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First Republic Bank (FRC) Q1 2018 Earnings Conference Call Transcript


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First Republic Bank (NYSE: FRC)
Q1 2018 Earnings Conference Call
April 13, 2018 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to First Republic Bank's first-quarter 2018 earnings conference call. During this call the line will be in a listen-only mode. Following the presentation the conference will be open 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 -- Chief Marketing and Communications Officer

Thank you and welcome to First Republic Bank's first-quarter 2018 conference call. Speaking today will be James Herbert, the bank's chairman and chief executive officer; Gaye Erkan, president; and Mike Roffler, chief financial officer. Before I hand the call over to Jim, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties, and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see the bank's FDIC filings, including the Form 8-K filed today, all available on the bank's website.

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

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James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

Thank you, Shannon, and thanks, everyone, for joining us today. It was an excellent quarter by virtually every measure. We've scaled back a bit our prepared remarks today and the number of speakers as well, as our results are quite straightforward. We've continued to deliver strong, safe, organic growth across the board while also providing a level of client satisfaction that was even higher during 2017 than the prior year.

Let me share some highlights. Year over year, our total revenue growth was 20%, net interest income growth was 18%, and tangible book value per share increased by 12%. These results are driven by strong growth across our franchise. Total deposits are up 16%, total loans were up 21%, and wealth-management assets grew by 25%.

Our loan-origination volume in the first quarter was $7.3 billion, by far our strongest first quarter ever. Credit quality remains excellent. Non-performing assets were very low, 5 basis points, while net charge-offs for the quarter were a nominal $154,000, and our capital levels remain quite strong. Turning briefly to conditions in our geographic markets and specifically home lending for a moment, we're starting to see some very modest differentiation by region.

The San Francisco Bay Area, Los Angeles, and Boston all remain quite strong. Activity in New York has moderated a bit, though we still see, we still view this market as healthy. Across our footprint, while rents are generally down slightly, residential real estate values are holding up well. Our underwriting criteria as always remains quite consistent and very conservative.

Overall economic conditions in our urban coastal markets continue to be good and the clients remain quite active. We still expect mid-teens loan growth for the full year. The emphasis that we have on safe, consistent growth also means continued focus on our regulatory and compliance infrastructure, as we've noted on many previous calls. We are still making investments in our business, including enterprise risk management, [Inaudible] BSA and compliance commensurate with maintaining our best-in-class programs.

These infrastructure investments have made First Republic an even stronger institution and we've been recognized for the effectiveness of our regulatory and compliance programs. We also continue to invest in future client household acquisition opportunities. A good indicator of our progress in this regard is the success of our student loan refinance product, which helps younger urban professionals reduce their student debt. At the end of 2015, we had only 1,300 student loan refinance client households.

Today we have almost 13,000 such households, a tenfold increase in just over two years. These new household relationships represent an important part of the ongoing development of our next generation of clients. We're very pleased with the results. While investing for the long term always, we remain completely focused as well on the daily execution of exceptional, differentiated client service.

Our 2017 Net Promoter Score, which we've just received, confirms this. The Net Promoter Score, as a reminder, measures our client-satisfaction levels and willingness to refer friends and colleagues. Our newest score for 2017 stands at 75. This is up 3 points from our already very high 2016 scores.

When our clients identify First Republic as their lead bank, our score increases to an industry-high 83. Both of these scores are more than twice the banking industry average and higher than many of the world's leading brands in any field. This level of client satisfaction is the primary driver of our strong organic growth. We deepen existing relationships and acquire new households through the strong referrals from our very satisfied clients, this is the key to the growth.

Overall we are very pleased with our quarter. Now I would like to turn the call over to Gaye Erkan, our president.

Hafize Gaye Erkan -- President

Thank you Jim. Let me touch on our business model and then cover our strong performance in the quarter. Our simple, straightforward model is based two core principles: our safety and soundness and our unwavering focus on the client. The successful execution of this model has enabled us to deliver consistent results over time through a variety of macroeconomic conditions.

