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First Republic Bank (NYSE:FRC)
Q2 2019 Earnings Call
Jul 16, 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 Second Quarter 2019 Earnings Conference Call. [Operator Instructions] 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 Second Quarter 2019 Conference Call. Speaking today will be Jim Herbert, the Bank's Chairman, Chief Executive Officer and Founder; 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, please see the bank's FDIC filings, including the Form 8-K filed today. All are available on the Bank's website.

And now, I'd like to turn the call over to Jim Herbert.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Thank you, Shannon. It was a good quarter. Growth continues to be very strong across our franchise. In fact, in terms of loan originations, this was actually the best quarter we've ever had. Let me share a few highlights. Total loans were up 19% year-over-year, and they are up more than 6% in this last quarter. The year-over-year total deposits have grown 15%. A strong growth has led to good financial performance, particularly in the face of the challenging interest rate levels and yield curves that have occurred particularly in this year since about November of last. We'll talk more about net interest margin in a moment.

Year-over-year total revenue grew 10%. Net interest income was up 10%, and our tangible book value per share has increased 13%. Credit quality remains very strong. Net charge-offs for the quarter were nominal $1.2 million, while we added $21 million to our reserves. Non-performing assets at the end of the quarter up a bit, but only 14 basis points at quarter end.

Our capital also remains very strong. Our Tier 1 leverage ratio was 8.69% as of June 30. In early June, we did announce a departure of some wealth managers. While this was indeed disappointing, it does not change our positive outlook for the wealth management business. We'll talk more about this in detail in a couple of minutes.

In terms of the interest rate environment, since our last call, the 10-year treasury yield has fallen by approximately 50 basis points, with no move at all on the short end. This has led to some pressure on NIM, which of course also impacts our efficiency ratio. Mike, will talk more about both net interest margin and our efficiency ratio in a moment.

Very importantly, economic conditions in our urban coastal markets continue to be quite good. Our clients remain very active, which is reflected in our continued strong growth and record loan volume. It's important to remember that over half the growth of First Republic comes every year from existing clients. As we enter the second half of 2019, our loan pipeline remains quite strong, and we continue to expect mid-teens loan growth for the full-year. In the current environment, we're doing what we do best, think and act for the long-term. In fact, there actually is no short-term version of First Republic's business model, which has been successful through many interest rate environments for the last 3.5 decades.

Now, let me turn the call over to Gaye Erkan, President.

Hafize Gaye Erkan -- President and Board Member

Thank you, Jim. As Jim noted, loan origination volume was a record $9.4 billion during the quarter. Single-family residential volume was also a record at $4.1 billion during the quarter. It was a very strong spring buying season across all of our vibrant urban, coastal markets. Purchase activity accounted for 52% of single-family residential loan volume for the quarter. In terms of refinance volume, we are pleased that over half of the time, we are acquiring new households from other financial institutions, when we refinance a loan.

Our loan pipeline going into the third quarter is stronger than it was at the beginning of the second quarter, and stronger than it was a year-ago. We expect to deliver mid-teens loan growth for the full-year 2019. Credit quality remains very strong, and we continue to maintain our conservative underwriting standards. Our weighted average loan-to-value ratios for loans originated during the second quarter were 60% for single-family residential and 52% for multi-family and commercial real estate combine. Loan yields overall were up 2 basis points from the first quarter.

Business banking, also had a very strong quarter. Business line commitments were up 23% year-over-year, primarily due to increased capital call lines of credit. Business loan outstandings were up $1.1 billion during the quarter. This was driven by an increase in line utilization rates from 33% to 37%, as well as the aforementioned increase in commitments.

Turning to funding, we are pleased that deposits were up 15% from a year-ago. Even though the second quarter is typically the most challenging quarter for deposits, due to the seasonality of tax outflows. Importantly, checking deposits remain strong, representing 58% of our total deposits at quarter-end. We continue to maintain a diversified deposit funding base. During the second quarter, our average rate on all deposits was 66 basis points, in line with the mid '60s spot rate at the end of the first quarter. Our total liability cost was 93 basis points for the quarter, up from 79 basis points in the prior quarter.

Finally, I would like to comment on two of our most important metric. Household retention and household acquisition. Our success in household retention is driven by our commitment to exceptional client service, which is reflected in the Net Promoter Score that continues to be more than double the industry average. With regards to consumer household acquisition, our compounded annual growth rate since 2017 has been 17%, that is more than double our historical run rate.

