SVB Financial Group
Q4 2018 Earnings Call Transcript

Published: 25 Jan 2019

[Operator:]

Welcome to the SVB Financial Group Q4 2018 Earnings Call. My name is Adrian and I’ll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded. I'll now turn the call over to Meghan O’Leary, Head of Investor Relations. Meghan O’Leary, you may begin.

[Meghan O'Leary:]

Thank you, Adrian and thank you everyone for joining us today. Our President and CEO, Greg Becker; and our CFO, Dan Beck, are here to talk about our fourth quarter and full year 2018 financial results and will be joined by other members of management for the Q&A. Our current earnings release is available on the Investor Relations section of our website at svb.com. We’ll be making forward-looking statements during this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information, which applies equally to statements made in this call. In addition, some of our discussion may include references to non-GAAP financial measures. Information about those measures including reconciliation to GAAP measures may be found in our SEC filings and in our earnings release. We expect the call including Q&A to last approximately an hour. And with that I will turn the call over to Greg Becker.

[Greg Becker:]

Thank you, Megan and thanks everyone for joining us today. Our fourth quarter was a strong finish to an outstanding year. For the quarter we delivered earnings per share of $4.96 and net income of $266 million driven by healthy loan growth, higher net interest income and interest margin, robust core fee income and stable credit quality. These results also reflect $8.5 million of expenses associated with our acquisition of Leerink, which represents approximately $0.11 of EPS. For the full year 2018 we nearly doubled our profitability with earnings per share of $18.11 and net income of $974 million. We also delivered exceptional return on equity of 20.6%. It was an excellent year marked by strong growth across the business. Net interest income increased by 33% to $1.9 billion, driven by robust balance sheet growth and higher interest rates. Average loans grew by 21% to $25.6 billion, reflecting particular strength in our private equity business as well as the private bank, life sciences and our global businesses and credit quality remained excellent. Client liquidity was robust with average total client funds growth of 31% to $123 billion, reflecting 12.5% growth in deposits and 46% growth in off balance sheet client investment funds. Core fee income grew by 36% to $516 million due to investments in and strong execution by our FX team as well as growth in our client investment funds. Our gains from VC related investments and warrants increased nearly 50% to $177 million, $140 million net of controlling interest, another effective healthy fundraising end market in 2018. The health of our industry was a major factor in our performance. Venture Capital had a record year with $131 billion invested and $55 billion raised as well as record levels of dry powder still to be invested. While later stage companies received the majority of dollars invested, early stage Venture investing remained very strong with aggregate values reaching all-time highs. The IPO market improved significantly over the prior year with 85 Venture backed IPOs, the highest number since 2014 and the highest aggregate IPO value since 2012. SVB’s clients represented 67% of these companies. Secondary offerings remain robust with more than $14 billion raised in 198 transactions. And overall private equity deal activity surpassed $700 billion. The second best year in history on a record number of deals closed. The strong supply of liquidity helped fuel our growth and contributed to healthy client activity across the board, including a nearly 5,000 new core commercial clients added in 2018. Looking ahead, 2019 is expected to be another vibrant year for VC investment and fund raising. Anecdotally, our VC clients tell us they anticipate good growth from their portfolio companies and they expect the funding environment and opportunities to remain healthy. 2019 is also expected to be a strong year for IPOs assuming the government shutdown is resolved soon and the broader economy remains stable. A growing number of highly valued venture backed unicorns have either publicly announced or expected to go public and IPOs are expected to make up the majority of exit dollars. In terms of our challenges, many of them have to do with the macro environment. These challenges include the ongoing U.S. trade battle, a potentially flat rate environment in 2019 and beyond, intense equity market volatility, the prolonged government shutdown and a closed IPO market. Beyond these macro factors, competition for loans, deposits and clients remains fierce. We continue to compete effectively as you can see from our results and we gain traction in our deposit initiatives, although that has come with higher deposit costs. But the competition and rate market cycles have always been part of our equation. We remain optimistic about our prospects for solid growth in 2019 as long as the markets remained relatively stable. We're confident in part because of our high quality balance sheet, strong capital and liquidity, and the fact that our client funds franchise provides us the flexibility to variety of strategies to drive deposit growth. We're also confident because of our investments we're making to support and drive our growth, which I talked about at our Investor Day and want to reiterate today. First is our investment and driving growth across the business. Much of our growth in 2018 came as a direct result of investments in our private bank, our global business, and private equity services to name a few. More recently, our acquisition of Leerink Partners has broadened our product set and will expand our fee income. Second, is our investment in creating a better, richer client experience, including a robust digital platform that will enable us to engage with clients in more meaningful ways. Third, is our investment in improving an employee enablement through tools, systems and mobility to allow our employees to focus on their highest value activities. Fourth, is our investment in risk management, creating robust systems and structures to support our global operating model, so that we can grow at the pace we want. And fifth is propelling business transformation through our investments in systems and processes across the bank from client onboarding and loan processing to data infrastructure. We think now is the time to make these investments and really believe they'll enable us to continue to deliver strong growth. Another reason for our confidence is the uniqueness and power of our business model. We have always been focused on the innovation economy, which represents the fastest growing and most active companies, and the ones most able to attract investment and funding. Our longtime focus on the innovation economy enable us to create the broadest set of products and services tailored for innovation clients, and to continuously enhance these products and services. We have an amazing team including many career SVB-ers as well as many newer hires who bring world-class skills and expertise. We're able to hire the best people because they're attracted to our strong performance, our culture, our values and our clients. And finally we have unique approach to client relationships leveraging our networks and expertise to help our client succeed through good times and challenging times. This consistent approach over 35-years has earned us our clients trust and cemented our reputation as a true partner. We believe our model, our people and the investments we're making in our business will enable us to deliver strong, high quality sustainable growth and profitability over the long term, including ROE of 15% in a low rate environment and 20% in a normalized rate environment. Normalized in this case means Fed funds above 2.5% and core EPS growth of at least 10% in a flat environment and at least 20% in a rising rate environment. We are seeing good momentum across our business and expect continued opportunities for growth in expansion in 2019, assuming current market conditions hold. Although we're paying a close attention to the challenges I outlined earlier. We have a long history of discipline growth and the ability to execute effectively under variety of market conditions. In addition our high quality balance sheet, strong capital and liquidity will provide stability and flexibility in the event of a market downturn. We remain focused on aligning ourselves with the best companies and investors and delivering high quality growth and strong returns that we can sustain over the long-term. Thank you. And now, I’ll turn the call over to our CFO, Dan Beck.