Safety and soundness are reflected in our robust operational controls, risk management, and compliance program, strong credit quality, and conservative capital and liquidity management. To that point, total net losses since 1985 are just 16 basis points cumulative on over 200 billion of loan originations. We maintain healthy capital ratios at all times and have a very strong liquidity profile. Our unwavering focus on the client is reflected in our high Net Promoter Scores, which Jim just mentioned.

Exceptional client service is what ultimately powers our organic growth. Now let me provide some detail about the first quarter. Our loan-origination volume was $7.3 billion, up 30% compared to the first quarter last year. It was our best first quarter ever.

Single-family residential lending, the biggest component of loan volume, was 46% purchase and 54% refinance. Residential lending is one of the key ways we acquire new households, both through purchase activity and the refinancing of loans from other institutions. Multifamily and commercial real estate lending also had a good quarter and grew nicely from a year ago. Importantly, credit quality remains excellent.

Our multifamily and the commercial real estate loan-to-value ratios are very low, at 52% and 48% respectively. Together these portfolios represent less than 200% of our total capital. Business banking continues to be a key contributor to the franchise. The growth of business banking is the result of our success in taking care of our clients' personal banking needs and then following them to their businesses and the nonprofit organizations they support.

During the first quarter business loans outstanding were up 30% from a year ago. This growth was primarily driven by an increase in business-loan commitments and higher utilization rates. Businesses and nonprofits have also been a strong source for deposits for us. For every one dollar we have outstanding in business loans, we have more than $4 in deposits.

Turning to deposits overall, it was a very good quarter. Deposits were up 3% from last quarter and up 16% from a year ago. Deposit growth fully funded are $2.3 billion in loan growth during the quarter. We are very pleased with the strong and diversified growth across all channels and geographies.

Business deposits were 54% of total deposits, the same as a year ago. Checking deposits represented 62%of our total deposits at quarter-end. [Inaudible 00:10:21] accounts from wealth management also remain a diversified and stable source of funding, representing 7% of total deposits for the quarter. In terms of private wealth management, it was another very strong quarter.

Wealth-management assets were up 6% during the quarter and 25% year over year. This continued strong growth, despite market-related volatility, was driven by positive net client inflows from both new and existing clients. Wealth-management fee revenues for the quarter were up 28% compared to a year ago and represent 14% of the bank's total revenues for the quarter. During the first quarter, three new wealth-management teams joined First Republic and another joined in April.

We continue to successfully recruit new wealth professionals who are attracted to our holistic and client-centric approach. Our focus on safety and soundness, coupled with our commitment to service excellence, produces these strong results as seen this quarter. Now I would like to turn the call over to Mike Roffler, chief financial officer.

Michael J. Roffler -- Chief Financial Officer

Thank you, Gaye. I'll cover the investment portfolio, net interest margin, our efficiency ratio, net interest income, our tax rate, and finally, overall earnings per share. Our investment portfolio totaled $16.5 billion at the end of the first quarter. High-quality liquid assets, including eligible cash, totaled $11 billion at March 31, or 12.8% of average total assets, in the first quarter.

As we previously disclosed in our 10-K, we took the opportunity during the first quarter to reposition and sell $2.2 billion of intermediate and long-term, fixed-rate investment securities. This sale resulted in a gain of $10.7 million during the quarter while also forgoing a modest amount of future net interest income. The net effect was a slight benefit to our quarterly results. Turning to net interest margin, during 2018 we continue to expect to be in the range of 285 to 295, as mentioned on our last call.

During the first quarter, our net interest margin was 297, which includes about 3 basis points of benefits from the repositioning of the investment portfolio. Looking at the efficiency ratio for the full year 2018, we continue to expect to be in the range of 63% to 64%, as noted on last quarter's call. We are pleased that our efficiency ratio for the first quarter was 64%, which does include about 60 basis points of benefit from the repositioning of the portfolio. Turning to net interest income, which we view as one of our key financial metrics, it was another good quarter.

