Q4 2019 Earnings Call
Greetings and welcome to your first Republic banks fourth quarter and full year 2019 earnings conference call. During today's call. The lines will be in listen only mode. Following the presentation. The conference will be open for questions to join the queue. Please press star one on your telephone keypad at any point during the key.
Conference call I would now like turn todays call over to Shannon, Houston, Senior Vice President and Chief Marketing and Communications Officer. Please go ahead.
Thank you and welcome to first Republic banks fourth quarter and full year 2019 conference call speaking today will be Jim Herbert the banks founder Chairman and Chief Executive Officer, Guy American 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 could differ materially from any forward looking statements either banks.
FDIC filings, including the form 8-K filed today all available on the banks web site and now I'd like to turn the call over to Jim Herbert.
Thank you Shannon.
My two was your very strong your across the board.
Our results come to demonstrate the great Powerpoint centric business model.
First republics ability to deliver extraordinary client satisfaction for almost 35 years is reflected in a high net promoter score, which is more than twice that of the banking industry.
This in turn translates into stable clients.
Additional dishes from these satisfied clients and a strong flow of referrals also from the satisfied client base.
The result is a very successful compounding effect the continues to drive our growth organically and safely.
This model work, well irrespective of economic and more conditions for several years.
Let me cover a few key metrics for the year.
Total loans outstanding were up 19.7%.
Total barges have grown 14%.
And wealth management assets have increased by 19.7%.
This growth in turn has led to strong financial performance.
Year over year total revenue grew 9.7%.
Our net interest income grew 10.5% and tangible book value per share increased 11% during the year.
We're pleased to report that our credit quality continues to be quite strong.
During the fourth quarter, we had net recoveries a 1.1 million.
For the entire year net charge offs were only 4.6 million less than a basis point of average loans.
Nonperforming assets ended the year at only 12 basis points.
Capital remains very strong at year end, our tier one leverage ratio was 8.39%.
Conditions in our markets continue to be quite healthy overall, our clients remain very active and our loan pipeline is strong.
We would note at the loan originations have some seasonality with the fourth quarter typically being a bit stronger in the first quarter somewhat slower.
This lower rate environment, which were operating and continues to represent a terrific opportunity to attract high quality new households, particularly through our home loan refinance activities.
We continued to also be very successful in attracting a younger generation clients through our student loan refinancing and our professional loan programs.
During the year, we added net nearly 8000, new high quality younger households through these two programs.
These households represent fully 35% of our total consumer borrowing base at this point up from only 19% three years ago.
2000, my two with a nice full year since we bought back first Republic from the Bank of America and under took our second IPO.
Over these past nine years, we've grown loans from 18.6 going to 91 billion.
[noise] tangible book value per share over this period has grown from $15, a 19 cents to $50 of 24 cents.
While we have also paid cumulative cash dividends of $4 a 55 cents.
That's a compound growth of tangible book value per share and dividend payable over 15% per annum.
These results demonstrate very clearly the power of our client centric sustainable organic growth model.
Overall is a terrific quarter and a terrific here, let me turn the call over to Guy or ICANN President.
Thank you Jim It was indeed, an excellent quarter and terrific year.
Loan originations for the fourth quarter were $11.2 billion, our best quarter ever.
For the full year 2019 loan originations for $38 billion another record year.
Thanks family residential volumes was also record.
Both for the quarter end here at 5.3 billion and $16.4 billion respectively.
Importantly, our loan to value ratio for single family originations in 2019 was a conservative 58%.
We finance accounted for just over 60% of single family residential volumes during 2019.
As we have noted before refinancing continues to be a means of getting trial with new clients.
[noise] multifamily and commercial real estate lending also performed well.
2019 originations were up 13% from last year.
Most importantly credit quality the main stroke.
Then they look at our fourth quarter originations for multifamily and other commercial real estate, our medium loan size was $1.5 million.
Conservative loan to value ratio of 48%.
And strong debt service coverage ratios.
