Questions and Answers
Thank you, and welcome to First Republic Bank’s Fourth Quarter and Full Year 2019 Conference Call. Speaking today will be Jim Herbert, the Bank’s Founder, Chairman and Chief Executive Officer; Gaye Erkan, President; and Mike Roffler, Chief Financial Officer.
Before I hand the call over to Jim, please note that we may make forward-looking statements during today‘s call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see the Bank’s FDIC filings, including the Form 8-K filed today, all available on the Bank’s website.
And now, I’d like to turn the call over to Jim Herbert.
Thank you, Shannon. 2019 was a very strong year across the board. Our results continue to demonstrate the growth power of our client-centric business model. First Republic‘s ability to deliver extraordinary client satisfaction for almost 35 years is reflected in our high Net Promoter Score, which is more than twice that of the banking industry. This in turn translates into stable clients, additional business from these satisfied clients, and a strong flow of referrals also from the satisfied client base. The result is a very successful compounding effect that continues to drive our growth organically and safely. This model has worked well irrespective of economic and market [Phonetic] conditions for several years.
Let me cover a few key metrics for the year. Total loans outstanding were up 19.7%, total deposits 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 of $1.1 million. For the entire year, net charge-offs were only $4.6 million, less than 1 basis point of average loans. Nonperforming assets ended the year at only 12 basis points. Capital remains very strong. At year-end, our Tier 1 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 that the loan originations have some seasonality, with the fourth quarter typically being a bit stronger and the first quarter somewhat slower. This lower rate environment which we’re operating in continues to represent a terrific opportunity to attract high-quality new households, particularly through our home loan refinance activities.
We continue to also be very successful in attracting younger generation clients through our student loan refinance and our professional loan programs. During the year, we added net nearly 8,000 new high-quality younger households through these two programs. These households represent fully [Phonetic] 35% of our total consumer borrowing base at this point, up from only 19% three years ago.
2019 was the ninth full year since we bought back First Republic from the Bank of America and undertook our second IPO. Over these past nine years, we’ve grown loans from $18.6 billion to $91 billion. Tangible book value per share over this period has grown from $15.19 to $50.24, while have also paid cumulative cash dividends of $4.55. That’s a compound growth of tangible book value per share and dividend payout of over 15% per annum. These results demonstrate very clearly the power of our client-centric sustainable organic growth model. Overall, it was a terrific quarter and a terrific year.
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 were $38 billion, another record year.
Single-family residential volume was also a record both for the quarter and year 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%. Refinance accounted for just over 60% of single-family residential volume during 2019. As we have noted before, refinancing continues to be a means of getting trial with new clients.
Multi-family and commercial real estate lending also performed well. 2019 originations were up 13% from last year. Most importantly, credit quality remains strong. When we look at our fourth quarter originations for multi-family and other commercial real estate, our medium loan size was $1.5 million, with a conservative loan to value ratio of 48% and strong debt service coverage ratios. As always, we have not and will not compromise our credit standards.
Business banking also had a terrific year. Total business loans and lines 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 and line commitments, which were up 14% year-over-year. This reflects our ongoing ability to create new relationships and deepen existing ones.
Our success in business banking results primarily from following our satisfied private banking clients to their businesses and nonprofits, which provides an important diversified source of funding. Business deposits were up 15% for the year and represented 56% of total deposits at year-end. For every dollar of business loans outstanding, we have over $4 of business deposit funding.
Turning to the overall deposit base, total deposits were up 14% from a year ago. Checking deposits remained strong 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 channels: preferred 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, we opened a new preferred banking office in Palm Beach Gardens, 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 to attract very successful wealth managers. During 2019, we’re pleased to have welcomed 10 new wealth management teams across our markets. We also recently opened a Wyoming trust company. This further expands our services for clients and enables them to realize the benefits of Wyoming trusts.
Despite a challenging interest rate environment, these strong results once again demonstrate the power of our unique client service culture, which fuels organic sales growth. Overall, it was a terrific year across the franchise.
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 raise $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 [Phonetic] million beginning in the second quarter of 2020.
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, net charge-offs were only $4.6 million, less than 1 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, in line 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 10.5% 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 focus 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 are 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 2.65% to 2.75%, 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%. The 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 1, 2020.
