SVB Financial Group
Q4 2017 Earnings Call Transcript

Published: 26 Jan 2018

[Operator:]

Welcome to the SVB Financial Group Fourth Quarter 2017 earnings call. My name is Brandon, 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. And I would now turn it over to Meghan O'Leary. Meghan, you may begin.

[Meghan O'Leary:]

Thank you, Brandon, 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 2017 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 some 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.

[Gregory Becker:]

Thank you, Meghan, and thanks, everyone, for joining us today. Our fourth quarter was an excellent finish to an outstanding year. We delivered earnings per share of $2.19, net income of $117 million, driven by healthy balance sheet growth, higher net interest income, and net margin, solid core fee income and stable credit. Our results also reflect the impact of $38 million in tax expense related to the Tax Cuts and Job Act and a $9 million loss related to the sale of securities as part of our treasury and tax management objectives. Together these items equate to $0.80 per share. For the full-year 2017 we had earnings per share of $9.20 versus $7.31 in the prior year and we net income by 28% to $491 million. 2017 was marked by strong growth across most aspects of our business. Net interest income increased by 24% to $1.4 billion, average loans grew by 16% to $21.2 billion, average total client funds grew by 15% to $94 billion and for the first time period end total client funds exceeded $100 billion. Core fee income grew by 20% to $379 million and we delivered a healthy return on equity of 12.4%. Our strong performance indicates that the environment for our business remains positive. We are enjoying one of the largest market expansions in history with the best performance across the Dow, the S&P 500 and the NASDAQ in four years. Venture capital just finished one of its best years ever with $84 billion invested the highest level since 2,000 and more than $30 billion raised for the fourth year. This positive activity translated into growth capital and liquidity for innovation companies, which contributed to strong new client activity and growth in our business. We added nearly 5,000 new core commercial clients in 2017 growing our net early stage client count and our total net client count by 15%. This included 25% net new client growth in private bank and 21% growth in private bank loan balances and 17% net new client growth in private equity with 29% growth in loan balances. It also included a win rate of middle market corporate finance clients that was nearly double the rate of any prior year. We had an outstanding year in core fee business as well due to strong market conditions and a focused plan to improve our outreach and client engagement. We exceeded $30 billion in FX volume and more than 30% increase year-over-year and ended the year with a record breaking quarterly revenue of $34 million. We surpassed $4.5 billion in annual card transactions for 2017, a 31% increase over 2016 and we now rank as the 15th largest commercial card issuer in the United States. All together we processed nearly $1.3 trillion in payments volume in 2017, a 25% increase over 2016. We are proud of these results and our momentum is reflected in our outlook for 2018 which Dan will go into detail in a few minutes. For the first time in years, we are enjoying a number of meaningful tailwinds. The first tailwind is interest rates. After several dovish rate hikes in 2017, the more confident tone of the Fed's commentary around December's rate hike was a welcome change. While SVB's outlook for the Street assumes no rate increases given our high asset sensitivity, we are likely to benefit from each successive rate increase. The second tailwind is the new corporate tax rate which took effect January 1. We expect our normalized tax rate to go from 40% to between 27% and 30% in 2018. The majority of these tax savings, 75% to 80% will go to our bottom line. The remaining 20% to 25% we plan to invest in our growth, infrastructure, and employee enablement, and neutralizing some of the negative impacts of tax reform on our employees. The final tailwind is regulatory reform, specifically the potential of lifting the threshold for CCAR compliance. While we will continue to be subject to many other regulatory requirements of being a global bank, we believe this change will enable us to focus more management time and attention on some of our growth and client engagement activities. While we believe the year ahead holds positive opportunities, we continue to monitor the more challenging aspects of the environment. A challenge for all banks is fierce competition from banks from non-banks and from equity. The availability of equity in particular has been a headwind for loan growth and believes this state of things is here to stay. We continue to win our share of deals and the majority of deals we want, but we remain focused on smart growth and making the most of our unique advantages in the market. Another challenge is the exit markets, which have not returned with the strength many, including us had predicted in 2017. Later stage companies took advantage of large private equity infusions rather than go public. While the availability of capital for these companies is a positive story overall, the lack of public exits could become an issue for venture capital investors if it continues. In addition, the lackluster pace of exits, combined with these large private equity infusions is driving valuations for some private companies to levels that are hard to justify. If we were to see a significant decline in VC funding, or a growing trend of exits below the last private round, it would likely affect the broader universe of venture-backed companies, which could mean higher credit costs for us. Despite these factors, we remain positive about our prospects for 2018. We have five top priorities for the year, areas where we will be focusing and investing. First, raising the bar on client engagement by investing in systems, process and improvements, people analytics that will enable us to connect with clients in a more meaningful way. Second, improving our process, procedures, and technology to help our employees to do their jobs more efficiently and effectively. Third, continuing to invest to support long-term growth across the platform, including private bank, global, life sciences, private equity, and early stage client acquisition. Fourth, growing our fee income by improving product penetration enhancing the ability of our teams to meet the needs of specific client segments and partnering with and leveraging the capabilities of our innovative FinTech clients. And fifth, enhancing risk management across the organization. We are pleased and proud of the results for the quarter and the year and are very optimistic in our outlook for 2018. We are fortunate to have an amazing group of dedicated employees, who live SVB's mission every day. We work with the most innovative, creative clients anywhere. And we are at the center of a robust and resilient ecosystem that continues to grow and expand. Thank you, and now I'll turn the call over to our CFO, Dan Beck.