Our success in both household acquisition and retention is a testament to a number of factors, which include, compounding referrals from a growing base of satisfied clients, a successful millennial strategy and returns on our investments in technology, and in the productivity of our colleagues, which allow us to scale our high touch business model. We are particularly pleased to be acquiring new client household at a very healthy pace, while keeping our existing clients happy.

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

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Thank you, Gaye. Let me start with our wealth management business. The departure of the wealth managers in the second quarter, which we announced on June 2nd, will have no material impact on earnings per share. Of the $16 billion in assets that they manage, we expect to retain about $2 billion. In the third quarter, we do anticipate a final outflow of approximately $4 billion in assets related to these wealth managers.

Even after this additional outflow, assets under management would have been up a strong 10% year-over-year at June 30. As a result, we expect investment management fees to be approximately $83 million in the third quarter. Such fees are based on assets under management at June 30, after fully accounting for this anticipated outflow.

Overall, in terms of wealth management, we're pleased with our assets under management and revenues. First Republic's integrated banking and wealth management model continues to attract very successful wealth managers. So far this year, we have welcomed five new wealth management teams to First Republic. Our liquidity position remains very strong. High-quality liquid assets were 13.3% of total average assets in the second quarter. Net interest income, which we do as one of our key growth metrics was up 10.2% year-over-year.

Let me take a moment to discuss the impact of the recent interest rate environment on both net interest margin and the efficiency ratio. Net interest margin was 2.85% for the second quarter. For the full-year, we now expect net interest margin to be in the low end of our range of 2.85% to 2.95%. The net interest margin has been impacted by the inverted yield curve and highly competitive loan pricing, especially for single-family. As a result of this NIM compression, our efficiency ratio was 64.5% for the second quarter. It's important to note, our actual expense run-rate in dollar terms was modestly lower than our expectations. For perspective, if our net interest margin has been to 2.90% in the second quarter, our efficiency ratio would have been 63.6%.

Turning to taxes, our effective tax rate for the quarter was 17.4%. We now expect the Bank's effective tax rate to be between 18% and 19% for all of 2019, slightly lower than our prior expectations.

Thank you. And now I will turn the call back over to Jim.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Thank you, Mike and Gaye. It was a good second quarter, a bit challenging in some aspects. But we have tremendous momentum going into the third and fourth quarters. We're focused on the net interest margin, obviously a bit out of our control, but we're focused as much as we can be. And we're also now focused on managing expenses to be sure to deliver consistent results in the current rate environment.

We remain very optimistic about growth opportunities, as Gaye has said our client household acquisition rate is an all-time high. Our client satisfaction levels continue to be twice the banking industry average, and as always this powers our safe, stable organic growth.

Now let me turn the call over for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Steven Alexopoulos -- JP Morgan Chase & Co. -- Analyst

Hey, good morning everybody.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Good morning, Steve.

Steven Alexopoulos -- JP Morgan Chase & Co. -- Analyst

Maybe I'll start on NIM. So when we think about the second half organic deposit growth should improve, loan yields are likely going to be under pressure, I would guess. And then you have the Fed potentially cutting rates. So for Mike Roffler, where do you see the mark, the NIM bottoming?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

So we think 2.85% for the year, which means we're a little bit below that in Q3 and Q4, and you hit the factors pretty well, competitive loan pricing is -- it's very competitive right now, and if the Fed were to cut rates a little bit, our variable rate lending would drop a little bit about 4 basis points a quarter, and so we sort of think low 2.80%, for the next couple of quarters looks good.

Steven Alexopoulos -- JP Morgan Chase & Co. -- Analyst

Okay. And then Mike, once the Fed is actually cutting rates, what's your expectation for the NIM then? I would think deposit costs would start to trend down with some delay. Can you help us think through that?

Hafize Gaye Erkan -- President and Board Member

Sure. Yeah, on the -- there is couple of places. On the deposit side, it would lag for about a quarter or so and then we would pick up pace with the rate cuts then assume no banks are faster to reprice down then to reprice up. So we would see some relief on the deposit side.

Steven Alexopoulos -- JP Morgan Chase & Co. -- Analyst

Okay, so you would expect NIM at that point to be stable or slightly increasing, Gaye?

