in 2019, we feel comfortable with the 2.85%, 2.95% range.

David Rochester -- Deutsche Bank -- Analyst

Okay, great. And just on the deposit growth in December, I know you mentioned you normally see a pickup in the back half of the year and we typically expect that. But I was just curious, did you get the sense that any of that really strong growth in December might have been somewhat volatility related or did you get some transfers from wealth management fueling some of that. Just any color there would be great?

Gaye Erkan -- President

It is being quite diversified so consumer account average account balances are higher. On the business side, it was very diversified across different verticals obviously private equity and venture capital is active, but also schools non-profits and REAs, we have seen increased balances in those categories, and private wealth management, they are very pleased with the deposit referrals from our private wealth management colleagues, taking into account the holistic nature of First Republic service. We used to be at 50% of our wealth management -- around 50% of our wealth management households serving a banking relationships, albeit it's slightly out, but we are about 52%, 54% now of those households trying us on the banking side.

David Rochester -- Deutsche Bank -- Analyst

Perfect. So it sounds like you are expecting that deposit growth to actually stick as we go into the first quarter then?

Gaye Erkan -- President

Well, the first -- the first half of the year is always the toughest from its deposits seasonality perspective; there is bonuses and then there is taxes. So that's why the spot lending (ph) rate is around mid to high 50s, but it's usually the second half where the deposits are much more stronger.

David Rochester -- Deutsche Bank -- Analyst

And are you guys, you know, as you think about the SALT impact or the caps next year, are you expecting to have any kind of impact on the deposit side?

Jim Herbert -- Chairman and Chief Executive Officer

No, not on the deposit side, particularly, I don't think. I think we're not going -- we all are not going to know the impact of the tax build until after this year's taxes are paid and people really can tally it properly and think about it. And so, but I will say, our client base is probably directly impacted rather significantly and you don't hear much chatter about it.

David Rochester -- Deutsche Bank -- Analyst

Okay. And maybe just one last one on the efficiency ratio guidance, can you just give -- maybe a range of how much in the way of your systems enhancement expenses you're actually expecting to hit in 2019, just trying to get a ballpark of that component?

Mike Roffler -- Chief Financial Officer

Yes, I mean, our information technology expenses, I think, grew about 15%, 16% in the year. That feels like a reasonable growth rate for us, is where sort of growing consistent over time. We do -- have talked about -- Gaye mentioned several initiatives, we also talked about the core conversion. We're getting started on that. It will probably happen early in the year and we will start to incur some, but it will grow as we go through the year.

David Rochester -- Deutsche Bank -- Analyst

Okay, great, thanks guys.

Jim Herbert -- Chairman and Chief Executive Officer

Let me, let me add just to that last question from a slightly different angle. During the last couple of years, '17 and '18, the number of new households -- business households, consumer households, millennial households that we have added to the base of the bank that have been running about 18% per annum. The prior five years, it ran 10% to 12%. The ramping up of that obviously is putting some pressures also on our systems, good ones actually, and we're being able to respond to them. A number of the improvements that Gaye previously referred to are directed exactly at that group of people and that growth rate and doing it very officially, a new account opening system, the new loan system, et cetera. And so the expenditures we're putting out are actually having very positive rather immediate effect and one of the reasons that doesn't show in efficiency or operating leverage gain is because it's being used to have a growth rate of 15% to 18% on household growth underneath.

Operator

Thank you. Our next question comes from the line of Matthew Clark with Piper Jaffray. Please proceed with your question.

Matthew Clark -- Piper Jaffray -- Analyst

Hi, good morning.

Jim Herbert -- Chairman and Chief Executive Officer

Good morning.

Matthew Clark -- Piper Jaffray -- Analyst

Did you reverse any comp accruals in the fourth quarter and how should we think about overall expense growth this year kind of embedded in that efficiency ratio range? It seems like, is mid double-digits the right way to think about it?

Mike Roffler -- Chief Financial Officer

Yes, I think mid-teens is the right way to think about dollar of expense growth. I'd say nothing unusual on the comp line, we pay bonuses, we will look at incentives and it's based on performance and production levels. There -- a year ago in the fourth quarter, there was the spike for a performance fee and comp related with that, that did not occur this year. So if you look at it that way. And also, our headcount has been pretty well contained for the year in growth percentage compared to where it had been in the past.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then for the systems upgrade, were there any of those related expenses in the fourth quarter and is that $30 million to $35 million still the right range to think about for this year?

Mike Roffler -- Chief Financial Officer

Still a good number for this year, yes. In the fourth quarter, there's probably a little bit of consulting dollars and a few headcount, but nothing significant in the numbers currently.

Matthew Clark -- Piper Jaffray -- Analyst

Okay and then just on the insurance line, up nicely linked quarter, just wondered if there was anything unusual there, a gain or anything?

Mike Roffler -- Chief Financial Officer

Nothing unusual in terms of a gain, I will say the insurance business, there is some seasonality to it and the fourth quarter is typically very strong, and so we just started breaking it out this quarter, because it had grown a bit because it's a relatively new business for us given the amount. And so we felt that it was double I think over the fourth quarter a year ago and so we thought that it was right to break it out. And there is some seasonality to it.

Matthew Clark -- Piper Jaffray -- Analyst

Okay and then just last one, just on the source of the increase in non-performers and net charge-offs this quarter?