[Daniel Beck:]

Good afternoon, everyone. Our excellent quarterly results were a continuation of the trend we've seen throughout the year, the healthy venture capital and private equity environment and a strong overall economy are driving robust client liquidity and we are executing effectively on our strategy. The quarter included the following highlights. One, strong growth in net interest income due to healthy balance sheet growth and higher yields from our investment securities portfolio. Two, strong client funds balance growth. Three, higher core fee income driven primarily by foreign exchange transaction volumes and higher total client fund balances. Four, stable credit with solid underlying trends. Five, somewhat higher expenses related to incentives tied to our strong performance, and six, continued strong levels of capital and liquidity with some slower growth and on balance sheet deposits. As Greg indicated, these results were partially offset by certain items related to tax reform, including a $37.6 million tax expense from a one-time valuation adjustment of deferred tax assets to reflect the recently enacted change in the corporate federal tax rate. In addition, we had pre-tax losses of $8.8 million on the sale of $573 million, investment securities for treasury and tax management objectives. I'll refer you to the 8-K that we filed in December and our earnings release for further information on these impacts. Now let's turn to our operating results. Starting with the balance sheet, average loans increased by $859 million or 4% to $22.4 billion driven primarily by private equity capital call lines and technology lending, despite continued competition in abundant liquidity in the market. Average total client funds grew by $5 billion or 5.2%, so $102 billion, $0.4 billion due to the continued strong new client acquisition, a robust equity funding environment along with a better IPO activity and secondary public offering activity for our clients, the rising rate environment and the wide availability of equity funding for private companies, meaning that we are seeing a heightened awareness among our early stage client of options for their excess liquidity. In the fourth quarter that translated into more early stage client proactively moving excess funds into higher yielding off balance sheet options than what we experience and in no rate increase environment. These are clients who we would fully expect to see move off the balance sheet. Those with excess cash balances, but they are now doing so with less lag time than earlier this year, in the early stages of the rate increase cycle. We expect this trend to continue as rates increase. This trend was reflected in average deposit growth of $731 million or 1.7% an average off balance sheet client funds growth of $4.3 billion or 8.1%. We expect this shift towards off balance sheet growth to continue and believe with the loan to deposit ratio 50% and extremely strong client liquidity overall that we have substantial liquidity to support our growth. Average assets grew by $1 billion or 2% to $50.8 billion and period end assets were $51.2 billion. We expect to cross the trailing four quarter $50 billion SIFI threshold in Q1 2018 and to be subject to the enhanced potential standard starting in Q2 2018. This means we expect to file a public CCAR in 2020. While we are positively inclined to believe that there will be some regulatory relief on the SIFI threshold, as a growing regulated entity were subject to multiple regulation and anticipate the continued expansion of our regulatory requirement. To that end, we remain focused on the SIFI threshold and monitoring our level of foreign exposure, specifically, the $10 billion threshold for internationally active banks. As we continue to see strong growth in our foreign operations. We have strategies to optimize our exposure without curtailing growth and we are also engaged in discussions with regulators and legislators on this topic. As of December 31, 2017, we have approximately $6 billion in foreign exposure as defined by the rule, leaving a healthy amount of headroom for continued growth. Now I'd like to turn to the income statement. Net interest income increased by $20.7 million or 5.5% to $395 million due to strong balance sheet growth and higher rates particularly from reinvestment in our fixed income portfolio. Higher loan balances and higher interest rates driven increase in interest income from a loan of $11.4 million to $280 million in the fourth quarter. In the investment portfolio, higher balances and higher yield drove an increase in interest income of $10.8 million to $122 million. Average gross loan yield excluding interest recoveries and loan fees increased by 2 basis points to 4.32% primarily due to previous rate increases. Our net interest margin increased by 10 basis points to 3.2% due primarily to higher loan and investment yields. Now I'll move to credit quality, which remains stable with good underlying trends. Our provision for credit losses was $22.2 million compared to $23.5 million in the third quarter. This consisted of $10.8 million in net new specific reserves for non-accrual loans, $8.2 million for loan growth and $3.5 million for unfunded credit commitments. Net charge-offs were $12.9 million or 23 basis points of total average loans, compared to $10.5 million and 19 basis points in Q3. Charge-offs came primarily from early stage software loans. We continue to see good overall performance across the portfolio, although high valuations and soft exit markets still pose a risk for early stage credit. Now I'11 turn to non-interest income, which is composed of core fee income, gains from private equity and venture capital related investments and gains from warrants. GAAP non-interest income was $152.3 million, compared to $158.8 million in the prior quarter. Non-GAAP non-interest income net of non-controlling interest was $144.5 million, a decrease of $8.7 million from the prior quarter. This decrease was primarily due to lower warrant gains in the fourth quarter relative to the strong gains in the third quarter and was partially offset by increases across most core fee income categories. Core fee income increased by $3.7 million or 3.6% to $106.4 million. This growth was driven primarily by foreign exchange fees which increased by $4.1 million due to robust levels of activity particularly from client actively managing currency exposure and client investment fees which increased $3 million due to higher client investment fund balances from our client strong liquidity. These increases were partially offset by a decrease of $5 million in lending related fees primarily due to a non-recurring $4.5 million