Hafize Gaye Erkan -- President and Board Member

So that also depends on the asset yields as well as to where the long end of the curve is going to be. Obviously, if it's the long end doesn't change, but the short end slowdown, then we also have about 20% of our earning assets that is linked to the short-end of the curve. So it will be a play between the two, going back to what Mike said for the year, it will be around 2.85%, it's the only assume, may cut or two on the short end and no changes to the long end.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Steve, to your point, the lag is, really the issue. And you've got about two times adjustable priced liabilities to floating-rate assets roughly. And it takes time to catch up, but it will catch up. The real issue is if it stimulates the economy, does the long end go back up a bit and you got a steeper yield curve. Recently the curve would indicate maybe yes.

Steven Alexopoulos -- JP Morgan Chase & Co. -- Analyst

Thanks, Jim. And then on the efficiency ratio, right., so the NIM is putting downward pressure, but then you have the Luminous assets moving out, which is going to help. So Mike, how do you think about the full-year efficiency ratio, are we still in the 63% to 64% range?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Steve, I think we're a little bit higher because the margin has gone to the low end of our range of 2.85%, and so right now we think for the full-year, efficiency, we should be a little bit under 65%. But importantly, our expenses in a dollar standpoint, we're right on pace and even slightly better than we thought. So we have been able to contain it and we will clearly look for opportunities if there are to reduce any places without sacrificing service to clients or long-term investment in the franchise.

Steven Alexopoulos -- JP Morgan Chase & Co. -- Analyst

Okay, and then just one final separate question. If we look at the increase in non-performers in the quarter, I understand the base is still very low, but maybe can you add some color there and was any of that related to the new rent regulations impacting New York City? Thanks.

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Yes, I'm sure I'll be glad to. None of it was related to the new rents. It's an issue in Southern California with one borrower is quite -- is completely idiosyncratic. It's one borrower -- fellow that we've worked with for a number of years actually. We've had 10, 12 loans quite successfully with him. He's got two spec homes, he built. We were construction -- that we are construction lender. We're in first positions. We've got about a 60% loan-to-value ratio. We do not see any risk of principal or interest whatsoever in the credits, but it's four different properties and he's got them up for sale, and he just reduced pricing on them, which is really holding it up. So, I should say it's current as well. He has paid [Phonetic]. We've never had a late from him and they're not. They're currently paid, but these had slow sales. He is dropping the pricing to see what he can do to pick it up. So, it's a one-off, it's a little under $100 million total exposure to and we think we'll be fine.

Steven Alexopoulos -- JP Morgan Chase & Co. -- Analyst

Okay, terrific. Thanks for taking my questions.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Thank you.

Operator

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

Rahul Patil -- Evercore ISI -- Analyst

Hi. This is Rahul Patil on behalf of John. So the question I had was around the Luminous team. So following the departure of Luminous team, I know you said it, no ongoing EPS impact, which kind of implies a pretty high comp expense ratio tied to this team. I'm just wondering whether you are reevaluating compensation levels of existing wealth managers and new hires to kind of maintain the same tenant retention in your wealth management business?

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Thanks for the question. No, actually, we think that first of all, Luminous was an acquisition as opposed to a wealth management team. It was the purchase of RIA, we've only done that a couple of times and we generally avoid it for cultural reasons, witnessed this event unfortunately. But we also have maintained some assets that came with them, and we've maintained, as Mike said about $2 billion of other assets that were in there. And so the earnings on the assets we retained equaled about the earnings on the overall situation before. This was a higher comp situation and associated with than most others are, and that had to do with the nature of the acquisition as opposed to simply hiring a team. We're actually very happy with the growth of the wealth management and we're very happy with the hiring of the teams and generally it's working out very well. They're very independent folks. They're great people and we're still working with them on the banking side. But they're very independent people and run their own shop. I would note, it even going into two new firms instead of one. So we wish them well. But it's unfortunate, but it's unlikely. We don't think it will happen again if it does, it is unlikely.