Thank you, Gaye and Mike. It was a terrific year by every measure. For almost 35 years, our simple, straightforward, very client-centric business model has been consistently profitable. Delivering exceptional client satisfaction one client at a time year in and year out is the driver of our growth. We’re very proud of 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 culture of collaboration and remain intensely focused on supporting the success of our clients. Looking ahead, we expect to continue delivering the same safe, stable organic growth, coupled with our very conservative underwriting standards and strong capital at all times.
Now, we’d be happy to take your questions.
Questions and Answers:
Hey, good morning, everybody.
Good morning, Steve.
My first question is for Mike on NIM. I appreciate the full year guidance. When we look at the quarter, loan yields were down 11 bps in the quarter and deposit costs were down only 6 bps. Mike, can you help us think about NIM dynamics over the near term and walk us through what the new money loan yields are and what — where you see deposit cost headed?
Sure. So the fourth quarter NIM was 2.73%, which was pretty close to what we had expected from our last call. 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 bias in the first quarter on loan yields, a few basis points, whereas our funding costs, all in, have been relatively stable, and it is reflective of making some changes 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, all in, was about 3.30% in the fourth quarter, which is slightly less than the third quarter, but it seems to have stabilized a bit and maybe even trending up slightly as we look at sort of locks-in [Phonetic] 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? And can you help us think about expense growth in dollars, like percentage growth of expenses in 2020? What are your expectations there?
Sure. So I would say, on dollar growth, probably low-double digits. And then, you’re right, the first quarter efficiency typically is above our top end of range at 64.5%, 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, of record loan originations. If you look at the detail, loan growth actually accelerated each quarter through 2019. When you guys look at the drivers of growth, I get why you gave the mid-teens guidance where you want to be conservative, but is there any reason to think that well above that won’t continue at least over the near term? Thanks.
I think Steve that ’19 benefited from kind of a dual situation in the single-family refi and purchase area. It was a doubly good year. Both of those cylinders fired. That’s pretty unusual. I think you’re now more into a refinance market, and the short supply of available homes for sale and the stabilizing of price increases in our markets probably augurs for a OK 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 Rahul Patil on behalf of John. A question regarding the seasonal impact. I realize you’ve talked about a 5% to 10% change in the reserve level. Is the bias to an upward revision of the reserve level given your balance sheet mix or is there a possibility that the reserve level might actually decline 5% to 10% as you make [Phonetic] changes to the qualitative component of your loan loss reserve? And then as a follow-up, can you just help us think through the day-two impact of loan loss provision? Do you have a view on the current consensus estimates for 2020 loan loss provision of $90 million to $95 million?
Thanks Rahul. I think on the seasonal adjustment, we’re finishing up the sort of audit review process, but the 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 it is just a very slight increase, it looks like. And that includes all reserves because we are going to 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 of portfolio. And given the runs we’ve done, it feels like a range of 55 basis points to 60 basis points makes sense to us, and that will obviously depend on loan mix, even on a go-forward day-two impact. And so, I can’t really comment on sort of consensus because that will factor in your view of growth and whatnot. But I think if that loan loss to allowance range is probably a good thing to look at when you’re figuring that.
Okay, that’s helpful. And then could you just give us some specifics of the upcoming core systems project that was announced yesterday with FIS, for example, the scope of the project, time to completion, the total cost? Or if there is any incremental hiring that’s associated with this project?
Sure. The core conversion is well under way. The planning process is well under way and on track in terms of budget and timeline, and we expect to complete the core conversion by the end of 2021. A simple business model, no major acquisitions, relatively low number of accounts are all advantages. And it is — the core conversion related costs are in the efficiency guidance that we have provided, 63.5% to 64.5%.
Okay, thank you.
Thank you. Our next question will be from Ken Zerbe with Morgan Stanley.
I guess my first question, just, were 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 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 a drop to the bottom line.
Okay, got it. And then, maybe it’s a more broader question in terms of your deposit strategy, just kind of curious how that’s changed over the last year or so, because obviously you had — on average, your interest bearing checking was up a lot this quarter, I mean, or at least in the back half of the year. But CDs which grew earlier in the year, it looks like they were down a little bit this quarter. Just kind of curious more of the strategy behind that. Are you trying to shift more toward very short duration stuff? Is CD still appealing to you? Thanks.