As always do you have not and will not compromise our credit standards.
Business banking also had a terrific year.
Total business loans that aligns outstanding were $11.6 billion at year end, representing 13% of total loans outstanding.
A key focus for US is the growth of business loans, then line commitments, which were up 14% year over year.
This reflects our ongoing ability to create new relationships.
And deepen existing one.
Our success in business banking results, primarily from following our satisfied private banking clients to their businesses and nonprofit.
Which provides an important diversified source of funding.
Business deposits were up 15% for the year and represented 56% of total deposits at yearend.
For every dollar of business loans outstanding.
We have over $4 self business deposit funding.
Turning to the overall deposit base.
Total deposits were up 14% from a year ago.
Checking deposits remained stroke and represented 59% of total deposits at quarter end.
The average rate paid on deposits for the quarter was 59 basis points.
Our diversified deposit gathering efforts performed well across all of our channel.
As far as banking business banking private wealth management as well as our integrated preferred banking office network.
In 2019, we opened three preferred banking offices.
One in mountain view in Northern California.
One in Manhattan Beach in Southern California.
And on Canal Street in New York City.
In addition yesterday the opens a new preferred banking office in Palm Beach Garden, Florida.
In wealth management assets under management grew 20% year over year and are now $151 billion.
Private wealth management fee revenues represent over 14% of our overall revenues.
Our integrated banking and wealth management model continues fed tracks very successful valves managers.
During 2019, we're pleased to have welcomed 10, new wealth management teams across our markets.
We also recently opened at Wyoming Trust company.
This further expands our services for clients and enables them to realize the benefits of Wyoming Trust.
Despite a challenging interest rate environment. These strong results once again demonstrate the power of our unique Klein service culture, which feels organic sales growth.
Overall, it was a terrific year across the franchise.
Now I would like to turn the call over to Mike Roffler Chief Financial Officer.
Thank you Guy I'll, Let me review the results for the year and quarter and then offer some guidance for 2020.
Our capital position remains very strong.
In October we retired 190 million of the series D, 5.5% perpetual preferred stock.
Then in December we were pleased to successfully raised 395 million of perpetual preferred stock at the historically attractive rate of 4.7%.
As a result of these capital actions, we now expect preferred stock dividends to be approximately $15 million beginning in the second quarter of 2020.
Liquidity also remained strong with high quality liquid assets being 12.7% of average total assets in the fourth quarter.
Our credit quality remains excellent.
As Jim mentioned, we had net recoveries of 1.1 million during the fourth quarter.
And for the entire year no charge offs were only 4.6 million less than one basis point of average loans.
During 2019, we added 62 million to our loan loss reserves to support our strong loan growth.
Our net interest margin was 2.73% for the fourth quarter and 2.83% for the full year 2019 inline with what we discussed on our last earnings call.
Net interest income remains a key driver of the franchise and a reflection of our growth.
Despite a challenging rate environment, which even included a short term inversion of the yield curve for part of the year net interest income increased 10 half percent during 2019.
The growth in net interest income is the result of our average earning assets being up a very strong 15%.
Net interest income growth again demonstrates the power of our client service focused model to thrive in varying economic and interest rate environments.
Our efficiency ratio was 63.7% for the fourth quarter and 64.2% for the full year 2019.
We're particularly pleased with this given the continued high level of client service and our ongoing investment in the franchise, including infrastructure.
Now, let me provide some guidance for the full year 2020.
Loan growth is expected to be in the mid teens.
Our net interest margin is expected to be in the range of to 65 to 275.
Which assumes an unchanged fed funds rate throughout 2020.
Assuming the present shape of the yield curve and competitive dynamics. We currently expect to operate in the middle to lower half of that range.
The efficiency ratio is expected to be in the range of 63.5% to 64.5%.
As a reminder, our first quarter efficiency ratio is typically higher due to the seasonal impact of payroll taxes and benefits.
With respect to income taxes, the full year tax rate is expected to be 20% to 21%.