[Dan Beck:]

Thank you, Greg, and good afternoon everyone. Our excellent quarterly and full-year results were continuation of the key trends we've seen throughout the year. A strong venture capital and private equity environment driving substantial client liquidity and continue to strengthen our core business despite the impact of turbulence in the public markets. The quarter included the following highlights. First, solid growth in net interest income due to healthy loan growth and higher loan yields. Second, strong off balance sheet client funds growth and flat average deposits. Third, outstanding core fee income growth mostly from foreign exchange and client investment fees. Fourth, continued stable credit quality with solid underlying trends. Fifth, solid gains on warrants and investment securities and sixth, the decrease in expenses related to a decline in compensation related costs. I'll start with the balance sheet. Average loans increased by $1.2 billion or 4.4% to $27.5 billion, driven primarily by continued strong momentum in private equity capital call lines as well as growth in life sciences and our private bank. Average total client funds grew by $5.5 billion or 4.3% to $134.1 billion driven by off balance sheet funds and reflecting growth across all portfolio segments. This was due to healthy funding environment and IPO activity Greg talked about as well as robust secondary offerings particularly for our life science funds as well as our continued success with client acquisition. Average off-balance sheet client investment funds increased by $5.5 billion or 6.9% to $85 billion. Average on balance sheet deposits held flat at $49.1 billion. Our mix of average non-interest bearing to total deposit accounts remained stable at82%. On a period end basis deposits increased by $0.7 billion or 1.5% to approximately $1.5 billion of new deposit flows into interest bearing accounts from our deposit strategy. The majority of it occurring in late December. As we indicated at our Investor Day higher year and distributions by our PEF clients and slower growth in Asia offset some of these inflows throughout the quarter. During the quarter we also announced a $500 million common stock repurchase program. Through year end we used $147 million of cash on hand to repurchase approximately 715,000 shares of common stock at an average price of $206 per share. Finally our acquisition of Leerink Partners closed on January 4th with cash paid at closing of $280 million. Now I'll move onto the income statement. Net interest income on a taxable basis increased by 4.3% to $517 billion primarily due to loan growth and the impact of higher rates on loan yields offset by higher funding costs. Higher loan balances and higher interest rates drove an increase in loan interest income of $26 million to $379 million. Overall loan yields increased by 16 basis points to 5.47%. The increase is primarily due to the benefit of the September rate hike and higher LIBOR rates. Loan prepayment fees increased by $2.7 million and accounted for one basis point increase. Interest income from cash and cash equivalents increased by $7 million reflecting a $1.1 billion increase in average interest earning Federal Reserve cash balances at higher market rates. We intend to continue to manage our cash balances higher for now to ensure we have the flexibility to manage our business and meet our five funding needs. In our fixed income investment portfolio average balance has decreased by $1 billion as a result of portfolio cash flows and the sale of $475 million of available for sale securities to fund loan growth and repay short term borrowing due to the timing of the deposit flows, resulting in a decrease in interesting times $3.7 million. Interest expense increased by $8 million primarily due to an $835 million increase in average, short term borrowings to fund loan growth, based on the timing of loan funding and deposit growth. We may use short term borrowings in the future our intent moving forward is to limit their use and to rely on our larger cash position and cash flows from our securities portfolio for medium and long-term cash management needs. Total deposit costs increase by three basis points and nine basis points in the fourth quarter due in part to the growth in interest bearing accounts. Net interest margin increased by seven basis points to 3.69% percent this reflects the increase in loan yields offset somewhat by increased borrowing costs during the quarter and higher deposit cost related to our deposit growth initiatives. Moving to credit quality, it remains stable with solid underlying trends. Our provision for credit losses was $14 million compared to $17 million in the third quarter. This amount primarily reflects reserves of $7 million for a period and loan growth and $5 million of specific reserves for new nonaccrual loans and then $3 million reserve for higher unfunded loan commitment balances. Now I’ll turn to non-interesting income, which is composed in core fee income, gains from venture capital related investments, and gains from warrants. GAAP non-interesting come was $187 million compared to $210 million in the prior quarter. Non-GAAP non-interesting income net of not controlling interest was $178 million a decrease of $26 million from the prior quarter reflecting lower market related gains. Net gains on investment securities, net of non-controlling interests, were $1.8 million driven primarily by valuation increases from our venture capital related fund investments of $12 million and offset by $7 million of losses from