Net interest income was up 18% year over year. Our effective tax rate for the quarter was 19%, in line with our previous guidance. As we mentioned the last call, we continue to expect the bank's effective tax rate to be approximately 19% for all of 2018. Finally, earnings per share were $1.13, up 12% from a year ago. Thank you. Now turn I will turn the call back over to Jim.

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

Thank you Mike and Gaye. We continue to invest in the operations and infrastructure of enterprise, future growth opportunities, which are considerable, and maintaining exceptional level of client service. We are quite pleased with the results of the quarter and with the results of these investments as well as a strong and consistent performance. Thank you. We'd like to open up for questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question today comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

Ken Zerbe -- Morgan Stanley -- Analyst

Thank you morning. I guess first question just for Mike with the NIM guidance, 285 to 295, obviously we've had sort of the long end of the curve move up a little bit over the last few months or so. Am I right to assume that the benefit of a longer end going up is offset by the bouncy repositioning that you did? Is that the right of thinking about it, because I'm just wondering why it shouldn't be a little higher than that current range?

Michael J. Roffler -- Chief Financial Officer

So yes the long end moving on up has has helped on some of our new lending production incrementally. I think one of the key things to look at, though, is the short end is also moving pretty consistently up so the curve is pretty flat, and that leads us to sort of stay in this range for the balance of the year.

Ken Zerbe -- Morgan Stanley -- Analyst

Gotcha, understood. And then maybe just going to deposit betas, we just had a different bank talk about that they're seeing an acceleration in deposit-price competition, they think 2018 is going to be a lot more I guess more aggressive or more competitive than last year was. Are you guys, can you just talk about some of the trends that you're seeing in your client base and what you expect for deposit betas going forward? Thanks.

Hafize Gaye Erkan -- President

Absolutely. And our deposit beta so far has been about 20% over the last 12 months. Fed funds change was 75 basis points Q1 to Q1 across the past year, and our deposit rate increased by 15 basis points. We are pleased with the 20% beta compared to what we have seen historically around mid-40s in terms the beta in the past rate [Inaudible] of cycles, that speaks to the strength of the checking deposits representing 62% of our total deposits.

Having said that, deposit rate, spot rate ending Q1 is 35 basis points, and we do continue seeing the competitive pressures. But checking, which is more operational nature, that's why the clients are here with us, for the service and the relationship, is a strong lever against that.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. And where are you seeing more of the competition?

Hafize Gaye Erkan -- President

So if roughly speaking let's say 62% is checking, the remainder is money market-type deposits and CDs. So CDs we are keeping it competitive as the market rates change, and they're still attractive compared to other wholesale alternatives because we get to leverage our 70 [ph] preferred banking offices, acquire households, and also have a 50% of our CDs have a checking relationship, great way to add duration to the liabilities over a longer, fixed-rate term as well as acquire households. And then money market rate deposits, we will be fair to our clients and try to keep it competitive in line with the expected Fed hikes.

Ken Zerbe -- Morgan Stanley -- Analyst

OK. And then just the last question on the expenses, obviously with the 63% to 64%, do you do you feel -- maybe this is more of a question for Jim -- but do you feel that you're having to sacrifice any additional investments, that you would want to invest more for that the next generation of client but you need to hold back because of that target ratio?

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

No, not really Ken. We've actually landed I think at a very good place. It's a good balance right now, and we're able to go forward at a pace that we can operationally handle very effectively, I wouldn't necessarily want to accelerate it.

Ken Zerbe -- Morgan Stanley -- Analyst

Perfect, all right. Thank you very much

Operator

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

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

Good morning everybody. I wanted to first start on the loans side and drill down into the 1Q originations. If we look at commercial originations they are almost 30% of total, which have basically doubled over the past year. Can you give more color on what's driving that? And is it all capital call lines?

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

On the business side of commercial -- I presume you don't mean the real state, you mean the business banking?

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

Yes, exactly.