Tax rate in the first half of 2020 is expected to be a little lower due to the anticipated exercise of stock options that predominantly expire on July Onest 2020.
Overall, it was a very strong year that speaks to the sustainable power of our business model.
Now I'll turn the call back to Jim.
Thank you a guy and Mike It was a terrific year by every measure.
For almost 35 years or simple straightforward very client centric business model has been consistently profitable.
Delivering exceptional client satisfaction, one client in time year in Europe is the driver of our growth.
We're very proud the entire first Republic team and their ability to work in such unison to deliver this exceptional client service once again.
We continue to maintain a cold through collaboration and remain intensely focused on supporting the success of our clients.
Looking ahead, we expect to continue delivering the same stay safe stable organic growth coupled with our very conservative underwriting standards and strong capital at all times now would be happy to take your questions.
Thank you you would like to ask a question. Please signal by pressing star one on your telephone keypad using a speaker phone. Please make sure that your mute function.
It's turned off to allow your signal to reach our equipment again that is star one to ask an audio question well pause for just a moment to allow everyone the opportunity to signal for questions.
Our first question will be from Steven Alexopoulos with JP Morgan.
Hey, good morning, everybody.
Good morning, see my first questions from Mike on NIM I appreciate the full year guidance. When we looked at the quarter loan yields were down 11 dips in the quarter deposit costs were down only 60 Bips. Mike can you help us think about NIM dynamics over the near term walk us through with the new money loan yields are and what.
You see deposit costs had it.
Sure. So the fourth quarter NIM was to 73, which was pretty close to what we had expected.
From our last call.
The <unk> the loan yields we did have a rate change in late September and also October so the October rate change isn't quite fully reflected and so you'll see a little bit of a down a bias in the first quarter on loan yields of a few basis points.
Whereas our funding costs all in had been relatively stable and is reflective of making some changes with the with the fed move and so that's why we think a little bit lower from here as we sort of project into the first quarter.
On loan yields you know all in was about 330 in the fourth quarter, which is slightly less than the third quarter, but it seems to have stabilized a bit and maybe even a trending up slightly as we look at sort of locks in process.
Okay. That's helpful. And then on expenses from a seasonal view you started 2019 around 65% efficiency ratio do you think that's a rough good starting point. If you can you help us think about expense growth in dollars like percentage growth of expenses in 2021 of your expectations there.
Sure. So so I would say on a dollar growth probably low double digits and then you're right. The first quarter efficiency typically is above our top end of range at 64, and a half. So I think it's been low 65 to mid 65 in the first quarter and then it trends down after that okay.
And then just finally, another quarter right a record loan originations, you'll get a detail loan growth actually accelerated each quarter through 2019. When you guys look at the drivers of growth I get why you give the mid teens guidance are you want to be conservative, but is there any reason to think that well above that one continue at least over the near term. Thanks.
I think see that my team benefited from a kind of a dual situation in the single family refined and purchase area. There was a doubly Goodyear both of those cylinders fired that's pretty unusual I think you're now more into or refinance market and.
The short supply of available homes for sale.
And the stabilizing a price increases in our markets, probably augers for a okay year on purchase.
Okay perfect. Thanks for taking my questions.
Thank you. Our next question will be from John Pancari with Evercore partners.
Hi. This is it all has brought to launch yeah for John .
Question regarding the seasonal impact I realize you have talked about 85% to 10% change in the reserve levels.
Is the buyers to an upward revision of the reserve levels, given your Ben and she's mix or is it or possibility that the reserve levels might actually declined 5% to 10%.
Changes to the quality of the component of your loan loss Reserve and then as a follow up you know can you just help us to into the date to impact of loan loss provision do you have a view on the current consensus estimates you know for 2020 Onest original from 90, 99 $90 million to $95 million.
Oh, Thanks role I think on the seasonal adjustment you know, we're finishing up the sort of audit review process, but a range looks to be an increase of less than 5%.