our public equity securities portfolio. Equity warrant gains were strong at $17 million driven by healthy round updates and strong IPO and acquisition activity among our clients. I want to emphasize that gains and losses from our warrants and venture capital related investments are primarily unrealized and subject to a variety of factors including market volatility, valuation fluctuations and sales restrictions, such as lockups. Moving on to core fees, core fee income increased by 10.9% to $146 million. This growth came from all core fee areas, but was driven primarily by a $5.6 million increase in foreign exchange fees from higher transaction levels and spreads as a result of increased currency market volatility and a $5.5 million increase in client investment fees related to higher rates and client investment fund balances due to the healthy funding in exit environment for our clients. Now, turning to expenses. Noninterest expense was $308 million compared to $309 million in the third quarter. Compensation and benefits expense decreased by $12 million mostly due to lower compensation related costs as a result of the broader market decline and lower warrant incentive compensation. These decreases were partially offset by higher professional services expense consisting primarily of $9 million of legal and consulting expenses associated with the acquisition of the Leerink Holdings. Turning to taxes. We saw a higher effective tax rate of 28.3% due in part to lower share-based compensation tax benefits. Our full-year effective tax rate was 26.5% compared to 42% in 2017. Moving on to capital, capital and liquidity remained very strong and our capital ratios increased across the board, our bank Tier 1 leverage ratio increased by 28 basis points to 8.1% in light of current market volatility. We feel very good about the flexibility provided by our strong capital and liquidity position. Now I would like to discuss our 2019 outlook and update our preliminary outlook we provided in October. As a reminder this outlook is for the full year 2019 versus the full year of 2018. This means balance sheet growth rates are based on full year averages, not quarterly averages. Our outlook reflects the impact of Fed funds, rate increases to-date but assumes no further rate increases in 2019, in the categories of core fee income and non-interest expense we provided our outlook with and without the impact of SVB Leerink. Finally our outlook is based on our current forecast and assumptions about market conditions and are subject to change. Starting with loans, consistent with our preliminary outlook, we expect average loan balances to grow at a percentage grade in the mid-teens, for average deposits based on good traction with our deposit initiatives so far, we are maintaining our growth outlook of the high single-digits. We estimate about half of that growth will be in interest bearing deposits which is higher than the range we discussed at our Investor Day, a variety of market factors could drive the proportion of higher or lower. These include funding and exit trends and the success of our deposit initiatives. All of this is factored into our outlook. We expect the net interest income to grow at a percentage rate in the teens. This is also consistent with the preliminary outlook and it reflects our expectation of higher deposit costs, albeit industry leading growth funding costs overall, we expect our net interest margin for the full year to be between 3.8% and 3.9%. We expect credit quality to remain stable and comparable to 2018 levels. Specifically we expect net loan charge-offs of between 20 basis points and 40 basis points of average total gross loans. We expect non-performing loans to be between 30 basis points and 50 basis points of total gross loans. And we expect our allowance for loan losses were performing well be comparable with 2018. Although we do not foresee staying at this all-time low of 99 basis points. We are increasing our outlook for core fee income growth to the mid-teens from the mid-teens to the high-teens driven primarily by stronger off balance sheet client funds balances and the impact of the December rate increase. With SVB Leerink, we expect core fee income growth in the high-60s. This reflects our expectations of slow investment banking revenues in the first quarter due to the impact of the government shutdown on the SEC IPO review process. We are maintaining our outlook for a non-interest expense growth in the mid-teens. This outlook reflects continued investment in our growth infrastructure and employees. With SVB Leerink, we expect expense growth in the mid-30s. Finally, we expect our effective tax rate to be between 26% and 28%. This outlook reflects our expectation of lower tax benefit from share-based compensation than we saw in 2018. In closing, we are proud of our strong performance for the quarter and the year, and pleased with our momentum going into 2019. Our clients are thriving and we are expecting healthy growth and solid credit in the year ahead. We have a robust capital and liquidity position that gives us the flexibility to manage our anticipated strong growth and we also have sufficient flexibility on expenses, in particular incentive compensation hiring and the timing of certain projects to adapt to changing conditions if necessary. For now though our outlook is positive and we remain focused on execution on our growth funds. Thank you. And now, I'll ask the operator to open the Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ken Zerbe from Morgan Stanley. Your line is open.