adjustment in the third quarter from prior period fees and unused lines of credit. Net gains on investment securities net of non-controlling interest were $8 million compared to $9.7 million in the prior quarter. This was primarily due to valuation gains from IPO and M&A activity. These gains were partially offset by net losses of $5.6 million from our available for sale portfolio sales which included the $8.8 million loss on sales related to our treasury and tax management objectives that I noted earlier. As a result of our 2018 adoption of the new accounting standards related to financial instruments that eliminates cost method accounting for equity investments. We will record approximately $100 million on a pre-tax basis as positive fair value adjustment to equity reflective of previously unrecognized gains for the impacted investments. In the past, the gains on these investments were recognized as income only when there was a monetization event. As a result of this change going forward we anticipate a reduction in gains on investment securities in the range of $2 to $3 million per quarter at the aggregate value of the gains have now been captured in equity. Effective January 1, 2018 we will mark these investments previously held the cost to fair value with all changes in value being recognized in the income statement. Moving to equity warrant gains, they were $12.1 million compared to $24.9 million in the third quarter. The notable item for equity warrant gains is our positions in Roku which contributed $4.8 million in gains for the fourth quarter and $16 million in gains for the third quarter. Given the size of our holdings in Roku I'd like to provide some additional color. We hold directly through the exercise of warrants previously held by us and indirectly through interest and certain fund investment approximately 1.7 million shares of Roku's common stock. As noted in our earnings release for the full-year 2017 we recognized approximately $70 million of total value appreciation related to Roku of which approximately $30 million was recognized for the income statement with the remaining $40 million recorded in equity on our balance sheet based on its closing price of $51.78 on December 31, 2017. However, the value of these holdings remains subject to market fluctuations that will continue to flow through earnings until the sale of the position. Turning to expenses non-interest expense was $264 million compared to $257.8 million in the third quarter. This increase is primary related to higher incentive compensation costs due to our strong performance and higher professional services costs associated with their global digital banking initiative. As we said previously we expect our efficiency ratio to trend down over time and we are committed to drive scalability in efficiency in our back office to make that happen. Now turning to taxes. Our effective tax rate in the fourth quarter was 53.5%, compared to 39.6% in the third quarter due to the revaluation of tax assets as I mentioned earlier. Normalized for the write-down of these taxes, our effective tax rate was 38% for the fourth quarter. Now moving on to capital. Capital and liquidity remained very healthy. Although growth in risk weighted assets due to loan and investments and higher unused loan commitments lowered risk based capital ratio somewhat. The Tier-1 leverage ratio at the bank was 7.56% and remains well within our target for range. Now I'd like to move to discuss or 2018 outlook and update the preliminary outlook we provided in October. This outlook is for the full-year 2018 versus the full-year 2017. Balance sheet growth rates are based on full-year averages. Our outlook reflects the impact of the Fed funds rate increases to date, but assumes no further rate increases in 2018. Finally, this outlook is based on our current forecast and assumptions about market condition and it's subject to change. Starting with loans, consistent with our preliminary outlook, we expect average loan balances to grow at a percentage rate in the mid-teens. For average deposits, we are lowering our outlook to the mid single-digits from the low double-digits. Liquidity among our clients remains robust. However, we expect clients will continue to proactively seek higher yields for their excess deposits and our off balance sheet offerings as I described earlier. We expect net interest income to grow at a percentage rate in the high-teens. That is at the low end of our preliminary outlook range based on expected deposit growth. If rates were to rise according to the forward curve, we'd expect net interest income growth in the low 20s. We expect our net interest margin for the full-year could be between 3.35% and 3.45%. If rates were to rise consistent with the forward curve, we'd expect net interest margin to be between 3.45% and 3.55%. We expect credit quality to remain stable and comparable to 2017 levels. Specifically, we expect net loan charge-offs between 30 basis points and 50 basis points of average total gross loans. We expect the non-performing loans between 50 basis points and 70 basis points of total gross loans, and we expect our allowance for loan losses for performing loans to be comparable to 2017 levels. We have narrowed our outlook for core fee income to the high end of our preliminary range of growth at a percentage rate in the high-teens consistent with 2017. As Greg indicated in his comments, we plan to use some of our tax savings for investments and growth, infrastructure and employees. As a result, we are raising our outlook for non-interest expense from the high single-digits to the low double-digits. That said, we still expect 75% to 80% of the tax reform benefit to translate to earnings. As Greg also indicated, we've added an effective tax rate outlook for 2018 between 27% and 30%. To wrap up, we are pleased with the performance for the quarter and for the year. Our core business remains robust, reflecting the general good health of our clients as well as their access to funding in liquidity in a strong economy. We continue to deliver healthy revenue growth, solid ROE and efficiency ratios, all underscored by high asset quality. We expect these positive trends that continue through 2018 assuming the macro environment does not change materially. Should future rate increases materialize, we would expect to see upside to our current outlook. In the meantime, we remain focused on delivering high quality growth, and we have ample capital and liquidity to support that growth. Thank you. And now I'll ask the operator to open the line for Q&A.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And from Morgan Stanley, we have Ken Zerbe. Please go ahead.