Sure. Yes, CDs are still appealing and it continues to be a great tool in our funding tool kit because it also helps us attract great households — client household relationships. Just year-over-year, as we have noted in the earlier calls, the barbell strategy within between checking and CD has been performing quite well. And actually, if you look at the year-over-year growth, checking has been extremely strong, consumer has been extremely strong in addition to business, and CDs were up 28% year-over-year, roughly $2 [Phonetic] 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 thus there has been a slower growth in CDs. But we will continue to use them as a great client acquisition tool going forward.
Ken, it’s Jim. I might add one thought here which Gaye referred to, which is, we grew deposits about 14%. The average of most of the banks, the banks who reported already today is running around 5% for the year. So what we do is, focus on a very wide range of methodologies and constituencies in the raising of the deposit funds. Wealth management obviously plays a role as well and business banking is very important. So what Gaye was really referring to is our range of focusing. The total — our total funding costs in fact are holding up quite well. We’re basically at about 84 basis points. About — that’s about 30% lower than the three other banks that reported already today.
Got it. Understood. And then just one last question, if I could. In terms of the provision expense, I know you had $1 million of net recoveries and that probably contributed to the $10 million of provision. So obviously, that was down a fair bit, but it doesn’t seem to account for all of it. Were there any other changes in terms of how you’re thinking about credit, any other adjustments that would have led to sort of the unusually low provision expense this quarter?
So I think I’d say, one, you added the $1 million dollar recovery that 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 a mix issue.
Perfect. That answers it perfectly. All right, thank you very much.
Thank you. Our next question will be from Brock Vandervliet with UBS.
Great. Good morning. Could you speak about the sale of Gradifi and how that might affect your expense run rate or anything else going forward and perhaps what was behind that transaction? I think the press release explained some of it, but wanted to review that.
Sure [Indecipherable]. Gradifi was actually — grew significantly under our ownership, but we decided that it was better placed at ETRADE, who has a very large business-to-business activity and they are adding it to their service offering. We expect to stay on the platform of Gradifi. We love the mission and the process that they have, and we expect to have our employee group stay on it as well, and we’re promoting their student loan pay-down and save-up activities to our business clients. It will reduce our run rate on expenses a bit, somewhere in the sort of mid-teen millions per year, and that’s obviously — that 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 a carry trade [Phonetic] strategy almost, if you will, with the increase in borrowings and an increase in investment securities. It looked like that also continued to the end of the quarter. Could you talk about that and how you think about the balance sheet’s shape?
Yeah, I guess I would say this, we found opportunistic purchases in investment portfolio. And when we look at the funding strategy, as Gaye mentioned before, between sort of CDs and some of the cost of other borrowings, we felt there was a good opportunity to buy 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, just in line with the guidance that we’ve given.
Got it, OK. Thank you.
Thank you. Our next question will be from Casey Haire with Jefferies.
Thanks. Good morning. I wanted to touch on the CI loan bucket. It finished a little bit more muted than we’re used to seeing. I know you guys had a very strong 2018 in capital call. I’m just wondering what is the outlook there. And are you seeing any sort of frothiness or just a lot of competition pushing too hard on price and/or structure?
There is still competition on the price more so than it has been earlier in the year. We are very pleased. When we look at the capital call line commitments, year-over-year, they’re up 25%. So it continues to be a very strong driver of the commitments. And in terms of the outstandings, the utilization rates play a role, and we have seen 4 percentage point drops in the utilization, which kind of creates the volatility in the outstandings. But in terms of commitments and client relationship, acquisition and retention and deepening, we are very pleased with the outcome.
Okay, great. So a little bit — price is under pressure, but structure, it’s still — you’re not seeing anyone do anything undisciplined?
It’s Jim. To be clear, we do see some undisciplined lending. We simply don’t copy it.
Got you. Okay. And then, Jim, just a follow-up question for you on student lending. As you mentioned, it’s I think 35% of your overall households. It’s entering its sixth year. What sort of cross-sell experience are you seeing toward the bigger ticket single-family mortgage of your student loan households that have graduated toward their first home purchase? How much — what percentage are going with First Republic or are going outside?
The truth is, we don’t know if they’re going outside very well. We can track it a bit, but it’s harder to track. What we do know is that we’re getting a fair number of household mortgages out of the base. Already a couple thousand so far, which we consider to be quite good because thinking about the cohort for a moment, these are people that although they refinance with us, still do have significant student loans outstanding, number one and number two. The average age in the portfolio would be about 33, 34 maybe at the most. And so, they are entering the household purchasing age at this point. So far, the younger cohort tend to be purchasing homes at somewhere around 4%, 5% of the cohort per year. So we’re actually quite pleased. The cross-sell of other products is going very well. And we appear to be — the Net Promoter Score, for instance, among this cohort is higher than the bank overall slightly, and we are getting a fair number of products per client, 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. I just wanted to question — the growth continues to be very strong and the outlook remains quite favorable. Just curious, obviously, the preferred raised recently, but given the growth expectations, do you expect to continue to maybe lean on preferred or might we see a common raise come in at some point in the near term?