[Ken Zerbe:]

Great, thanks. Good evening.

[Greg Becker:]

Hi, Ken.

[Ken Zerbe:]

It was – it was definitely good to see that the air pocket that you had highlighted back in the Investor Day was a little bit less negative than what you had originally flagged. Can you talk about the trends and deposits that you're seeing so far in first quarter and is there any potential risk that some of the air pocket carries over into first quarter or is that mostly behind us at this point?

[Greg Becker:]

Yeah. Ken, so, where we are we've seen a continuation of what we talked about in the fourth quarter with fund distributions in both the private equity and the venture capital deposit. So that – that trend has continued. But at the same time we reaffirm our guidance on deposits as we continue to have strong confidence in the level of liquidity in the markets in which we operate. And second with our product positioning we've made strong progress in being able to one position appropriately for the client, but two be able to position both on and off balance sheet. So we think in a market with strong client fund flows and these product placement options that we have that we have the ability to grow and to reaffirm guidance at the levels. But I think. Mike, you have further guidance.

[Mike Descheneaux:]

Yeah, Ken, it’s Mike Descheneaux maybe just a little bit more color. I mean you’re correct right as we talked about at the Investor Day about being down I think it was something around $500 million or so was what we were saying. So it was really nice to see that we did start to rebound towards the end of December and you certainly of late going into Q1. It looks like it's starting to come back as kind of as we had suspected, but we have to step back and think of some of the fundamentals of why, you know as we said during the IR Day that we felt pretty comfortable that it would come back and when you look at the level of VC investment dollars, I mean coming again after Q4 another high. When you look at what P is doing in the deployment there. When you look at the dry powder that they actually have, all the dollars raised, you feel really good about the backdrop there. Now the other thing to think about is our off balance sheet funds. I mean we actually did grow at quite healthily in Q4, we added like $5.5 million. So which now means we have about $85 billion dollars in our balance sheet. So from the various initiatives, the various focus on the teams, they are able to tap that into and try to redirect some of that on the balance sheet. So it’s a really good position to have. Some other things to think about is just with our channel checks with our clients out there whether it’s the CEO or VC, the fee income and they're feeling very good about 2019 that they’re not seeing anything that’s going to derail us yet. Now I’m going to talk a little bit about some of the things that we’re going to be watching. I mean some are pretty obvious. So but again I think when you add all these things together we’re feeling pretty good going into it. But when you think about the things to watch obviously with the government shutdown, something we’re keeping a very, very close eye on with the IPO market being shut down, as you can imagine we do get a healthy amount of funding coming from IPO. So that’s definitely something we’re watching. No doubt with what’s going on in China and Brexit with the tariffs and et cetera that’s always something we’re watching. But again it’s not nothing that we’re not really use to me. Uncertainty has been kind of the certainty for the last year it seems like, but again when you look at what business we’re in the innovation economy, right? We know that’s going to be resilient and strong over the long-term. . So those are just some of the few things to think about.

[Ken Zerbe:]

That’s very helpful. And just to be super clear on the deposit guidance that you gave of the high single-digits, that does include the initiatives that you have to bring some of the off balance sheet deposits on balance sheet or at least in terms of the onboarding more towards on balance sheet? Is that correct?

[Mike Descheneaux:]

Yeah, Ken, it’s us. And to be clear, what we're expecting is the growth of deposits about 50% of that is going to be interest bearing. So, when we take a look at overall expected average deposit cost or for 2019 we're expecting that to be in let's call the 11 basis points to 15 basis point range because of the level of those initiatives that we have confidence in.

[Ken Zerbe:]

Perfect. And then just one last question, we’ve obviously heard a lot from some of your competitors such as signature for example getting into the capital call lending space and they had a pretty good quarter for driving capital call balances. What are you seeing from your perspective? Like are you seeing a noticeable impact from these new competitors coming in, or is it business as usual for you guys?

[Greg Becker:]

Ken. You we were seeing any deterioration portfolio. In fact I feel stronger in our belief in our team as than ever before. I mean, again, we have great leadership with our PS team there is such a large market so it’s always going to be a very competitive market out there we have particular on the East Coast there's just so many banks that are involved. So, again, nothing new we’re more than holding our own and continue to add to the bounces so, feeling pretty good about our capabilities there.

[Ken Zerbe:]

All right. Great. Thank you very much.

[Operator:]

Next question comes from Ebrahim Poonawala from Bank of America. Your line is open.

[Ebrahim Poonawala:]

Good afternoon.

[Greg Becker:]

Hi, Ebrahim.

[Ebrahim Poonawala:]

So, just – the first question on the margin in terms of it seems like just the balance sheet mix in the fourth quarter muted some of the expansion at least relative to what I expect is, I was wondering if you can talk through in terms of when we look at your guidance, what incrementally we should expect to the margin in the first quarter tight to the December hike and from there on, we’ll just would love to get your thoughts around how you think about the margin given that the asset mix shift should be helpful, and also the reinvestment security, so any color there Dan would be helpful.

[Greg Becker:]

Yeah. So, trying to unpack that. First, as we look at where we were in the fourth quarter, the borrowings position that we had on muted the net interest margin expansion by something close to 6 basis points. But as we look ahead into the first quarter, especially with the growth in interest bearing deposits at the end of December that funding cost is going to carry into the first quarter, so that that is not going to drop to the bottom line from a NIM expansion perspective. That being said, with the balance sheet mix and the payoff of some of the lower yielding securities where you're going to see the expansion of NIM into the first quarter because of that as well as the Fed funds rate hike in December. So you'll see a NIM expansion, but at the same time the overall average earning assets will be you know slightly up or less up as we pay the borrowing position on an average basis out of the fourth quarter. So there was a lot there. We'll see if you have any follow-up questions.

[Ebrahim Poonawala:]

So that's helpful and then I guess if you go back to the sensitivity that you would disclose for maybe 25 basis points hike I think it was about $52 million, $53 million in NII upside. Where does that stand at the end of the year and based on the deposit dynamics you are seeing what would that number be?

[Greg Becker:]

So on a static balance sheet that is still the sensitivity that we have. That being said the deposit cost increase is going to eat into that – eat into that slightly, but from a static balance sheet perspective that – that number still holds.

[Ebrahim Poonawala:]

On the separate topic one quick question on the non-interest bearing deposit they decline a fair bit $1.4 billion a year your guidance would love to get Greg if you have any thoughts around how this environment compares even 2015, 2016 when we had a little bit of equity markets connection like, are we at a point where slowing deposit growth is more a function of the rate environment or could this be a precursor where we start seeing small credit issues popping as we see lose confidence around investments?