[Kenneth Zerbe:]

Great. Thanks. Good evening.

[Gregory Becker:]

Hey, Ken.

[Kenneth Zerbe:]

I guess just to start off, and in terms of the client investment funds, obviously congrats on getting over $100 billion which is impressive, but is there any way - maybe I'm trying to ask like, are you happy with the revenues that you're generating from the entirety of your client investment funds? Obviously, the off-balance sheet stuff is what I'm referring to. Like is there any way the U.K. as clients continue to pull money out of sort of on-balance sheet to off, can you monetize that in a better way to generate higher fee income from that piece? Thanks.

[Gregory Becker:]

So Ken, this is Greg. I'll start, Daniel would add. I think, first you've to understand what that cash is, it truly is set up for investments in cash like instruments over time that are very safe and secure. And so when you're doing that, obviously, the margins that are there are tend to begin with. So we set out and we've been pretty clear about this and we think we're on the right track, which is we're running about 13 basis points right now, and maybe able to get an additional 1 basis point per 25 for a few more rate increases, and then we'll probably cap out maybe at 15 basis points, maybe a little bit at 16 basis points. So if there were 3 more basis point increases during the course of the year, our three rate increases this year maybe you could get up to 16% or 16 basis points on average, right. I don't see a lot of ability to go much further than that because of what the investments are being made in. There's a second question though, which actually is, is there a way to direct more of what's going to the off-balance sheet on to the balance sheet. But what's appropriate for clients. I'm going to start there, because it is very important, meaning there may be some opportunities to move some of those higher balances that are off-balance sheet, on to their on-balance sheet and actually pay a reasonable return for that on the balance sheet. But still be able to drive a very strong ROE from those deposits. We're looking at that. We think there's an opportunity there, but that isn't factored into our forecast.

[Kenneth Zerbe:]

Got it, okay. That definitely helps. And then just the other question as you do so qualify for becoming a SIFI, over the next quarter or so. Is there any obvious expenses that you need to incur in first quarter or second quarter were your expense guidance might be shifted a little more towards the first half of the year?

[Daniel Beck:]

This is Dan. So the expenses that were expected or baked into our outlook and there's no periodic expenses that we're going to incur in the first couple quarters related to that compliance. So I think you'll see a pretty even burn rate of that expense throughout the year.

[Kenneth Zerbe:]

Great, all right. Thank you.

[Operator:]

From Bank of America Merrill Lynch, we have Ebrahim Poonawala. Please go ahead.

[Ebrahim Poonawala:]

Good afternoon, guys. Just Dan, if you can go to the expense guidance and the increase relative to October, is it all entirely driven off of - because of the tax reform, you feel like you can make more investments and so why not do it or what the other sort of drivers of why the guide - it has moved higher?

[Daniel Beck:]

That's a great question. And it's all related to tax reform. We definitely see those in opportunity to invest in employees and the overall infrastructure for employee enablement. So we think it's a great time. It's a great opportunity and that's where that's coming from.

[Ebrahim Poonawala:]

And as we sort of think about it means clearly if the forward curve plays out and I should be more in the low to mid 20% growth rate. Can you talk about drivers of what would push the expense going to guide higher because that tends to be sort of point of I guess uncertainty even revenue growth picks up for you guys. I just want to handicap the risk of that expense growth, moving higher as we move through 2018?