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

Yes. That's being driven by capital call lines they're very active. The P and venture capital guys are busy. And the real state funds we have in that category ,which are a lesser percentage of the total but growing, are also quite active.

So it's mostly business activity level. Particularly since the tax bill we've seen a lot of things happening that are pretty exciting actually.

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

Following up on the tax bill, Jim, if we look at the single-family originations, it declined modestly year over year, and I know you said that NewYork was a bit soft. Is this related to the impact of SALT? Is that what this is?

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

We don't think so. New York is somewhat of a case unto itself. It's actually the opposite of the other markets. Los Angeles, San Francisco, and Boston continue to be quite supply constrained, whereas New York actually is experiencing a bit of new supply and a fair amount of slowdown at the upper end, which we're all I think pretty aware of by now.

So it's a little different market. It's had more supply developed. So I think it's a supply demand balance, it's not really a SALT. The -- I think that the pipeline that we've got is actually very strong, however, so we don't yet see anything to be worried about it at all.

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

And then I wanted to talk about the margin for a second. I hear Mike's full-year guidance, it's unchanged. But how do you think about the margin near term, sounds like 244 -- 294 as a starting point?

Michael J. Roffler -- Chief Financial Officer

I think that's right, Steve -- 294 is sort of a normal level, call it, first quarter. And then it probably ticks a little bit down from there, sort of the middle of that range, given some of the deposit pricing that Gaye talked about. But we feel really good that the loan yields are getting a little bit incrementally better to help offset some of that, and we do have some benefit from the recent rate hike that will flow through through the prime and LIBOR portfolios, but sort of that midpoint feels pretty good near term.

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

Thanks. And maybe just one final one for Jim. Just to follow up on the Net Promoter Score moving up even further in 2017, which is remarkable, how does the Net Promoter Score in the student loan refinance business compare to the overall NPS?

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

It's actually higher than the overall.

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

It's higher than the overall. OK. Thanks for taking my questions.

Operator

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

Jared Shaw -- Wells Fargo Securities -- Managing Director

Hi, good morning. Maybe just following up on the deposit beta, Gaye, you had mentioned that it looks like it's been 20% so far compared to the mid-40s historically. Do you feel that this cycle we're going to get back to that mid-40s or could you expect actually maybe even see it higher than mid-40s as we go through the cycle?

Hafize Gaye Erkan -- President

So just in general, the beta question, I would prefer to answer in terms of the NIM guidance is 285 to 295 for the year. Now drilling to deposit for a second, on the beta for the second quarter, as you know, the first half of the year is always more challenging from a deposit perspective than the second half of the year. And on top of it in the second quarter of we have, as Jim mentioned, the pipeline is strong on the lending side, and on the deposit side, the anticipated tax outflows are going to happen in April and May timeline. So because of that, and starting at 35 deposit rate, we would expect it, a slight increase in the deposit rate in the second quarter followed with a strong activity in the second half of the year just as we have seen historically.

So I wouldn't see a very big jump in a year over year from the betas that we have seen but yet increasing toward the historical betas over time as the Fed funds normalizes.

Jared Shaw -- Wells Fargo Securities -- Managing Director

OK great,thanks. And then on the expense side, Mike, maybe you can just walk through a little bit of what we can maybe pull out of the salaries and benefits line that were 1Q-discrete items? And what would be a good base from there going forward? And then a corollary to that is on expenses how, maybe a little update on Gradifi and are you still hiring and growing there? Or have you stabilized the investment in gratify?

Michael J. Roffler -- Chief Financial Officer

Sure. So I'll start with Gradifi. So a reminder last year was about a $17 million, $18 million expense run rate. The first quarter was just under $5 million, so we're at a pretty consistent pace that I think we talked about, a level amount, that we talked about at the end of the year so we're still investing accordingly, but at a normal run rate.