[Greg Becker:]

Several questions underneath that one question. I'll bring it back to 2015 and early 2016. So if you go back and look at all the data back in that time period there's several things going on. One is if you look at the number of companies that were invested in there were significantly higher than they were today. I would argue there were too many companies that were funded, which then created you know you combine that with the market dislocation that happened at the end of the year beginning in the first 2016. You had a higher credit cost you had venture capitalists that actually slowed down funding. Right. So there was a lot of things going on. It was short lived, but for that you know basically 90 days period that was actually a pretty big and quick slowdown although it improved. Contrasting that to today. What is the number of companies that are raising dollars. There's actually fewer meaning there is higher dollar balances is going to the average company, which creates a kind of a healthier company today than it was back then, that's number one. Number two, Mike said this, the last couple of weeks I've spent time with a variety of different venture capital groups and asked the question really we haven't seen it. So as they are getting their temperature on how they're feeling about it and the feedback to a person was we actually feel very good about 2019? You may see a slowdown in some of the larger ones. It depends upon what's going to happen with the IPO market some of those companies that typically get big fundings may be public, so one should open venture capital dollars, but the funds are still flowing they’ve raised a lot of money and they feel very good about the outlook and the opportunity in front of them. So, that's the context which is why we believe that this is going to continue. This is nice deposit liquidity engine. Credit quality as I’ll comment on that briefly, we don't see anything right now that would cause us concern when we think about it because we're not seeing a slowdown. So, if it does happen if we do see a slowdown and it’s prolong that's when you're going to start to see you could see some deterioration in the quality of the early stage. But again, it's decreasing percentage of our portfolio and we're coming from an incredibly strong base right now. So, I'll pause there and maybe see if Mark has anything to add on the credit side and then I answered your question appropriately.

[Mike Descheneaux:]

Yeah. Pretty thorough answer. The only thing I would add is to your point about the channel checks recently and they're very optimistic investor sentiment. Contrasting that to Q1 2016 when what we were hearing was a course of winter is coming up. And so that right there I think is indicative of a very different outlook at least starting into year recognizing that things could change.

[Ebrahim Poonawala:]

Got it. Very helpful. Thank you.

[Operator:]

And the next question comes from Jared Shaw from Wells Fargo. Your line is open.

[Jared Shaw:]

Hi. Good evening.

[Greg Becker:]

Hi, Jared.

[Jared Shaw:]

Just circling back on the margin. You were talking about the roll-on and roll-off for the investment portfolio. What is – what type of yield pickup are you seeing now in terms of the cash flow coming out of the portfolio?

[Dan Beck:]

Yeah. Jared, it’s Dan. So in the fourth quarter with the deposit – the deposit position, we weren't buying, but from a roll-off perspective we did execute close to $1.5 billion with a security sales and did have securities mature. The yield on the securities maturing are in the kind 150 to 160 range. So that's what's rolling off at this point.

[Jared Shaw:]

Okay. So you should still see a little bit of a pickup then from the -- over there?

[Dan Beck:]

Yeah.

[Jared Shaw:]

Okay. And then, in terms of the off balance sheet client funds, what was the management view on that and are we at the peak levels for that now?

[Dan Beck:]

Yeah. So coming out of the fourth quarter we’re 20 basis points. And if we were to get additional rate hikes, I think that we could get another couple of basis points worth of spread out of that. So I don't think we're capped out at this point, but 20 basis points coming out of the fourth quarter which was one of the reasons we saw that strong growth in quarterly incomes that's sustainable getting into next year.

[Jared Shaw:]

Thanks. And just finally for me on the buyback. With that coming into play in November, were you in the market consistently through the quarter with a five [ph] plan and should we expect to see a stable level of repurchasing going into the beginning of the year here?

[Greg Becker:]

So it's obviously all depended upon market conditions, so we has authorized the $0.5 billion repurchase, we've made good progress against it, continued continue to watch market conditions and continue to execute with that.

[Jared Shaw:]

Okay. Great. Thank you.

[Greg Becker:]

Yeah.

[Operator:]

And your next question comes from Steven Alexopoulos, JPMorgan. Your line is open.

[Steven Alexopoulos:]

Hi, everyone.

[Greg Becker:]

Hi, Hey, Steve.

[Steven Alexopoulos:]

The first follow-up on the conversation regarding the health of your startup clients, at the Investor Day, I'd ask Mike Descheneaux, of if you had seen startup clients adjusting cash burn and you really said they were holding steady, since then, we've seen a tremendous amount of market volatility. Are your startup clients holding steady still in terms of cash burn or have you seen any reduction?

[Mike Descheneaux:]

So Steve, this is Mike Descheneaux again. It's still pretty consistent, we don't have anything to show one way or the other still right now, it seems to be steady. Again, you know people are feeling good about 2019 as I said and Greg said as well too here. But again, clearly everybody is watching what's going on the backdrop of the mark and in the macro environment as well too. But at this point, yeah, I would say it’s steady.

[Steven Alexopoulos:]

Okay. That's helpful. And then regarding the deposit guidance in half of the growth coming in interest-bearing, is that mix shift coming from you guys changing pricing and incentives or our clients preferring the interest-bearing product more now over non-interest-bearing, just given where rates are?

[Dan Beck:]

Yeah Steve, it’s Dan. So, that’s more product placement on our part, as we have clients that otherwise would’ve gone off balance sheet where we have continued to enhance our product that and we've actually been able to open new products that meet their needs on balance sheet. So, it’s largely that versus clients opting directly from non-interest-bearing in to interest-bearing noninterest-bearing into interest-bearing.