Well, we’ve always been opportunistic in the market, as you know. The philosophical base of First Republic is to stay well-capitalized at all times and possibly more to the point to stay capitalized ahead of growth so that we’re funded in advance of growth.
Okay. And then, following up on the CI questions, Gaye, if — you said that utilization was down 4 points. What is the actual number of the utilization rate at period end?
So it’s around mid-30s, but we did make a slight adjustment to the way we calculate the utilization rate to take into account the flex amount. Mike is going to touch on that.
Yeah. So we are about 35% in the fourth quarter. And I think Gaye referenced down 4, 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 you have to get future credit approval. And so we just lowered commitments ever so slightly for that.
Okay. So what are the total commitments at this point?
Yeah. Business line commitments and term loans together is about $24 billion. And then to just do the math on the utilization, it’s about 2 percentage point to 3 percentage point difference between the pre-recast and post-recast. So the new range would be around mid-30s to low-40s is kind of where we are seeing utilization when you look at the last two years with that adjustment.
Okay, that’s helpful. Thank you.
Thank you. Our next question will be from Arren Cyganovich with Citi.
Thanks. Just looking at the unsecured part of your loan book, the student lending has obviously been growing very solid. But it seems like it may have decelerated a little bit in the recent quarter? Is there anything in particular that’s driving the unsecured loans to slow down there?
No, not really, other than this last year, we implemented a full range of pricing based upon how much business you do with the bank, and that actually slowed down our new acquisitions slightly but it raise the quality of those that we acquired 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 or 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. And separately, the professional fees kind of jumped a bit. Was that related to CECL or the core conversion? And how do you think about professional fees as we go out through the year?
Yeah. So there is a little bit in there from obviously the sale of Gradifi, some professional fees associated with that, and we have started to incur some of more core-related costs. It might come down just slightly, but I wouldn’t think a lot from here. It’s probably $2 million extra this quarter.
Okay, thank you.
Thank you. Our next question will be from Brian Foran.
Hi. I was hoping to 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 two, SALT is back in the press and it’s always hard to discern. Is it just anecdotes about people moving from New York to Florida and things like that? Or is it actually having an impact? So as you look across your business and talk to your borrowers, has anything risen beyond those kind of one-off anecdotes in terms of people migrating to lower tax states?
I would say as a practical matter, there’s an increasing number of anecdotal examples, but there is not a flood by number of households by any means. The size of the households that are migrating are considerable, and so I think the amount of dollars being shifted from the tax states to the lower tax states is increasing reasonably rapidly. And it’s hard to put your finger on exactly what tips people over. I think the thing the press isn’t speaking of is that we need to remember the demographic bubble happening among baby boomers. They’re arriving at their retirement age just as this is happening. So it probably is accelerating what might have been a somewhat natural event anyway, particularly in the Florida situation, for instance, from the Northeast, things like that. Wyoming is obviously a beneficiary of this. And it hasn’t been lost on us, and it’s a good time to be opening there.
So now we have three offices in that area.
And then on Prop 13, just kind of any thoughts on real estate impacts in California?
I think it’s too early to know. The fundamental characteristic of California urban real estate is, there’s simply a shortage of supply.
Thank you very much.
Thank you. Our next question will be from Lana Chan with BMO Capital Markets.
Okay, great. And could you also give us an update in terms of — I guess you mentioned it a little bit before, but the planned office openings, a couple more in Florida? And what is the new schedule for like the Hudson Yards and the other new openings?
Depending on the timing on Hudson Yards opening, this year, we’ll be — toward the end of the year, we’ll open several offices. We’re mostly — this year, we’ll be mostly focused on New York City. Then as Gaye went through, this past year, we had been focus in a broad way around the franchise. In New York, 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. They will open very much toward the end of the year or the first of next, but mostly the end of this year. And we also have another location in — two more locations in the New York City area that will be opening later in the year as well. So we’ve probably — in the next 15 months, let’s say, we would expect to open about six new offices in the New York City area.