Mike Roffler -- Chief Financial Officer

So charge-offs are still very low at $2 million. It's a variety of clients that periodically run into some challenges that we work with and so nothing geography concentrated or anything like that or deterioration and non-performing, still less than 5 basis points, so no real change there.

Matthew Clark -- Piper Jaffray -- Analyst

Great, thanks.

Operator

Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Please proceed with your question.

Brock Vandervliet -- UBS -- Analyst

Great. Thank you. Just trying to connect the dots a little bit between your current loan growth and what you're guiding for. I understand some of that's just conservatism and you've called out the lower single-family activity like going next year or 2019. Is there anything more you can say about the private equity venture capital area that's been such a powerful growth driver? Is there anything you see there going forward that would point to a materially lower loan generation rate?

Jim Herbert -- Chairman and Chief Executive Officer

Not really, although -- and actually we continue to book new clients in that area. We have a pretty decent backlog of discussions going on right now with some new clients. But one of the things that has interrupted our ability to be quite as accurate as we have been previously on loan growth is the utilization rates on those lines is less predictable. It does have seasonality in it, but it's not as steady as Gaye indicated it's swung from 33% to 37%. Well, it doesn't sound like much from a fair number of volumes it is. We're delighted to have the usage, obviously, it's quite profitable one. But we can't predict it as a group. We can predict each one relatively well, because we hear from them regularly. But predicting the group is really hard surprisingly. So we -- and that give us little more variability than we have had for many years on the growth production.

Brock Vandervliet -- UBS -- Analyst

Okay. And as a follow-up on the -- within multi-family and the growth, I believe that was 20% year-over-year. Is that the result of adding new teams? And just a similar question, what do you think the kind of go-forward organic growth rate there would be?

Jim Herbert -- Chairman and Chief Executive Officer

That's -- and it's not new teams in this year. And it's just opportunity in the marketplace and deepening relationships. It's mostly deepening relationships. We've added a number of new relationships over the last 24 months. And we are doing more and more with them. I think the loan-to-value ratio on most of that new business in the year was somewhere between 50% and 52% from the right of that lines. And the service coverage ratio was very positive. So it's very conservative business. But we like the business when it's conservative and when it solid. And we like it with good borrowers.

Brock Vandervliet -- UBS -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of David Chiaverini with Wedbush Securities. Please proceed with your question.

David Chiaverini -- Wedbush -- Analyst

Hi, thanks. I have a question on business mix. With the success of the millennial strategy and how it has outpaced growth in other areas of the bank, is it reasonable to assume that business banking could represent a smaller proportion of the overall balance sheet over time?

Mike Roffler -- Chief Financial Officer

Well, I guess technically, but the outpacing of the millennial strategy is primarily centered in the number of households. I guess, the obvious point is that the younger clients tend to borrow less dollars. And so we're particularly delighted to be getting them. We're averaging about 4.5 to 5 products per household, and we're delighted the net promoter score in that segment is actually even higher than the bank as a whole. So they're quite satisfied. But dollar growth in the outstandings for them is still -- we grow about $1 billion, $1.2 billion net in that outstanding last year and so most of that -- one of the reasons we like it so much is, the vast majority of those clients have not yet purchased their first home. And so we are anticipating hopefully doing quite a lot of that; we've done a couple of thousand home loans with the cohort already. So it seems to be working quite well. So I don't think it's going to meaningful dip the percentage of business as a total -- business banking as a total.

David Chiaverini -- Wedbush -- Analyst

Got it. That's all I have. Thanks very much.

Operator

Thank you. Our next question comes from the line of Aaron Deer with Sandler O'Neill. Please proceed with your question.

Aaron Deer -- Sandler O'Neill -- Analyst

Hi. Good morning, everyone. All my questions were answered saved one, which is just, I wondered, if you could break out -- obviously, the weakness in the capital markets caused your (inaudible). Just wonder if you could break out what amount of inflows you had into assets under management in the quarter?

Mike Roffler -- Chief Financial Officer

Yes. So it was very, very strong actually. The market declined, I think in the quarter was about $10 billion. So we had over $5 billion of new money come in during the quarter.

Aaron Deer -- Sandler O'Neill -- Analyst

Okay, that's great. Thank you.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Jim Herbert for any closing remarks.

Jim Herbert -- Chairman and Chief Executive Officer

Thank you very much. Thanks everybody for taking the call today and joining us. I just would close on focusing on the power of the growth of the model coming off of the satisfied client levels. The engine on First Republic has been and will continue to be satisfied clients, doing more with us, growing their size of the relationships and then giving us very strong promotional type referrals and that has a power through economic conditions actually. So thank you all very much. We appreciate your attention today.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.

Duration: 54 minutes

Call participants:

Shannon Houston -- Senior Vice President, Chief Marketing and Communications Officer

Jim Herbert -- Chairman and Chief Executive Officer

Gaye Erkan -- President

Mike Roffler -- Chief Financial Officer

Steven Alexopoulos -- JPMorgan -- Analyst

Casey Haire -- Jefferies -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Samuel Ross -- Evercore ISI -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

David Rochester -- Deutsche Bank -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Brock Vandervliet -- UBS -- Analyst

David Chiaverini -- Wedbush -- Analyst

Aaron Deer -- Sandler O'Neill -- Analyst

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