[Steven Alexopoulos:]

Okay. That’s helpful. And just finally based on the updated guidance, it looks like Leerink will now represent around 20% of total expenses, around 50% core fee income to the fairly material contribution, with once a Leerink goes into the run rate from a big picture view how will that impact the overall growth rate of expenses and core fee income?

[Greg Becker:]

Yeah. So Steve while on the line basis that's a – and it’s a really important business to us. The bottom line impact is still small relative to the rest of the – rest of franchise. So from where that stands right now you know obviously we’ve got the guidance for what we expect in 2019 on a go forward basis you know investment in those areas is really going to be dependent upon you know the opportunities that we see and this continues to be an area of the market where we see a strong growth and where we do want to invest.

[Mike Descheneaux:]

I’ll add a little color to it. So we were actually just – we’re spending time yesterday with Jeff Leerink and Jim Boylan the two key principles there and – you know and we see this in our life science portfolio too in the commercial banking side is that the outlook for the capital markets activity in 2019 appears to be very, very strong. There is a lot of companies lined up and ready to go. It's a great place to be. You can look at the venture capital numbers in 2018 related to healthcare and biotechnology life sciences and it was an incredibly strong year, very, very, very strong year. And if you look at that investment that was on top of a strong year in 2017 so those big investments are kind of fueling the growth for the next companies to go public or be acquired and again if we think it fits exactly where we want to be. So we feel very, very good about the business. To give you a little more color, because it’s a first quarter we will be talking about SVB Leerink. You can look at the outlook and you can do the math but others help you along. You can look at the outlook we're looking at kind of $250 million to $270 million in revenue that's what that kind of math would show up. And you can look at the pre-tax contribution you're probably in that 10% to 15% range, right. Now first quarter as we said, there's going to be very, very slow because a big part of their business is equity capital markets. You know as well as anybody and everyone else on the line does that there's nothing happening right now in the equity capital markets business. And it's going to be that way until the market opens up. But the pipeline backlog looks very robust and we feel good about it.

[Steven Alexopoulos:]

Okay, great. Thanks for all the color.

[Operator:]

The next question comes from Brett Rabatin from Piper Jaffray. Your line is open.

[Brett Rabatin:]

Hey, good afternoon, everyone.

[Greg Becker:]

Hey Brett.

[Brett Rabatin:]

Wanted to ask just going back to deposits and thinking about DDA, can you guys give us any color on what early stage makes up of DDA at this point? And then is that or you expect the growth in DDA this year is the early stage businesses and maybe just any color on what you're seeing with DDA balances on the early stage clients?

[Greg Becker:]

Hey Brett, I'll start. I don't have that in front of me, I don't know if Dan or Mike do. But we really again it's important we have not seen a behavior change when you think about the broad client base. We have seen – where we've seen change. We've seen it when rates are low, we've seen some bigger balances and with some companies that raise large rounds of financing and they just kept it in their DDA. Obviously the rates have gone up, they have moved that to either off balance sheet or they have moved it to the interest-bearing solutions that Dan was talking about. So I think what you're getting to is have we seen anything really change? And the answer is, no. I'll see if Dan or Mike have anything else to add.

[Dan Beck:]

Yeah. It’s running approximately on 25% to 30% somewhere in that neighborhood from when you think about emerging tech and early stage start up somewhere around there. That is deposits on balance sheet as percentage of total deposits.

[Brett Rabatin:]

Okay, great. And then the other question I want to ask is, just you talked about continued success in capital call lines of business and – or credit and not really seen the competition, stymie what you're being able to do? There was a comment about pricing competition, has anything changed meaningfully related to that either in that line of business or in any other verticals as well?

[Greg Becker:]

Yeah I will – I'll start and Mike may want to add something. Look, the market continues to be very competitive. And I would say the message that we have delivered in prior quarters about the competition and price compression is consistent with what we've described in prior quarters. I would just say that the biggest differentiator we have and it's not just in private equity services, it’s across the platform is – it’s the people, it's the product and it's the service levels. And all three of those things are very, very differentiated. So what we see consistently when we show up and we're price that a certain level it is very likely that we’ll get a win if it's a jump ball and typically we'll see even a little bit of premium. That hasn't changed and I don’t expect it to change. Now, we have to continue to earn that every single day. But our teams are very much in tune with that and are doing an incredible job.

[Brett Rabatin:]

Okay. That’s fair color. Thank you.

[Operator:]

The next question comes from Aaron Deer with Sandler O'Neill. Your line is open.

[Aaron Deer:]

Hi, good afternoon everyone.

[Greg Becker:]

Hi, Aaron.

[Aaron Deer:]

I want to follow up on something else that came up at the Investor Day, which is a subject of kind of reducing some of your asset sensitivity over time. Looks like maybe some of the balance sheet actions were just taken in terms of holdings more liquidity. Does some of that, but just curious what are the plans you are undertaking now or maybe in the future to reduce that asset sensitivity.

[Dan Beck:]

Yeah Aaron, it’s Dan. So yes the goal is to continue to reduce the sensitivity we talked about a target with 100 basis points rate chart to bring that sensitivity to down rates of less than 10%. So the actions we’re taking, the continued extension on the investment securities portfolio. And secondly moving to a swap program and as part of that swap program extending duration and that’s in addition to adding interest rate force where appropriate to our lending contract. So all three of those options are in motion and the expectation is to get to that less than 10% sensitivity.