[Daniel Beck:]

So yes, I'll take that and Greg might want to add to it. So as we look at the expense baseline for 2017, we already have embedded in that higher incentive compensation costs related to our good ROE performance, investments and infrastructure for regulatory compliance and for continued business growth. So that that's a very good baseline for us, then on top of that we're building a low-teens expense growth to be able to continue to support the growth in the franchise. So we feel pretty strongly that the guidance in the outlook supports what we plan to do in 2018 with the growth of the franchise, with a very high ROE and strong performance. So we feel really good about the expense guide.

[Gregory Becker:]

Yes, the only thing I would add on to it is that we have built-in not only just dollars or projects in across the board client experience and employee enablement. We also have some headcount growth built in there as well that we feel very comfortable with both domestically and globally. And so I think we feel good about the broad base expenses that are already factored into the number. And so I feel very good saying there should be surprises and if there are surprises to the number everybody should be happy because it means that we are dramatically outperforming the forecast that we're giving.

[Ebrahim Poonawala:]

Very clear, and just moving separately Dan, now that we've got clarity on tax reform, maybe we've seen some steeping in the yield curve. Could you sort of give us an update on the strategy on the bond portfolio, what we're investing into and are you actively looking to extended duration as we moved through the year?

[Daniel Beck:]

Yes, that's a great question. So as we're looking at over our duration, you saw a bit of extension in the portfolio in the last quarter. So move from 2.7 years up to 3 years. As we continue to purchase the bond portfolio, runs off let's say roughly about $1 billion a quarter. We're buying out in the let's call it four to six year range. So you'll see a general creep up in duration as we move into 2018. On top of that as a part of those purchases we're buying, let's call it in a range of $200 million to $300 million of municipal bonds based on the availability in the marketplace. That also has a tendency to extend bit duration as well to improve yields and obviously provide the tax benefit. So that's what you should expect to see from the investment portfolio in 2018.

[Ebrahim Poonawala:]

And can you sort of frame for us in terms what's the new yields versus what's rolling off just so that we get in a sense of how much we are adding incrementally every quarter as the $1 billion gets - some of the get reinvestment?

[Gregory Becker:]

Yes, I think the best way to think about it is about 100 basis points roughly let's call it 90 to 100 basis points improvement on that billion every quarter.

[Ebrahim Poonawala:]

Understood. That's all my questions.

[Operator:]

From JPMorgan we have Steven Alexopoulos. Please go ahead.

[Steven Alexopoulos:]

Hi, everybody.

[Gregory Becker:]

Hi, Steven.

[Steven Alexopoulos:]

And I wanted to start regarding the accounting changes cited the 100 million valuation adjustment, I want to make sure I understand that, is that in the funds business and the portion that the bank receives? That didn't sound like in impacted warrants at all?

[Daniel Beck:]

No it doesn't impact warrants and it impacts the fund investment.

[Steven Alexopoulos:]

Okay. And you said you expect that to go down to did you say $2 to $3 million per quarter?

[Daniel Beck:]

Yes, we're recognizing these were previously held that cost. So recognizing $100 million worth of value as of the beginning of January based on those investments. You would have seen that with the point of distribution flow through the income statement at a general pace of let's call it $2 to $3 million a quarter. So we're likely to see because of that value that we are going to book in January. You're likely to see a little bit of degradation in non-interest income from that.

[Gregory Becker:]

So Steve, this is Greg, just to clarify because I want to make sure that what you asked was the right which is it's a decline from where it is of $2 to $3 million per quarter it's not $2 to $3 million per quarter and we expect okay big difference.

[Steven Alexopoulos:]

Okay, yes, that is a big difference. Okay. Greg, look at it the $5.5 billion in client fund inflows which I think I've asked should last two quarters, because you've been over almost $5 billion for three quarters in a row? What's driving it at that such an elevated pace and do you think it's sustainable?

[Gregory Becker:]

Yes, so there a couple things obviously when you look at the overall venture capital fund flow for last year again it was $84 billion. So again second highest on record going back to 2000 so you had a start there. So that the pool of money is available is just from venture is a big number that's just part of the story right. Because get a part of the story is you still have corporate that are coming in bigger you have more angels coming in bigger and you have the sovereign wealth funds. The amount and breath of availability of capital is very substantial that's one piece. Second piece relates to you know I think we used our teams are doing an excellent job of just calling on the right companies with the higher balances and so you can look at both right to get a big population of money coming in and very good execution on our team side that's really been the driver of the incredible client fund's growth. The second question is what is the outlook look like? We certainly believe that the outlook for 2018 is still going to be healthy it's obviously hard for us to predict is it going to be higher than $84 billion or lower than $84 billion I would just say we feel pretty comfortable it's going to be a another really good year. So it's kind of the context that I'd give you.