Rahul Patil -- Evercore ISI -- Analyst

Got it. And then just a question on the expenses. I know Mike, you kind of alluded to the expense run rate is coming in better than what you had expected? And in the past you've talked about your expectations of expense growth in the mid-teens for this year, is that still the case or I'm just trying to get a sense for, especially given the expansion efforts in Hudson Yards, San Francisco, it is still hiring, [Indecipherable] tight of this expansion efforts. I'm just wondering if that mid-teens is still intact?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Yeah. So the first half of the year, our expenses were up just under 13%. So we think sort of low to mid teens makes sense. Given the environment, we are going to take a little bit closer look obviously at cost containment and see if there are things that don't impact the long-term benefit of the franchise or client service that can either be done more efficiently or possibly pushed out. Relative to Hudson Yards, the cost for that really doesn't come online until late 2020 or early '21 and so we do have a bit of time with respect to that to be able to cover those cost once they start.

Rahul Patil -- Evercore ISI -- Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Erika Najarian with Bank of America. Please proceed with your question.

Chris -- Bank of America Merrill Lynch -- Analyst

Hi, good morning. This is Chris on the call for Erika. I just have two quick questions. This a follow-up to your margin commentary. If the fed were to cut rates two or three times this year. Can you just discuss the impact to your deposit pricing strategy. I appreciate the color on the 4 basis point impact of variable-rate loans, a little focused on the deposit side in here?

Hafize Gaye Erkan -- President and Board Member

Sure. On the deposit side assuming a rate cut, let's say at the end of July and one more before year end just hypothetically speaking, it would take about a quarter lag. So it would actually be more of a flat maybe slightly down on the deposit rate and then catch up with the consecutive cuts afterwards on the deposit side.

Chris -- Bank of America Merrill Lynch -- Analyst

Okay, great, thanks. And then just one quick follow-up. I noticed there's a 20 basis point quarter-over-quarter drop in your cash yield, is there anything to call out there? Thanks.

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Probably just mix of cash between what we hold at the Fed and other banks. And I think they also maybe reduced interest on excess reserves slightly in the quarter.

Operator

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

Jared Shaw -- Wells Fargo -- Analyst

Hi, Good morning.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Good morning, Jard.

Jared Shaw -- Wells Fargo -- Analyst

I just wanted to ask was there any one-time charge from revaluation of the customer relationship intangibles associated with Luminous in the quarter?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

No, there was not. We retained enough revenue that it didn't require any charge.

Jared Shaw -- Wells Fargo -- Analyst

Okay. And then going forward, we shouldn't expect any impact from that (Technical Issues)

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

At this point, we would not expect so.

Jared Shaw -- Wells Fargo -- Analyst

Okay. And then any early update on CECL or when we can expect to see some preliminary thoughts on that? And I guess specifically, how would you think the all in one program would fare under CECL given the limited track record [Indecipherable].

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Sure. So we have -- maybe an update from last quarter, we have largely into model [Phonetic] validation near completion. We've run parallel a few times, based upon sort of the current results of that, we don't see --

Jared Shaw -- Wells Fargo -- Analyst

Still there. I think we lost you there for a second, Mike.

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Jerry, can you still hear us?

Jared Shaw -- Wells Fargo -- Analyst

I can hear you now, but you said model validation was near completion and then cut off from...

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Yeah. Sorry about that. I think we cut out. So, we've run parallel a couple of times. It looks like, no significant changes to the overall reserve at this point based on the current economic outlook. A lot of that's driven by the Bank's historical losses, which do have an impact over the life of loans. When you look at portfolio, [Indecipherable] refinance your question, we'll have a little bit higher allocation than it does today, just because of the extended life compared to what we reserve on it today. But you're right, there is no lot of history.

Jared Shaw -- Wells Fargo -- Analyst

Okay great. Thanks for the color.

Operator

Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Thanks , good morning.

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Good morning Ken.

Kenneth Zerbe -- Morgan Stanley -- Analyst

First was question Mike, you mentioned in 3Q, you expect wealth management fees to be $83 million. I just want make sure I have the right comparison, are we comparing that to the $120 million this quarter or in advisory fees of $94 million?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

No, it's to the $94 million. It was specific to the line item entitled investment management fees.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got you. Okay. So, down $11 million understood. And presumably there is a corresponding expense reduction as well that goes into your -- I think it was low to mid-teens expense growth?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

That's correct, the compensation associated with the luminous individuals, much of that you had in Q2, you will not have in Q3.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Okay, perfect. And then just last question. In terms of the capital call lending, I heard you guys say that, it was the main driver of your business banking, your business loan growth. Can you just talk about the competitive environment there? Obviously, there is some new entrants, who are aggressively pursuing capital call lending. What are you seeing from competition-wise from a spread perspective, how is the overall outlook? Thanks.