[Aaron Deer:]

Okay. And then a thought question at Leerink. I think Stephen was maybe trying to get at this but with the given that the revenue outlook for that business and the guidance given just curious if the if the expenses if you plan to say accrue for those consistently through the year or if that's going to be more tied to deal activity in any given quarter.

[Dan Beck:]

It’s Dan. It’s largely you know tied to deal activity. So there would be a reduction on the expense side you know assuming that we don't have the deal activity, but there is also just a standard amount of fixed cost that you’ll see and continue to come through. So assuming a weaker first quarter from a profit all in profitability perspective, it could be you know net flat to the P&L in the first quarter.

[Aaron Deer:]

Okay, great. Thanks for taking my questions.

[Operator:]

And our next question comes from Chris McGratty from KBW.

[Chris McGratty:]

Yeah. Thanks for the question. Dan on expenses, I think for the reported number for this year was $1,188 million again I just want to confirm that’s the starting point I know there looks like about $8 million of kind of one timers in the quarter.

[Greg Becker:]

Yeah. We’re using the $1,188 million is the basis.

[Chris McGratty:]

Okay. And then I think in your prepared remarks you talked about some level of flex in that to the extent the environment changes, could you maybe elaborate a bit on that kind of mid-teens flexibility. Thanks.

[Greg Becker:]

Yeah. As we mentioned we do have you know controllable, you know from a hiring perspective we do have a controllable incentive compensation and then obviously in project spend and things along those lines. So we built in through those investments, thus the flexibility to the extent that the environment changes that we can change this trajectory on expenses.

[Chris McGratty:]

Great. And then maybe one more, Stifle [ph] is becoming a more common talk on conference calls, any initial comments I know probably a couple of quarters away from getting specific.

[Greg Becker:]

Yeah, you're right. It's still early and we’ll probably, we'll have our range view by the time we get to Q2 earnings in July of what we expect the impacts going to be in 2020. So we have to hold till then.

[Chris McGratty:]

Right. Thank you.

[Operator:]

Your next question comes from John Pancari from Evercore. Your line is open.

[John Pancari:]

Good afternoon.

[Greg Becker:]

Hi, John.

[John Pancari:]

On the capital call lines. Just a couple questions there. Can you give us the new money yields that you're seeing in terms of where these lines are coming on the books in terms of – of the yields and, and you know if you've seen any contraction in spreads as it's getting more competitive?

[Marc Cadieux:]

Yes. It’s Mark. I'll take that one. Yields note only are the interest only yields are in the high fours and the historical spread between VCNP has really narrowed to the point where they are basically are the around the same. In terms of further compression nothing really material not withstanding that as mentioned earlier pricing competition continues to be fierce in that segment.

[Greg Becker:]

We actually saw a bit of a pickup in Q4 obviously with the rate increases as well too because as you know a fair amount those are tied to variable rates as well too.

[John Pancari:]

Got it. Got it. Okay. And then separately also on the – the lines. You know, I know you've acknowledged in the past and we can see with the industry that funds using the lines are using them increasingly for return enhancement as the products become more and more popular not just for the bridge financing, but as return enhancement. So as you have funds doing that what does that mean in terms of does it have any implications for credit quality of that portfolio after using it for credit quality of that portfolio if they’re using it for return enhancement, does that have any implications in terms of the duration of the capital call lines and then lastly does that have any implications in terms of the rate that you're able to get? Thanks.

[Greg Becker:]

Sure. So, there is a – so three questions in there. Maybe starting with credit quality, really no implications there at all. As we've talked about in the past, it's the PE fund borrowers that tend to borrow a bit longer than the VC ones do. But at the same time they tend to have a very high quality LP basis, we have an assignment of the right to call capital defaults of zero we've had no loan losses there. And so, to the extent that APE fund wants to keep it out a bit longer and get some IRR enhancement that frankly is a good thing from our standpoint. As you might imagine because the risk is no different, our ability to charge more for longer duration really isn't there for us or any other market participants. The rate is generally about the same whether it's going to be you know the 90-day advance or longer. And then, the duration PE relative to VC really hasn't moved much. You know VC borrowers tend to be 60-day to 90-day borrowers historically speaking. Private equity can be in that 180-day to 270-day, but that's been relatively stable over the last several years. I think I got all of your questions, hope I did.

[John Pancari:]

Yeah, now you did. And the last thing was, do you have a – are you able to better calculate what your market share is yet in the PE side I know and VC is pretty high, but in the PE side within middle market?

[Greg Becker:]

We don't have an estimate of that other than to say is if we think pretty low overall and thus a lot of room for growth for us and other market participants.

[Dan Beck:]

Hey, John, it’s such a large market and it's also a global market. It's not just the U.S. So it's really hard to calculate our market share. But, certainly we continue to grow that portfolio. So there's plenty of runway for us to go in terms of market share.

[John Pancari:]

Got it. All right. Thanks, Mike.

[Operator:]

Your next question comes from David Long from Raymond James. Your line is open.

[David Long:]

Thank you. Good afternoon.

[Greg Becker:]

Hey Dave.

[David Long:]

As we are starting to talk about reducing the level of asset sensitivity and I thank you for sharing some of the initiatives that you could take on, but what are the indicators that you're watching that would cause you to accelerate these initiatives?

[Dan Beck:]

So I think it would be consistent with what most folks are looking at. So continue to pay attention to GDP, overall levels of inflation and your expectations in the futures market, what's happening with the fed funds. So we – and also, obviously paying attention to what's going on with short-term yields. So combination of all those things are going to help us drive and again, this is not a periodic decision. This is something you build over time. So we'll be building a portfolio especially as we take a look at the interest rate hedging portfolio building that over time to dampen that sensitivity.