At this point based on sort of our runs to date and so it's a little bit tighter than when we last spoke about it and news that just a very slight increase it looks like and that includes all reserves. Because we are gonna have to put up a reserve on held to maturity securities now.
So we'll break those components out when we do our filings.
In terms of ongoing run rate our loan loss reserve to loans today is about 55 basis points based upon the mix the portfolio.
And given the runs we've done it feels like a range of 55 to 60 makes sense to us and that'll obviously depend on loan mix even on a go forward day to impact and so I can't really comment on sort of consensus because that will factor in your view of gross a and whatnot, but I think if that that.
Loan loss allowance range is probably a good thing to look out when you are figuring out.
Okay. That's helpful.
And then could you just give us some specifics of the upcoming core systems project that was announced yesterday, but if I ask a for example, the scope of the the project.
Completion, the total cost.
So you don't see or if there's any incremental hiring this associated with this project.
I'm sure the core conversion is well underway a the planning process is well underway and on track in terms of budget, then Tom <unk> timeline, and we expect to complete the core conversion by the end of 20 to 21.
I'm simple business model no major acquisitions relative to low number of accounts are all advantages a and it is the core conversion related costs are in the efficiency guidance, a that'd be a provider six it's gonna have to six different Uh huh.
Okay. Thank you.
Thank you. Our next question will be from Ken Zerbe with Morgan Stanley .
[laughter].
I guess my first question, just where there any incentive fees or any kind of other unusual items in the investment advisory line. This quarter. It looks like it ticked up as a percentage of assets a little bit higher than what we would have expected.
Yes, that's right Ken there is a performance fee for one of our legacy related activities. It's a just under $9 million that was in the fourth quarter investment advisory fee.
Most of that is then recorded as an expense between compensation and other expense. So just a little bit of it drops to the bottom line.
Okay got it and then maybe that's a little more broader question in terms of your deposit strategy. You just kind of curious how that's changed over the last year. So because obviously you had.
On average your if you're in spring checking was up a lot this quarter I mean or at least in back half of the year.
But Cds, which grew earlier in the year kind of if the it looks like they were down a little bit this quarter, just kind of curious more the strategy behind out like are you trying to shift more towards very short duration stuff. The CD still appealing to you. Thanks.
Sure, Yes, Cds are still appealing and it continues to be a a great tool in the in our funding till kids because it also helps attract great households, Klein households have relationships I just year over year as we have noted in the earlier calls the barbell strategy between checking in C. D has been performing quite well.
Oh, and if actually if you look at the year over year gross.
Checking has been extremely strong consumer has been extremely strong in addition to business and Cds were up 28% year over year, Ralph a $2 billion in the second half, especially in the fourth quarter given the short term rates have come down there has been other alternative funding sources that has been attractive from that perspective.
So does there has been a slower growth in Cds, but we will continue to use them as a great client acquisition tool going forward.
Okay, I might add one thought here, which a guy I referred to which as you know we grew deposits about 40%. The average of most of the banks. The banks have reported already today is running around five for the year. So [noise], what we do as focus on a very wide range of methodologies and and constituencies.
In the raising of the deposit funds wealth management, obviously plays a role well in business banking for important toward guys really referring to as far as our range of focusing the total our total funding costs in fact or are holding up quite well, we're basically at about.
84 basis points about that's about 30% lower than the three other bikes are reported already today.
Got understood and then just one last question if I if I could in terms of the provision expense I know you had to $1 million of net recoveries and that probably contributed to the $10 million provision I'm, sorry to see that was down a fair bit but doesn't seem to account for all of it were there any other changes in terms, how you're thinking about credit or any other adjustments that would've.
Glad to sort of the unusually low provision expense this quarter.
So I think I'd I'd say, one you added the million dollar recovery, then obviously leads to less provision and if you look at the components of growth in the quarter.
70% was single family and so that's a much lower reserving rate than some of the other things like business, which was I think relatively modest growth in the quarter. So it's largely on a mix issue.