Okay, great. Thanks Jim.
Thank you. Our next question will be from David Chiaverini with Wedbush Securities.
Hi, thanks. 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 refi 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 the rates are settling right around a little above 3. And so, I would say it’s a modest tailwind. But mostly, it’s the holidays and the slowness that comes from that.
Okay. And then shifting to the efficiency ratio, I was curious as to the driver behind the lower guidance of 63.5% to 64.5%. Is Gradifi the main driver here? Or are there any expenses or projects you’re pulling back on?
Nothing from a project that is sort of client — that is client service focused or is going to help us continue to add and acquire households. I think part of it is the team really did a great job of prioritizing and looking at where is the best place to make investments 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 for the Bank.
And just to reinforce Mike’s point, we continue to make investments into our infrastructure to be commensurate with the growth of the organization. And we are not going to compromise when it comes to prudent expense management. We’re not going to compromise on safety, soundness or client service excellence or culture and employee engagement. So those are the core pillars we will continue to invest prudently.
So, it typically increases a bit, given the growth in our average assets, which is the biggest driver sort of your assessment basis, size of the bank, and so that’s the main reason it would have jumped in the quarter. If they 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. Looking at the investment fees, even excluding that $9 million of incentive fee, it looks like you’re starting to see some growth there. Should we expect to see continued sort of expansion in the fee level as a percentage of AUM? Or is where we are here in the high-50s a good level?
We think the high-50s is a good level. We’re happy to see it sort of stabilized and maybe even a little bit better, but the high-50s is the right place to be, looking back to the start of the period, right, so fees divided by the prior starting point.
Right. And is there any of that improvement — is that just general pricing improvement? Or is that due to an improved maybe mix with the Luminous Group now off the platform?
Earlier this year, we did have more people in fixed income. That does put the fees down slightly because there is a 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 I also think that growth in assets sometimes can distort a little bit depending on when you hire or when they assets come. But if you look back over long periods of time, sort of 56 basis points, 57 basis points, 58 basis points has been a pretty good range for us.
Okay. That’s a great color. Thanks. And then, just finally on the infrastructure investments that you referenced, anything — any major strategies or investments that are coming up besides the core systems? Or is it just more things associated around the edges with that? Any major projects that we should be planning as well?
As you said, it’s mainly core. And both FIS and Fiserv, we’ll continue to work with both of them. They’ve been great technology partners, and they will continue to do so. There are other lesser scope projects that we have been continuing on wire system improvements or corporates online enhancements, given our business deposits to delight our clients further. But in general, on the expense side, 63.5% to 64.5% is what encompass all these projects. Thank you.
Thank you. Our next question will be from Garrett Holland with Baird.
Thanks for taking the questions. I just had a couple related to the balance sheet’s updated rate sensitivity. The futures market is a bit all over the place. But were we to see a Fed rate cut in the back half of 2020, can you help us size the potential NIM impact in that subsequent quarter? And then conversely, if the yield curve were to steepen say 25 basis points with no change of 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 than 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 one rate cut, if it’s in the July to September period, for the year, probably doesn’t have a big impact because we’d lose a little bit on our loan yields because about 25% of the portfolio is tied to short-term rates, although about 20%, call it LIBOR and prime. And we have a little relief on deposits. 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 the questions.
Thank you. Our next question will be from Jon Arfstrom with RBC Capital Markets.
Thanks, good morning.
Good morning, Jon.
Yeah. A quick follow-up on that, Mike. What is 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, 2.65% to 2.75% 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, good. Message on deposit costs, it sounds like relatively stable, is what you’re thinking on deposit pricing?
Yeah. In general, around 59 [Phonetic], and spot rate is high-50s. 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, thus the guidance that Mike has provided slightly lower in Q1 and the lower half of the 2.65%, 2.75% ranges for the year.
Okay, that’s helpful. And then, Jim, one for you. Obviously, very positive numbers, but I just want to ask on the NPL balances jumped up a couple of quarters ago. 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 situation. We’ve got one of our larger — well, not large, but a decent concentration that’s — that we’ve got 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 add anything to that list, particularly in this quarter.
Okay, all right. Thanks for the help.
Thank you. I’m showing no further questions at this time. I’d like to turn the call back to Jim Herbert for closing remarks.
Operator[Operator Closing Remarks]
Duration: 50 minutes
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