[David Long:]

Thanks, Dan. That’s all I had.

[Operator:]

And your next question comes from Chris York from JMP Securities.

[Chris York:]

Good afternoon guys and thanks for taking my questions. So maybe Greg and Mike, are you guys making any changes to your capital call line loan docs as a response to Soc gen's dispute with a barrage group LPs. And then, does this event change your view of future credit losses in this loan sub type going forward?

[Greg Becker:]

So, this is Greg, I'll start. So, we have to be honest I'm not familiar with that situation, but we have had zero issues with I guess, both documents or losses, challenges et cetera. And when you think about it, it’s critically important and we have continued to enhance our structure over time especially with the larger loans and especially around PE where the assignment of calls basically can be given to us, so we can go directly to the borrower and it’s a direct obligation. So, from that standpoint, we see no issue with how we’re restructuring our loans and therefore, we see no issue with an increasing loss potential in that portfolio.

[Chris York:]

Got it. And then you said that life sciences was a driver of loan growth in the quarter and this should be a good source of loan growth for you guys going forward especially, with Leerink, but non-banks appear to be a fierce competitor and I noticed a couple of them led senior loans to Leerink clients in the fourth quarter. So can you maybe talk about your thoughts about the market environment there, and the expectation for loan growth in 2019 for this concept?

[Greg Becker:]

Yeah. Over the course of 2018 we had a nice growth in life science portfolio albeit a smaller portfolio. Clearly, as one of the drivers of the acquisition with Leerink is being able to partner more with them and be able to show more value. So from the standpoint of our expectations for growth, we do expect to see solid growth in our life science portfolio. It's a big market. What I would tell us is as I said the venture capital levels, venture capital is flowing into that market in a very substantial way it’s an increasing portion of the overall venture capital level and there is more non-venture firms that are putting money into this space as well. So from that standpoint, we think the market's increasing at a very solid rate, and we feel good about our prospects to get our fair share more than our fair share of that of that growth.

[Chris York:]

Makes sense. Last one is maybe Dan, could you provide us with 4Q revenue and expenses at Leerink? And then how does your guidance for Leerink in 2019 compare to Leerink’s full 2018 numbers?

[Mike Descheneaux:]

Yeah. So, we've given at least our view of what we think is going to happen in 2019. Now that there are under the SVB umbrella and I think, from a guidance perspective and what Greg mentioned that gives you a good assessment of what we're expecting. It’s a good market a healthy and vibrant market and obviously, we're paying attention to what's going on with the government shutdown, but so strong business and the guidance reflects that.

[Chris York:]

So could you provide us or are you not able to provide us numbers for Q4?

[Greg Becker:]

From -- this is Greg, I’ll take it. So, when we look at Leerink I mean, Leerink was a separate entity private entity before, we've acquired them we've given the outlook for 2019 Leerink had a very strong 2018 and you'd see that just basically by how healthy the IPO market was for life science companies in 2018. So, we believe it’s going to be a robust 2019 and we’re using the numbers from 2018 as the driver of the forecast.

[Chris York:]

Understood that’s it for me. Thanks, congrats on the year.

[Operator:]

And your last question comes from Brett Rabatin from Piper Jaffray. Your line is open.

[Brett Rabatin:]

Hey, just one quick follow-up. I was just hoping to get -- you bought back shares this quarter, which I’m not sure if everyone expected. The capital ratios will continue to improve given their profitability over the next two years. Should we expect kind of a continued buyback activity or can you give us any color on managing the capital ratios.

[Greg Becker:]

I think if we look at the authorization that we have, obviously we're going to work through and based on our interest and work for that. And then based on continued expectations of growth we should be in a good capital position and at that time we’ll talk about what makes sense for us that you know we share repurchases dividends or use that capital. I mean those are the options right now. We’re executing on the share repurchase assuming market conditions.

[Brett Rabatin:]

Okay. So you guys have continued to buy stock into this year.

[Greg Becker:]

We, I mean we disclosed the activity through Q4 and early this year okay.

[Brett Rabatin:]

Okay. Thank you.

[Operator:]

And I will now turn the call back over to CEO, Greg Becker for finally. Great.

[Greg Becker:]

So just to wrap up everyone. You know we had a great quarter. Had a great year, our best year in history when you look clearly across net income, EPS growth rates really across the board. And the good news is we have described we're expecting solid growth in 2019 while we're keeping an eye on the broader environment and I know we all are. We see lots of good activity in the conversations we're having with clients with investors remains positive. So I know there was a lot of questions about how does this compare at all to 2015 to 2016 and the answer was no. So feel good about it, but we are definitely paying attention to it because we all know it could change pretty quickly. The other parts is just our capital liquidity, if it does change, we're prepared to respond to those changes in the environment. So the investments we believe are paying off and that's going to help you will to a long-term growth so. So, I want to thank everyone as I do on each quarterly call. Really appreciate what our employees are doing because at the end of the day, they're the ones who’re doing a fantastic job for our clients. So really appreciate what they're doing. And secondly, I really appreciate the clients and what they are doing. And the fact they put their trust in us is such a big deal. Finally, I want to welcome the Leerink team to SVB as we talked about we close the deal on January 4. And all indications the people we've engaged with the whole team, we are – we feel really good about the outlook. So with that, again thanks everyone and have a wonderful day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.