Perfect that answers a perfectly alright, thank you very much.
Thank you. Our next question will be from Brock Vandervliet with you, but yes.
Oh, great good morning.
I'm sorry.
Could you speak about the a the sale of gratifying and how that might affect your expense run rate or anything else going forward and and perhaps what was behind that transaction I think the press release explain some of it but wanted to review that.
Sure a very fair to ratify it's actually HM grew significantly under our ownership, but we decided to its and with better place. So the trade who has a very large your business to business.
Activity and they're adding up to their service offerings, we expect to say on the platform is ratify we love the ambition in the process that they have and we expect to have our or employee group stay on and as well on work and we're promoting their Rob student loan pay downs and save up activity store visit.
Points or it will it will reduce our run rate on expenses are bad somewhere on the sort of mid teen volumes per year, and that's obviously a bought obviously helps a little bit in terms of going forward.
Okay, great and separately, Mike It looked to me like there was a bit of Oh, yeah carry trade strategy almost a few will with the increase in borrowings and an increase in investment securities. It looked like that also continued to the ended the quarter could you could you talk about.
That and how you do you think about the balance sheet shape.
Yeah, I I guess I would say this we found opportunistic purchases in investment portfolio and we will look at the funding strategy as Guy mentioned before between sort of Cds and some of the cost of other borrowings. We felt there was a good opportunity to.
By in investments and we funded it with federal home loan Bank in this case and just to add we do expect looking forward the earning asset growth more in line with the mid teens I'm just in line with the guidance that we have given.
Got it okay. Thank you.
Thank you our next question will be from.
He's here with Jefferies.
Thanks, Good morning, one of the touch on the Cnine are seeing eye loan bucket.
The it finished a little bit more muted than than we're used to seeing I know you guys.
I had a very strong.
[laughter] 2018, and capital call I'm, just wondering what does the outlook there and are you seeing any sort of a you know frothiness or just you know a lot of competition pushing too hard on on price and or structure.
Ah that there is still competition on the price more so than it is being earlier in the year, you're very pleased when you look at the capital call lines commitments year over year, they're up 25%.
Okay continues to be very strong a driver of the commitments.
In in terms of the outstanding the utilization rates play a role and we have seen four percentage point drops into utilization, which kind of creates the volatility and outstandings, but in terms of commitments in client relationship a acquisition and retention and deepening of your very pleased with the outcome.
Okay, great. So a little bit <unk> price is under pressure, but structure, it's still a you're not seeing anyone do anything you know a andreas.
Hey, good it's Jim to be clear, we do see someone discipline. One thing we simply don't copy you got gotcha, Okay. And then Jim just just follow up question for you on a student lending as you mentioned, it's I think 35% of your overall households, its you know entering its six year.
What what sort of cross selling experience are you seeing towards the bigger ticket I'm single family mortgage you know of your student loan households that have graduated towards their first home purchase how much you know what percentage are are going with first republic or or going out.
Side.
<unk>.
The truth is we don't know if they're going outside very well, we can track it a bit but it's hard to attract what we do know is that weren't getting a fair number of household mortgages out of the base already couple of thousand so far.
Which we consider to be quite good because.
Thinking about the cohort for a moment. These are people that although theyve refinance without still do have significant student loans outstanding number one number two the average age in the portfolio would be about 30 334, maybe at the most and so they're entering the household purchasing.
Age at this point.
So far the younger cohort tend to be purchasing homes and somewhere around four or 5% of the cohort per year. So we're actually quite pleased the cross sell of all the products is going very well.
And we appear to be the net promoter score for instance, among those cohort is higher than the bank overall slightly and we're getting a fair number of products for quiet per household cross sell that we're very satisfied with.
Great. Thank you.
Thank you. Our next question will be from Aaron deer, with Piper Sandler companies.
Hi, good morning, everyone.
Just wanted to questioning the growth continues to be very strong and the outlook remains quite favorable I'm just curious I, obviously to the the preferred raise recently, but.