Hafize Gaye Erkan -- President and Board Member

Thank you. The activity is very strong. While there is competition, there is really enough for everyone, enough grade business to do for everyone. So from that perspective, the impact of competition in significant compared to the prior quarters. It's very healthy activity, both in terms of deal activity and the valuation.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Okay, thank you.

Hafize Gaye Erkan -- President and Board Member

Thanks.

Operator

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

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Hi, good morning everyone.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Good morning.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

The -- just looking I guess at the compensation line specifically the salary and benefit line, with the cost of the Luminous team going away, despite your other investments in new hires and such as it reasonable to assume that line item is lower in the third quarter relative to the second quarter?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

I don't think I'd go lower. The growth that is maybe had in the past is probably not as significant because we started a lower base, but we have hired other teams, other relationship managers who are also supporting them. The big drop, if you think about from Q1 to Q2 is seasonality of payroll taxes and benefits as a downward trend, that big drop doesn't happen again for the next few quarters.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay. And then looking at the information systems line, I think you guys are in the midst of a core systems conversion and obviously spending quite a bit of areas related to technology is that core systems conversion is completed, presumably some time here in the back half of the year, can we expect some of those costs to go away?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

So we're in the early phase of the project. And so, we're still in the ramp-up of the cost. So there is a little bit in contract in the IT and professional fees. But it will actually start to probably increase later this year and into 2020.

Hafize Gaye Erkan -- President and Board Member

Yeah. And it is the core conversion which is going to take a couple of years because we want to do it methodically and without any distractions declines ourselves. It is all baked in entire expense outlook number 1. Number 2, given what we have discussed the rate environment, we are focused on aligning expenses to deliver consistent returns in a volatile rate and yield curve environment.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay, and then just maybe one last one related to deposit pricing. You gave some color in terms of expectations of freights come down that there might be some relaxation there. I know among some of the highest paying banks out there in the market, they've relaxed their pricing some maybe 5 basis points or 10 basis points at the high-end. Have you, at this point made any changes to your pricing or is that you really waiting to see what the Fed does before you make any moves on that front?

Hafize Gaye Erkan -- President and Board Member

We'll be relating for the Fed move and actually we have on the CD front all the money market checking and savings a bit. We have started to [Indecipherable] down. There is some room for us to do so. And then I would also note that I'm looking -- when we're looking at the other three banks who have reported before us, the total liability cost there is so much lower of it, 93 basis points of the total cost of liabilities compared to the average of the three banks at 144 basis points. And with the rate cut, obviously, we will take action, which we have already started to some extent modestly, which will lower down on the deposit rate, maybe a quarter lag that you will see the impact of it in the consecutive cuts, it'll show itself.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Sure. Great, thanks. I appreciate the additional color.

Hafize Gaye Erkan -- President and Board Member

Thank you.

Operator

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

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Yes, thanks, good morning. Gaye, just a follow-up to Aaron's question about deposits. Can you give us a sense of where, what the spot rate was for deposits at June 30?

Hafize Gaye Erkan -- President and Board Member

June 30 spot rates was right around 70 basis points.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

70 basis points. Okay. And so the idea is that, post the cut you would ease -- you would exercise some of the flexibility you have on that pricing, and we would start to see the lag there?

Hafize Gaye Erkan -- President and Board Member

You're right.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Got you. Okay. Switching to the capital front, obviously, very strong loan growth. The CET1 ratio did dip down low to around 10.2% -- I know you guys have talked about, you'd be all set for capital this year, but just given the strong pace of loan growth is -- is that something that you guys would revisit this year?

James H. Herbert -- Chairman, Chief Executive Officer & Founder

We don't think so at this point. Casey, it's -- remember we did a equity round of modest size, but we did an equity round in January, right at year-end around the S&P ad, which was, in fact an early round for us. It was opportunistic. I think we probably don't need any equity capital through to the end of next year, even with our growth rate. If we need some Tier 1, we might do a preferred, but I think we're fine.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Okay. I mean, Jim, does that presume that you'd be willing to go below 10% Tier 1 common?