[Michael Descheneaux:]

Maybe one other thing Steve, this is Mike Descheneaux here -- to think about as well is with the recent tax reforms as well and the talk about repatriation of those significant amounts of money that are overseas that are going to come back, whether it's to the corporates and the corporates deploy it out into our ecosystem as well. So that's something to keep an eye on as well that could potentially help support the flow of funds as well.

[Steven Alexopoulos:]

Nice to hear from you Mike. Just one on taxes, regarding the tax rate going down to 27% to 30%. Dan I know you've been working on different tax strategies is that fully baked that in the cake or could this range move even lower? Thanks.

[Daniel Beck:]

That bakes into the cake for 2018 what we expect in terms of implementation of the strategies for the next year. Obviously with the purchases of municipal bonds throughout of the year that impact will grow and the full-year impact in the next year could be a little bit better. But that, that bakes in what the plan is in terms of our municipal bonds and other strategies.

[Steven Alexopoulos:]

Okay. Terrific. Thanks for all the color.

[Gregory Becker:]

Thank you, Steven.

[Operator:]

From Wells Fargo Securities we have Jared Shaw. Please go ahead.

[Jared Shaw:]

Hi, good evening.

[Gregory Becker:]

Hi, Jared.

[Jared Shaw:]

Maybe be just sticking with the security side, when you look at the securities loss this quarter was that - that was just a tax opportunity restructuring, is that the way to think about that, are we taking some of the losses now? And then, was that basically restructured or reinvested in similar securities?

[Daniel Beck:]

Yes. This is Dan. That's exactly what it was. We had an opportunity. We had some lower rate securities purchased before improvements in the rate, while at the same time having to the tax opportunities. So the combination of the two things, we thought it was a unique time to execute sales in the portfolio.

[Jared Shaw:]

Okay. And then on the muni side, given the change in tax rates make that incrementally less attractive from a pure tax planning strategy. How big could we expect to see muni's as a percentage of the securities book grow?

[Daniel Beck:]

It will remain a small portion of the investment securities portfolio. As we're moving forward with time, we're obviously paying attention to what rates we can get there and what the tax opportunities are. We're growing that as I mentioned before in the - let's call it $200 million to $300 million range, but obviously, the volume and the supply dictate how far we are going there with that.

[Jared Shaw:]

Great. And then just finally for me, when you look at the professional services at year-over-year growth, how much of the - that there's a large component that is based on the global growth opportunities? So how much of that is due to the SIFI preparing for the SIFI threshold?

[Daniel Beck:]

I'll give you the total amount at least that we're spending on the CCAR implementation which is one of the largest components of the enhanced prudential standards SIFI implementation. And that amount in fourth quarter 2017 and let's call it $10 million to $11 million range. So as we look ahead, anticipation as that we are going to be in the - let's call it $11 million to $13 million range of which we would say 60% to 70% is really professional service spend.

[Jared Shaw:]

Great. Thank you.

[Operator:]

From Evercore ISI, we have John Pancari. Please go ahead.

[Rahul Patil:]

Yes. This is Rahul Patil on behalf of John. Quick question on NII growth outlook. You recently provided growth outlook of high-teens to low-20s, it did not assume a December rate hike, and today you lowered the NII growth outlook to high-teens with December rate hike in the numbers. I'm just wondering like what changed in your assumptions over the past couple of months to bring about this differential cost? It you look like you're adding high yielding securities going forward, so where is the downside coming from?

[Daniel Beck:]

Yes. The downside is coming from the deposit forecast, so the movement in the deposit range to the mid-single digits is really the driver there that offsets the benefit of the December move.

[Rahul Patil:]

Okay. And then on the deposit side, I mean your deposit costs have been - have held up relatively well. Could you talk about any pricing changes already put in place or planned following the December rate hike, and then maybe talk about your beta expectation over the next couple of rate hikes?

[Gregory Becker:]

Yes. This is Greg. We haven't seen a very - well really any change with the deposit costs from kind of Q2 to Q3 to Q4. Our modeling we're kind of looking at about a 35% deposit beta and obviously that impacts what you'd have on your interest bearing account, but even that with a 25 basis point rate increase you're still talking about a very low cost of funds going from interest bearing 12 basis points, but maybe it's up another maybe it's an additional 6 basis points, or 7 basis points, or 8 basis points on top of that, but it's still relatively low. As I mentioned, in one of the earlier questions, we are looking at - how can we direct some of the off-balance sheet on and what would it take to pay appropriately to incentivize those clients to move it on, and how do we make sure that it's both the right thing for a client and the right thing for us in ROE perspective. That's where we're going through right now. That's not factored into our outlook, but obviously more to come in future quarters as that plan starts to materialize.

[Rahul Patil:]

All right. Thank you.

[Operator:]

From KBW, we have Chris McGratty. Please go ahead.