Given the growth expectations.
Do you expect to continue to maybe between on preferred or might we see common raise come in at some point in the near term.
Well, we've we've always been opportunistic on the market as you know the philosophical base of fruits Republic is to stay well capitalized at all times and possibly more to the point to stay capitalized ahead of growth.
All that worse, so that were funded in advance of Ah of growth.
Okay and then following up on the on the scene I questions I'm Guy. If you said the of utilization it was down four points, what what is the actual number the utilization rate that a period on.
Oh, so it's around mid Thirtys, but we did make a is slight adjustment to the way we calculate the utilization rate to take into account like the mound, Mike is going to touch on that.
Yeah. So we were about 35% in the fourth quarter and I think guy a reference down for that was from 39% a year ago, we did make some modest adjustments to total commitments lowering them.
For certain capital calls, where a total amount is part of the loan agreement, but there's some limitation until certain acts occur and they have to get future credit approval. So we just lowered commitments ever so slightly for that.
Okay. So anyway, what are the total commitments at this point.
Line commitments are just under 19 billion and that's a 16% increase from a year ago for business lines business line commitment and term loans together is about 24 billion.
And then to just do the math on the utilization its about two to three percentage point difference between the pre recast and post recast so the new range would be around a mid thirtys to low fortys. This guy to where we're seeing utilization. So when you look at the last two years with that adjustment.
Okay. That's helpful. Thank you.
Sure.
Thank you. Our next question will be from Aaron together that she was city.
Thanks.
Looking at the unsecured part of your loan book the to the student lending has obviously been growing very solid but it seemed like it did it may have decelerated a little bit in a in the recent quarters in or anything in particular, that's that's driving the unsecured loans to to slow down there.
There's no not really other than this last year, we implemented a on a I'm hopeful range of pricing based upon how much business you do with the bank and that actually slowed down our new acquisitions slightly but it raises the quality of those that we acquire.
Considerably so net net it's actually quite positive the other thing I'd add is as the portfolio matures you have more and more repayment activity happening. So even if we did the same numbers for slightly up each year, you've got more cash flows coming back in the portfolio like you do on any.
Amortizing consumer portfolio.
Got it okay. Thank you [laughter] and separately the professional fees kinda jumped a bid was that.
Related to Cecil or the or the core conversion.
And how do you think about a professional fees is as we go through the year.
Yeah, So there's a little bit in there from obviously the sale of gratify some professional fees associated with that and we have started to incur some of us more core related cost it might come down just slightly but I wouldn't think a lot from here.
You know, it's probably 2 million extra this quarter.
Okay. Thank you.
Thank you. Our next question will be from Brian Fran.
Oh, Hi, I was hoping ask about two tax related issues for your customers.
One there's a lot of press recently around prop 13 in California, and just kind of how you're thinking about that what you're hearing from borrowers.
If it does go forward and then to you know salt is back in the press and it's always hard to.
Discern you know is it just anecdotes about people moving from New York to Florida, and things like that or or is it actually having an impact.
So as you look across your business and talk to your borrowers.
Has anything reason beyond those kind of one off anecdotes in terms of people migrating to lower tax states.
I would say as a practical matter or is it an increasing number of anecdotal examples, but then there's not a flawed by number of households by any means the size of the households that are migrating or considerable and so I think fee.
Out of the always being shifted from.
The tax taste of the lower tax states is a increasing reasonably rapidly.
And it's hard to put your finger on exactly what tips people over.
I think the thing that process and speaking of is that we need remember the demographic bubble happening among your baby boomers their arriving up there a retirement age just as this is happening. So it probably is accelerating what might have been a somewhat natural about anyway, particularly in the Florida situation for instance from the northeast things like that.
Wyoming is obviously, a beneficiary of this and and it hasn't been loss on a set of so good time to be opening here.
And we just opened Oh yesterday, we opened our Palm Beach Garden, PBS in Florida, and others to follow so now we have three three offices in that area.