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Well, we might go a little bit below. We might -- we focus a little more leverage, but we run very solid for the risk in our portfolio, the risk of the balance sheet, we run very, very solid capital. We've got access at all times as you know and our growth rate is so solid, that we're actually quite comfortable at this point.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Okay, understood. And just last question, just the -- some updated thoughts on the student loan programs. Are you, as that program is what five years old now and seem very strong loan growth, is that what's -- what kind of cross sell are you seeing as that program matures?

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Actually, it's a good question. It has matured. We've just actually received the early indications from an outside review of that. And it is meeting or exceeding our expectations. The volume is running right around 8,000 to 9,000 per year of new clients. The profile is very strong. The profile of the current clients that we're getting in that program in fact is better than the profile of our single-family home loan clients. And -- but simply -- but obviously they're younger. And I say better in the sense that their deposit to loan ratio is stronger, their incomes at their age groups are stronger, their FICOs are the same, and their education levels are higher.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Okay, great. Thank you.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Thank you.

Operator

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

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. Thanks. Mike, maybe just a clarification on the margin outlook. I think, Gaye you said, if we get two cuts this year, the guidance would be the low end of the 2.85% range. So that was kind of in for like a mid to 2.70% by the end of the year. If we get two and kind of done, and the economy kind of stabilizes, expectations for 2020 would be stability relative to that number or do you think you might see some catch-up in the deposits and maybe a little bit of expansion in 2020? Thanks.

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Yes. I think the biggest thing on 2020 that's hard to say at this point is obviously the shape of the curve, and what it does is a competitive lending arena, right? Because that -- we're very focused in talking about deposit pricing impact, but where is the lending rates going to be on new production. And so that's why I think the next two quarters, we feel pretty good about lead us to 2.85% low-end for the year of '19 and it's probably too early to say on 2020, because of -- what's going to happen to lending rates.

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay, great. And maybe on the investment portfolio. Can you speak to what you may be, have bought in the quarter kind of yield and how they might have compared to the prior quarters?

Hafize Gaye Erkan -- President and Board Member

We have been opportunistic on the investment portfolio. We bought some municipal bonds around [Indecipherable].

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Thank you.

Operator

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

Matthew Clark -- Piper Jaffray Companies -- Analayst

Good morning. Mike, how many rate cuts do you have, if any in your NIM guidance?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Two.

Matthew Clark -- Piper Jaffray Companies -- Analayst

Okay, great. And then...

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

One in July, Matt.

Matthew Clark -- Piper Jaffray Companies -- Analayst

Got it. And on the investment management fee line, the guidance of $83 million, does that incorporate the mark at the end of June in terms of price appreciation, and consider any inflows -- new inflows from clients?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

It's based on the June 30 assets we report for First Republic Investment Management. You see in the press release of about $61 billion adjusted for the anticipated outflow that we talked about from Luminous, which is about $4 billion more.

Matthew Clark -- Piper Jaffray Companies -- Analayst

Got it. Okay, great. Thank you.

Operator

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

Lana Chan -- BMO Capital Markets Equity Research -- Analyst

Thanks, good morning. Just wondering , I was surprised to see with the comments on the competitive loan pricing, that your loan yields actually increased linked quarter. Was there any prepayment fees in the number this quarter?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

So it helped maybe 1 basis point compared to last, so not a big impact.

Lana Chan -- BMO Capital Markets Equity Research -- Analyst

Okay, thank you. And any color in terms of where the end of period spot rate was on the loan yields?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

So at the end of the first quarter, I think it was about [Indecipherable] and it's about the same this quarter.

Lana Chan -- BMO Capital Markets Equity Research -- Analyst

Okay, great. Thank you. And I guess the other question is in terms of your loan to deposit ratio has increased to 98%, given some of the seasonality with deposits this quarter -- how do you feel -- of 99%. How do you feel in terms of the ability to fund loan growth going forward with core deposit growth, while at the same time being able to potentially lower deposit rates if the Fed does cut?

Hafize Gaye Erkan -- President and Board Member

Yes. So we have -- actually, we feel comfortable and we are pleased with the mid-teens deposit growth year-over-year. We do not manage to certain loan to deposit ratio, in fact between 2012 and 2015. We have been over 100%. I would go back to the guidance in terms of the mid-teens loan growth and the low end of the NIM range just around 2.85% for the NIM outlook. So we're comfortable with the growth opportunities and diversification of the deposit base.