[Christopher McGratty:]

Hey, good afternoon. Thanks for taking the questions.

[Gregory Becker:]

Hi, Chris.

[Christopher McGratty:]

Hey, Greg. Last quarter, I asked you about capital return, you've got this capital benefit, you've got taxes coming down and rates going up. How are you thinking about capital return given the balance sheet shifting and the capital accumulation is occurring? Thanks.

[Gregory Becker:]

Yes, it's a great question. And if you think about from a prioritization perspective, here's how I would look at it, right. So the first part, it has to be, how do you optimize the balance sheet? And is there a better ways to as I said go back to my last comment, if we were to move more deposit on to the balance sheet from off, obviously you've got to reserve capital against that. We did factor that into making sure we get an appropriate return on it. But from a shareholder perspective, we certainly believe that that would be the highest and best use of capital. Now once you go beyond that and we look at all the growth opportunities are already taking care of then you do of that some point look at other capital alternatives. Those discussions will probably happen later this year, we're talking about it. Nothing has been decided for sure. You'll hear more about it and my guess is we start to get closer to Q3, Q4. It's probably the next time or the time we'll price it down and start to articulate what our game plan is. And that's only if I would say we're really not driving forward ahead on the deposit side with pulling more of that onto the balance sheet.

[Christopher McGratty:]

Thanks for that. In terms of when you do have those conversations there's obviously two - there's dividends and there's buybacks. Do you have - I know that neither are in a place today, but do you have preference or how you're thinking about potentially buying back stock, obviously multiple on book is pretty high, but also could be accretive to earnings?

[Daniel Beck:]

This is Dan. I mean at this point, we're really considering all options and we don't have a preference as we're going into it.

[Christopher McGratty:]

Thanks a lot.

[Gregory Becker:]

Yes, you're welcome Chris.

[Operator:]

From Sandler O'Neill, we have Aaron Deer. Please go ahead. Aaron, your line is open.

[Aaron Deer:]

Hi, good afternoon everyone.

[Gregory Becker:]

Hi, Aaron.

[Aaron Deer:]

If I could follow-up on the accounting change, I guess I'm a little surprised actually if you're recapturing all of the unrealized gains that kind of the balance sheet. It sounds like you're still - if you're only suggesting 2 million to $3 million drop in the type of quarterly gains that you continue to realize, then it sounds like you're still anticipating some pretty good gains on those investments going forward, is that right?

[Daniel Beck:]

Those investments have been held at cost, so those -- are the value was really sitting in those investments anyway. So now what we've done is through the change in accounting brought them to a fair value with the adjustment in equity. So that value because these funds were only distributing that value at the point that it was time to return capital, which is a long cycle. So these funds, we're nearing the end of their cycle and starting to contribute to our non-interest. So we marked it. It's sitting in equity and the expectation is that we're just not going to see that $2 million to $3 million of non-interest income on a quarterly basis, because it's already sitting in equity.

[Gregory Becker:]

The only thing I would add on to it is, these are investments that were made a while back and because of the type of investments they were, they were held in our balance sheet at cost and so that's what we're talking about. But the core, what I'll call it SVB capital business and that's been the more significant driver of securities gains. That still is intact. That's not impacted by what we're talking about. So we're trying to make sure we dissect those two or separate those two - and want to give as much clarity as possible on what's happening with that those investments that were held at cost.

[Aaron Deer:]

Okay. And then how about the corresponding impact on the non-controlling adjustment, is it will there then be a similar magnitude impact there?

[Gregory Becker:]

Yes, there isn't one because again these are investments that we would hold [indiscernible] 100%. It's kind of ours. Therefore there is no non-controlling interest.

[Aaron Deer:]

Okay. I just want to make sure. I understood that. And then just one last one, Greg, you'd mentioned the foreign exposure and looking to keep that below $10 billion for the time being, it sounds like you're at about $6 billion now. How much is that increased over the past year?

[Gregory Becker:]

Yes, so we've gone up, it's a roughly a couple billion dollars. So again if we have opportunities to optimize and we believe we do. You can effectively take roughly I would say $2 billion to $3 billion that we could optimize in the next 12 months. We continue on that growth path that kind of somewhat negates that. So you're really looking at a two to three year time horizon, based on kind of the current trajectory, right. And it Dan said in his remarks, if you really dig into it and you look at the - what the intent it was of the $10 billion dollars based on all the other regulatory changes that they're being discussed. This one again my opinion makes more sense than others even to move it changes or to give exceptions around it. So that's we're going to be talking about we're certainly hopeful about it and we'll keep everyone informed as we have more information.

[Aaron Deer:]

Understood. Appreciate the clarification.

[Operator:]

[Operator Instructions] And from Piper Jaffrey we have Brett Rabatin. Please go ahead.