And then on prop 13, I'm, just kind of any thoughts on real estate impacts in California.
I think it's too early to to know the fundamental characteristic of California urban real estate is or simply a shortage of supply.
Thank you very much.
Okay.
Thank you. Our next question will be from Lana Chan with BMO capital markets.
Hi, Thank you good morning, I'm, just wondering if you could give us spot rate for deposits at the end of the quarter. I think you she has that number for us.
But it's the inline with the <unk> fourth quarter average high Fiftys.
Okay, and what was the good new purchase money under Securities added in the fourth quarter.
So the fourth quarter was around three in a quarter for the year. The purchases were around mid threes, and then a new money for the MIDI is about three in a quarter, 3.3% enough for the H.C.L.A. high twos.
These are all T. bye.
Okay, Great and could you also give us an update in terms of I guess, you mentioned it a little bit before but the plan I'm office openings, a couple of more in Florida, and what is still the new schedule for like the Hudson yards and the other new openings.
Depending on the timing on Hudson yards openings. This year will be towards the end of the year. We'll open several offices were mostly this year will be mostly focused on the New York City them as as Guy went through this past year it and focus.
Broadway around the franchise, New York will will be we will be opening sometime in the next 12 to 14 months about four offices in the Hudson yards area. In addition to office space in which we will have teams.
[noise] they'll open very much towards you ended the year or the first of next with most of the under this year. We also have another location in the two more locations in the New York City area that will be opened late in the euro as well. So we would probably next 15 months, let's say, we would expect open about six new offices in New York City area.
Okay, great. Thanks, Jim.
Thank you. Our next question will be from David Giovanni with Wedbush Securities.
Hi, Thanks, I wanted to touch on your single family residential outlook, you mentioned about how the growth tends to be seasonally slower in the first quarter. I was curious are you also seeing appetite waning for Wi Fi at this point or is it still a tailwind into the first quarter.
I would say, it's a modest tailwind.
It's slowed down a little bit as a as the rights are suddenly right around the book little above three.
And up so I would say, it's a modest tailwind, but mostly it's the holidays in the slowness that comes from that.
Okay, and then shifting to the efficiency ratio I was curious as to the driver behind the lowered guidance of 63.5% to 64.5%. It's gratifying. The main driver here or are there any expenses are projects you're pulling back on.
Hmm nothing from a project that is sort of client that has client service focused or is going to help us continue to add an acquire households, I think part of it is the team really did a great job or prioritizing and looking at where is the best place.
Since in the franchise and our infrastructure and try to be more aligned with the revenue outlook, which is reflective of a slightly lower margin than we had this year and just being very disciplined and focused on where the best investments can be made to continue to serve households are for the bank and just to reinforce a milestone.
And we continue to make investments into our infrastructure or to be commensurate with the growth of the organization and were not going to compromise when it comes to prudent expense management were not going to compromise on safe to sound this or climb service excellence or culture and employee engagement. So those are the core pillars evil.
Continue to invest prudently.
Thanks for that and one last housekeeping FDIC assessments I saw that jumped up in the quarter any commentary there as to whether that's a good new run rate going forward.
So it typically increases a bed given the growth in our average assets, which is the biggest driver sort of your assessment bases size of the bank and so that's the main reason it would have jumped in the quarter. It if the asset base continues to increase you'll continue to see modest increases I would say.
Thanks very much.
Thank you. Our next question will be from Jared Shaw with Wells Fargo Securities.
Hi, good morning.
The investment fees, you know, even excluding that $9 million of incentive fee. It looks like you're starting to see some some growth.
There should we expect to see continued I'm sure extension, the the fee levels or percentage of it you EM.
Or is it where we are here in the high Fiftys a good level.
We think the high Fiftys is a good level, we're happy to see it sort of stabilized and maybe even a little bit better, but the high fiftys is the right place to be.
Looking back on looking looking back to the start of the period right. So fees divided by the prior starting point.