On the salary and sort of bonus-payroll benefits, if you look at it Q1 versus the fourth quarter, we have elevated payroll tax and benefits of about $17 million, compared to Q4 to Q1. Not all of that goes away in Q2 but a good portion of it does come down because of the seasonality. So probably 12 to 14 is a good good pull-out. And then the thing I'd add on that, obviously the first quarter is when you give salary adjustments.

That's not fully reflected in the run rate, so it does cause a little bit of offset there.

Jared Shaw -- Wells Fargo Securities -- Managing Director

Right. And then apart from the expenses on Gradifi, just any more of an update on trends there and the expectation for maybe profitability or a little longer-term goal?

Hafize Gaye Erkan -- President

So we are pleased with the momentum. Today Gradifi had over 350 employers on the platform, compared to 300 at the end of the year, and we are seeing more interest on the Gradifi refi as well. Having said that, as we have indicated, so we are not rushing the process there so it would be past 2019 from a profitability perspective.

Jared Shaw -- Wells Fargo Securities -- Managing Director

Great, thank you

Operator

Our next question is from the line of the Dave Rochester with Deutsche Bank. Please proceed with your questions.

David Rochester -- Deutsche Bank -- Director

Good morning guys. Just on the deposit growth trends this quarter, I know those tend to be seasonally softer in the first half, you mentioned that. But this is the largest CD growth that we've seen in a while. I was just wondering if you think this is more of a sign of things to come on the deposit side, if we should expect more CD growth going forward, even as you get into the second half of the year just given the competitive dynamic you're seeing?

Hafize Gaye Erkan -- President

So let me, using your question if you don't mind, let me just give the drivers of the quarter-over-quarter growth. As you said, so we are pleased that the $2.3 billion deposit growth has fully funded to $2.3 billion of loan growth. In terms of the drivers, $1.7 billion is CDs. The large portion of that is consumer CDs, so that's retail.

And that comes with a fixed-rate term that adds duration to the liabilities, which we consider opportunistic in a rising rate environment or prudent from a risk-management perspective in a rising rate environment. And on top of it, 50% comes with a checking relationship and it brings great energy to our preferred banking offices, to deepen these relationships. And it's a great household-acquisition tool that leads nicely into the second half of the quarter. So we are actually very pleased with that.

Also, $0.6 billion of the $2.3 billion growth came from business checking, that we are also very pleased about given that they are coming in with almost no rate attached to it.[Crosstalk]

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

This CD question is kind of interesting to me because having done this for a long time. CDs are actually a very attractive product from a retail point of view. They take very little attention on our ongoing basis, they tend to roll automatically. And RCDs tend to have a kind of a new maturity in the sort of 13- 14-month rangem and for instance this quarter I think our average rate was about 1.4, 1.45 and that compares to a one-year T of 1.95.

So actually, if you put all that together, and then you take the comment that Gaya made about 50% or more starting with checking, it is, and we have 70 offices, average size is about 300, 350 million, so they're very profitable. And this has been an opportunity to grow those and that channel for the bank again. And so in fact it's a very attractive thing, it's just that CDs went out of favor at zero rates. So we are actually delighted to see them, we're pleased to see them come back, actually.

David Rochester -- Deutsche Bank -- Director

And were you pricing the new CDs around that average cost of 140, 145, or were they higher than that?

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

The incremental is probably at this point slightly higher than that but we are following the T up, but we're lagging behind the T by 50 or so

David Rochester -- Deutsche Bank -- Director

Yeah, OK, great. And then I guess going forward if there is a little bit of a shortfall on the core deposit funding side for 2Q, just typically you see stronger loan growth but to your point typically deposit growth is a little soft, would you expect to fill in that gap with more of that CD-type product? Or would you term out on [Inaudible], which you've done historically occasionally just to match assets-liability funding?

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

We might do the latter. Our approach to CD, we started building, rebuilding our CDs about a year and a half ago now as we saw rates beginning to turn, and we've taken a very methodical approach to it somewhat, as is our way. We are growing CDs $7 million, $8 million a day, basically, very methodical, and so we would not adjust that rate by meaningful increments in response to a kind of a temporary shortfall. We see this as a very steady-Eddie kind of base-building.