Lana Chan -- BMO Capital Markets Equity Research -- Analyst

Okay, thank you.

Hafize Gaye Erkan -- President and Board Member

Thank you.

Operator

Our next question comes from the line of Tim Coffey with Janney. Please proceed with your question.

Timothy Coffey -- Janney Montgomery Scott LLC -- Analyst

Great, thank you. Good morning to everybody.

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Good morning.

Timothy Coffey -- Janney Montgomery Scott LLC -- Analyst

I have a couple of questions. One, on the mortgage business in the loans that you're putting on portfolio specifically the jumbos. Are you seeing any structural changes within that business as a result of the same local income taxes?

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Not really, Tim. It's surprising to us a little bit, but no. And of course we've -- that's been our business for a very long time and our markets -- now, almost all of our markets are in this what they call soft states [Phonetic]. And so I would expect that we might have, but as Gaye has said, we've been -- we did over 50% purchase in the last quarter, and this next quarter, that may be a little more refinance, but because it's picking up because of the rate drop, but nonetheless we're still doing a lot of purchase finance. So it seems to be going just fine.

Timothy Coffey -- Janney Montgomery Scott LLC -- Analyst

Okay, and then fully understanding that, the mortgage sales that you do, every quarter are kind of balance sheet related. Can you kind of explain what happened to the margin this quarter?

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

I think I wouldn't look at that as a trend. It's a very limited amount of sales that we did. So I don't think it's anything unusual or a trend. It's just the fact that there are so few loans delivered.

Timothy Coffey -- Janney Montgomery Scott LLC -- Analyst

Okay, all right. And then in the CDs that you're bringing on, what are the typical terms of those? How long are you going out?

Hafize Gaye Erkan -- President and Board Member

We actually have a short end compared to a year ago, which was over a year like about 18 months weighted average original from the short end and then given the rate environment to less than a year, about -- It's about around six months.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Which will be helpful in catching up...

Hafize Gaye Erkan -- President and Board Member

Correct.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

-- as we go forward.

Timothy Coffey -- Janney Montgomery Scott LLC -- Analyst

Right, OK. All right. Those are my questions. Thank you very much.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Thank you.

Hafize Gaye Erkan -- President and Board Member

Thank you.

Operator

Mr. Herbert...

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Operator.

Operator

Mr. Herbert, it it looks like we do get another question. Our next question comes from the line of David Chiaverini with Wedbush. Please proceed with your question.

David J. Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. Good morning. So you mentioned that none of the increase in the NPLs was related to rent regulation, law changes in New York City. And I know you're construction portfolio in New York is only $400 million, so very modest for you. But conceptually, do you expect any stress or pressure on your construction portfolio in New York as a result of the law changes?

James H. Herbert -- Chairman, Chief Executive Officer & Founder

No, we don't actually. In our permanent loan portfolio in the rent controlled buildings is only about $1.2 billion and the composite loan to buyer ratio on those building is about 40% -- 42%. Net debt service coverage ratio is about 2.40. So we're in very good shape. We are carefully reviewing our going forward strategy on those buildings obviously, but we have been for quite a while rather conservative.

David J. Chiaverini -- Wedbush Securities -- Analyst

Good to hear. Thanks very much.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Thank you.

Operator

Mr Herbert. We have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Well, thank you. Thank you everybody very much for coming into the call today, we appreciate it. Have a good day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 42 minutes

Call participants:

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

James H. Herbert -- Chairman, Chief Executive Officer & Founder

Hafize Gaye Erkan -- President and Board Member

Michael J. Roffler -- Executive Vice President and Chief Financial Officer

Steven Alexopoulos -- JP Morgan Chase & Co. -- Analyst

Rahul Patil -- Evercore ISI -- Analyst

Chris -- Bank of America Merrill Lynch -- Analyst

Jared Shaw -- Wells Fargo -- Analyst

Kenneth Zerbe -- Morgan Stanley -- Analyst

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Matthew Clark -- Piper Jaffray Companies -- Analayst

Lana Chan -- BMO Capital Markets Equity Research -- Analyst

Timothy Coffey -- Janney Montgomery Scott LLC -- Analyst

David J. Chiaverini -- Wedbush Securities -- Analyst

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