Right right.
And is any of that improve is that just general pricing improvement or is that due to an improved maybe mix with a with Illumina. This group now off the off the platform.
[noise] earlier this year, we did have more people in fixed income that does put the fees down slightly because there's less of a charge there, but I don't think it's anything systemic or I'm not sure luminous would have driven it that differently.
I think it's more of a stabilizing amount and also think that growth in assets, sometimes can distort a little bit depending on when you hire or when the assets come but if you look back over long periods of time sort of 56, 57 58 basis points has been a pretty good range for us.
Okay. That's all that's great color. Thanks, and then just finally on the.
You know the infrastructure investments that you referenced anything any major strategies are investments that are coming out. Besides the core systems or is it just more ah things associated around the edges without any any major project. So we should be planning as well.
As you said, it's mainly core and both F.I.S. and Pfizer will continue to work with both of them they've been great technology partners. I mean, they will continue to do so there are other a lesser SCO projects. They have been continuing on large system improvement or corp. its online.
And enhancements given our business deposits to delight, our clients further but in general on the expense I'd 63, and half the 64 and a half is what encompass all these projects. Thank you.
Thank you.
Thank you. Our next question will be from Cara fine with Baird.
[laughter]. Thanks for taking the questions I just had a couple of related to the balance sheets updated rate sensitivity [laughter] futures markets a bit all over the place, but where we see a fed rate cut in the back half of 2020 can you help the size of potential NIM impacts and that's up second quarter and then Conversely, if the yield curve, where to steepen say 25 basis points with no change in competition.
And what would be the margin benefit.
A little bit steeper yield curve to take the second part first would be a little bit beneficial and probably stabilize the margin with the one key caveat you said that competition doesn't.
Behave differently, then such move in the curve depending on how they react we obviously would follow suit because we're going to serve our clients and do the best thing for them.
On the you know one rate cut if it's in the you know July to September period for the year, probably doesn't have a big impact because we'd lose a little bit on or loan yields because about 25% of the portfolio is tied do short term rates, although about 20% caught library.
In prime.
And we have a little relief on deposit. So I think it's probably a couple of basis point impact, but not a very large impact lower.
That's helpful. Thanks for taking my question.
Thank you. Our next question will be from Jon Arfstrom with RBC capital markets.
Thanks, Good morning.
[laughter] mortgage on dip a quick follow up on on that Mike what does the message.
In terms of the margin trajectory I hear what you're saying on Q1, but it feels like that's basically it for margin pressure once you get the asset repricing through and you're maybe signaling stability from there is that fair.
I think that.
As we talked about to 65 to 275 for the year, but we're probably in the middle to the lower part of that range. So if you're down a few basis points in the first quarter there might be a couple more to go I would say.
Okay, but then sort of stability the back half of the year.
Okay. Good.
Message on deposit costs. It sounds like relatively stable is what's your thinking on deposit pricing.
Yeah in general around 59 as spot freight as high Fiftys absent any other fed moves or rate cuts that would largely stabilize here and just to bring it all together so the rate locks on the loan side are slightly lower than what we have on the books and then the deposit cost stabilizing around here.
Does the guidance that Mike as per light that a slightly lower in Q1 and the lower half of the two six to five to seven to five ranges for the year.
Okay. That's helpful and then Jim one for you, obviously very positive numbers, but I'll just want to ask on the NPL balances <unk> jumped up a couple of quarters ago, and I know it sounds like it was a few bigger deals any update there that you can provide for us.
No. It's the same it's the same situation, we've got one of our larger well not large, but it's a decent concentration limits that we brought in nonperforming although it continues to pay current.
And so we don't really have any update on it at this point. The good news is we're not we had we did not have had anything to that list, particularly in this quarter.
Okay, alright, thanks for the help.
Thank you I'm showing no further questions at this time I'd like turn the call back to Jim Herbert for closing remarks.
Thank you all very much for taking the time on the call today, we appreciate it.
Good day.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.