David Rochester -- Deutsche Bank -- Director

OK, I appreciate that. Just one last one on expenses, if I could. I know you're reiterating the 63% to 64% efficiency ratio, Gaye, for this year. I was just wondering how you see that carrying into 2019 just given your goal to grow the wealth-management business faster than the bank and the wealth-management business is a higher efficiency ratio-type business.

So any thoughts there would be appreciated.

Michael J. Roffler -- Chief Financial Officer

Yeah, Dave, we haven't gone out that far in terms of outlook and guidance. You're right, if wealth management continues to grow and become a bigger part of the overall revenue base, that does put pressure on it. But we're really comfortable in this range for the balance of this year.

David Rochester -- Deutsche Bank -- Director

OK, great. Thanks, guys.

Operator

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

Aaron Deer -- Sandler O'Neill -- Managing Director

Good morning everyone I guess, following up the repositioning of some of the securities book and I'm curious to know, of the new purchases that you're making today what kind of duration are you putting on? And to what extent are you continuing to use munis given that the tax law change and some of your thoughts there.

Hafize Gaye Erkan -- President

Sure. The redeployment of the sale of securities, which from a timing perspective, we are very pleased going into the second quarter, it'll be into lending and investment opportunities opportunistically. And given the rising rate environment, it was great timing for that. So in terms of the HQLA, it's similar duration as we have been buying, and we are committed to the 12% HQLA ratios we have always been.

And we're seeing somewhere around 3 1/2 to 3.75-type of yields for the similar four- to five-year duration paper in the HQLA space. Regarding munis, again, we'll be opportunistic as we go, and we will be comparing it to the lending opportunities as we go.

Aaron Deer -- Sandler O'Neill -- Managing Director

OK. And then on the expense side, obviously you guys are still investing in a lot of different areas of the business. I'm wondering if if there's a way to kind of prioritize those in terms of how you would stack-rank the priorities? Is it wealth management and the student loan business, technology, regulatory compliance. Do you think about it in those terms? Or is it just kind of a multifaceted effort?

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

No, it's interesting. Let me take one second on this conceptually. We have a very established core bank, which kind of represents the highly satisfied, home loan-based urban professional client that we have ranging in age from mid-40s to mid-60s, probably, and from them come other elements. The three growth elements in the bank that are outgrowing that core, if you can separate them, and it's a little hard, but just conceptually the three that are outgrowing the core are wealth management, businesses banking, and the student loan refinance, the young generation, including our professional loan program.

If you take those three elements and consider them separately, they're growing in the low 20s-to-mid-30s-percent range. So what's happening is that we're expanding outwards our age ranges of the company, the younger is the obvious one, the somewhat less obvious one is the older and wealthier clients through the wealth-management growth. Each one of these has an investment component. The business banking has the least investment component, it's highly profitable,we're not, we're adding products, of course, but basically the cost there is the operating cost of on-boarding good new clients, and we invest in systems but that's not, that's kind of ongoing.

If you go to the other two, wealth management, clearly there's an investment there as we bring on new teams and they need to ramp up always, and the efficiency ratio is different there as we all know, but the capital requirement is very low. If you go to the young end of the spectrum and the PLP and the student loan refinance, there are you have an investment, and the investment is in the form of the fact that a young new client breaks even at about 15 to 18 months and then forever after is highly profitable. And so as that grows rapidly you have a large base of unprofitable clients that turn profitable about a year and a half into their lives. So what's happening is, as we build our base -- as I said in the presentation, we went from 1,300 to 13,000 in two years -- we now have a base of 13,000, so the next 8,000 will begin to be carried by the earlier ones that are turning to profit.

We also have some marketing in there. The other thing that's on top of that is Mike's comments about Gradifi and Gradifi's another form of that young client acquisition activity and it has a steady loss run rate in the kind of 15, 16 million but it will turn to profit, we think in '19 maybe '20, but soon. In the meantime we don't mind it because we're acquiring relationships at a very rapid rate. So that's kind of the overall picture.

You have three elements growing faster than this, what I think of as the core bank, which is business banking, wealth management, and the young-client acquisition, that's where the investments are going. What's coming out of that is a lot of knowledge about data needs, about service needs, etc. We've got a tremendous feedback loop on both ends and we are using that to drive our technology investments and our continuous process improvement. So it's all working together very well.

And what you see is a company that has a growth rate on the surface of kind of 18% to 20%. But elements inside of that are ahead of that and pulling it forward.

Aaron Deer -- Sandler O'Neill -- Managing Director

That's good strategic overview. Thanks, Jim.

Operator

Our next question comes from the line of Chris McGratty with KBW. Please proceed with your question.

Chris McGratty -- Keefe, Bruyette & Woods -- Managing Director

Hi, good morning, thanks for the question. Mike or Jim, a question on capital. it's been about six months since you've come for equity, common equity that is. With you reiterating the growth outlook how are you thinking about you know when the right time might be to come back? And also maybe a comment, any thoughts on perhaps running the bank a little bit more levered given the thawing in the regulatory environment? Thanks.

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

I guess our comment on the latter is we are almost pathologically conservative and so the better things get, the more nervous I get. So we generally will not lever up even if kind of allowed to. I think on the other hand, we are well-capitalized right now, the profitability is strong, and touch wood here, the credit quality is extremely strong, and as a result, I think we probably don't need capital for several quarters at least.

Chris McGratty -- Keefe, Bruyette & Woods -- Managing Director

OK ,great, thanks for that. And maybe a question on competition. Heard a lot of banks, smaller banks talk about the opportunity out on the West Coast given the dislocation in one of the larger banks. I think you hired someone away from their wealth-management business recently.

Can you comment twofold -- one on our whether this is going to accelerate growth or support growth for the company? And also what it may be having, what the impact might be on on loan yields and loan competition given that [Inaudible] pulling back? Thanks.

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

I don't think -- we're all aware of the challenges over there although I have enormous respect for the organization. I think that it's not meaningful, to be honest with you, I mean it's not going to, it's not a negative but it's not really much of a positive overall I wouldn't think. And we certainly wish them well in working through their problems.

Chris McGratty -- Keefe, Bruyette & Woods -- Managing Director

OK, thanks.

Operator

Our next question's from the line of David Chiaverini with Wedbush securities. Please proceed with your questions.

David Chiaverini -- Wedbush -- Analyst

Hi, thanks. A question on resi mortgage-origination volume. You mentioned in the prepared remarks that 54% is refi. I was wondering, do you expect rising rates to impact the refi biz for your customer base?

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

Refi will slow down a little bit, but as we tried to say in the text and maybe not as clearly as possible, a large part of what we call refi is of course refi and other institutions bringing in new clients to us. So in fact refi is a client-acquisition opportunity as opposed to what one might imply, a refi of our own paper. Of course, we do that too.

David Chiaverini -- Wedbush -- Analyst

So we can expect that to stay roughly 50-50 between purchase throughout?

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

Yeah. It's been 50-50 through a lot of different conditions over a long time. It flips between 55-45 and the reverse

David Chiaverini -- Wedbush -- Analyst

And shifting to the securities repositioning, was the strategy behind that sale to shorten duration?

Hafize Gaye Erkan -- President

So it was risk-management driven. So in light of the rate environment as well as the recently enacted tax code changes, we have reexamined and optimized our portfolio purely from a risk-management perspective. And in doing so, the impact of duration was slightly shorter and it also, a slight improvement to the TUI and we are looking into the redeployment. But all in all, we've continued to stick to our guidance of NIM 285, 295.

And it was a one-time opportunity given the adoption of the new hedge accounting guidance that enabled us to do that.

David Chiaverini -- Wedbush -- Analyst

Thanks very much.

Operator

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

Geoffrey Elliott -- Autonomous Research -- Partner

Hello, good morning thanks for taking the question. I guess you talk about efficiency ratio quite a lot, but can you help us get a better sense on expense growth? It looks like it's kind of running low 20s right now. I mean is that the sort of pace that continues? Or how much scope is there for that to move around?

Michael J. Roffler -- Chief Financial Officer

So it is in the low 20s in the first quarter here. I think if we look at some of the things we talked about with mid-teens loan growth and the investments we're making, it probably comes down on an absolute percentage-growth basis to get closer in line with revenue growth during the year. Part of the growth year over year is that last year we had some acceleration, so when you're comparing that naturally it is a bit higher earlier in the year but it should come down a little bit about on a quarter-over-quarter, year-over-year basis, as we move throughout 2018.

Geoffrey Elliott -- Autonomous Research -- Partner

But just kind of following up on that, the 63% to 64% range, it's much narrower than you've given historically and it feels pretty narrow for a company that's growing so fast. I mean, does it make sense to, I guess why does it make sense to think about it in terms of such a narrow range rather than give yourself a bit more scope to either invest more or kind of pare back depending on the situation?

Michael J. Roffler -- Chief Financial Officer

It's a good question. Going back to maybe an earlier question, we think the pace of investments that we are making we're not shortchanging anything. We feel that the margin's in a relatively consistent range, so given that outlook, we think a narrow band for this year makes a lot of sense

Geoffrey Elliott -- Autonomous Research -- Partner

Great, thank you

Operator

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

Matthew Clarke -- Piper Jaffray -- Analyst

Hi, good morning. Wondering about the other-expense line this quarter relative to the fourth quarter, that decline and what was driving that?

Michael J. Roffler -- Chief Financial Officer

So it would be a variety of things. A little bit lower recruiting costs, a little bit lower in terms of internal events, the fourth quarter has always a bit busier seasonally. If you look at some of our expense lines, marketing, along with this. But just really being disciplined about where some of these things are being invested and spent.

Matthew Clarke -- Piper Jaffray -- Analyst

OK and then on the expense guide I think you gave last quarter it sounds like growth coming down is mid- to high teens still your expectations for the year?

Michael J. Roffler -- Chief Financial Officer

From a dollar standpoint, that's right.

Matthew Clarke -- Piper Jaffray -- Analyst

OK. And then just on loan yields, I guess how do you think about the loan-yield outlook given the lift that you should be receiving from prime and LIBOR and then the competitive pressures that might mitigate some of that?

Hafize Gaye Erkan -- President

Sure. The -- just to give perspective the real estate loans that we booked in Q1 were in the mid 3s, so 3.5%, around 3.5%. Recent rate lock's a bit higher than that, if it helps.

Matthew Clarke -- Piper Jaffray -- Analyst

OK. I assume you expect some uptake here going forward?

Hafize Gaye Erkan -- President

All in, so second quarter all in, great season pipeline depends on the rates. Deposit side, obviously we have total competitive pressures to 285, 295 captures in terms of NIM guidance for the year.

Matthew Clarke -- Piper Jaffray -- Analyst

Yep. Got it. OK, thank you. [Audio cutoff]

Duration: 46 minutes

Call Participants:

Shannon Houston -- Chief Marketing and Communications Officer

James H. Herbert, II -- Founder, Chairman, and Chief Executive Officer

Hafize Gaye Erkan -- President

Michael J. Roffler -- Chief Financial Officer

Ken Zerbe -- Morgan Stanley -- Analyst

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

Jared Shaw -- Wells Fargo Securities -- Managing Director

David Rochester -- Deutsche Bank -- Director

Aaron Deer -- Sandler O'Neill -- Managing Director

Chris McGratty -- Keefe, Bruyette & Woods -- Managing Director

David Chiaverini -- Wedbush -- Analyst

Geoffrey Elliott -- Autonomous Research -- Partner

Matthew Clarke -- Piper Jaffray -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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This article appears in: Personal Finance , Stocks
Referenced Symbols: FRC



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