[Brett Rabatin:]

Hi, Good afternoon.

[Gregory Becker:]

Hi, Brett.

[Brett Rabatin:]

I wanted to ask Greg early in your commentary, you talk about how there was obviously elevated valuations and private companies and that that could actually how somewhat of an impact on your credit quality? Are you expecting some sort of self-correction this year and some of those markets or what do you see happening as we move through the year to some of these private companies that are valued really high numbers?

[Gregory Becker:]

Yes, I'll start and then let Mark comment some as well. So my only comment is that you - when you see all this liquidity coming in there clearly are companies that are raising healthy amounts of money and the valuations are what I'll call we said this and I could - this dialogue in about 2015 using the same words which were there price for perfection and anytime you see things that are priced for perfection obviously there is more area to the downside then to the upside typically speaking in those companies. And we're seeing that to some extent. What my commentary really is on credit quality, is that if you saw a significant amount around that were down around in a few minutes it would become more difficult to raise money that would in turn more than likely impact - some impact on our credit quality to an extent, right. We're not seeing it. We don't predict it. It's really just saying what are the things we're paying attention to and if we were to see it, we would certainly comment on it in future calls. Marc over to you.

[Marc Cadieux:]

I think you captured it in your opening remarks as well in terms of what would potentially cause investor sentiment this hour. It really is not seeing exits at those valuations in the venture like returns. But as Greg stated, there's no imminent signs that that is likely to happen and so. For the moment, the outlook is what it is.

[Brett Rabatin:]

Okay. Appreciate the color there. And then I've seen on Twitter, Greg you make some comments about biopharma and some other industries. Is there a group in 2018 that you expect might lead to growth outside of TCP on the balance sheet in terms of loan portfolio?

[Gregory Becker:]

Well, I don't know what tweets you saw, but I don't tweet, so it wouldn't have…

[Brett Rabatin:]

Through an email, I'm sorry.

[Gregory Becker:]

Okay. You look and you say, my comments about higher valuations is pretty broad-based, almost any industry that you look outwards biopharma or certain software i.e. et cetera. There is going to be some of the higher profile companies in those industries that are at higher valuations, again priced for perfection. So my comments are, I would say pretty broad-based. We don't expect any anything to happen that's not what our outlook is predicting, but certainly the higher profile companies are getting healthy valuations.

[Brett Rabatin:]

No, I'm sorry I didn't mean in terms of credit as it relate to that. I just meant in terms of the growth in the portfolio outside of the TCP.

[Gregory Becker:]

I heard your comment. So we do expect actually in life sciences, technology, we expect more broad base growth this year than we've had in the last few years, although as we've certainly said if there is upside, it certainly is more than likely to come from private equity services. Now the only, again the only caution I would have is, if you saw a massive amount of M&A happen, if you did see equity grow at even faster pace, that could be create some headwinds. But it was nice to see in the fourth quarter, some tech banking growth. We think that is partially the market, but clearly part of it. How we're approaching the market and our teams, which is why we are pretty optimistic about 2018.

[Marc Cadieux:]

Correct - the only other thing I would put on or add that considers the private bank, again we've been experiencing quite healthy growth over the last couple of years. So you'll definitely see some growth like that in 2018.

[Brett Rabatin:]

Okay, great. Appreciate the color.

[Operator:]

From Stephens, we have Tyler Stafford. Please go ahead.

[Tyler Stafford:]

Hey, good afternoon guys.

[Gregory Becker:]

Hi, Tyler.

[Tyler Stafford:]

Hey, just one last one for me, I'm just trying to I guess better triangulate to the NII guide, with the loan and the deposit outlook and then the [3.35 to 3.45] margin. Can you help me with the size of the securities portfolio that's I guess more or less embedded in that guide? Does that assume securities balances down throughout the year?

[Daniel Beck:]

So generally speaking, it assumes more of a flat level of the investment securities, but that's to some degree tied to the overall amount of deposit and liquidity that we have.

[Tyler Stafford:]

Okay, so roughly security balance that should be flat?

[Daniel Beck:]

That's roughly.

[Tyler Stafford:]

Okay.

[Michael Descheneaux:]

I mean you can kind of through it when you see the outlets and other words if you took that deposit growth outlook of mid single-digits right apply that to the deposit balance then compare that to the outlook for a loans that mid-teens to the balance we had, you can kind of see there within the vicinity there ballpark each other. So that would imply that investment security is not going to move that significantly right one way or the other.

[Tyler Stafford:]

Yes, guess that's where I was going at a kind of first pass as I walked through it to hit that lower NII guide, it was kind of implying and security balances declining throughout the year, but I'll go back to that. Thanks guys.

[Operator:]

At this point, we have no further questions. We'll now turn it back to CEO, Greg Becker for closing remarks.

[Gregory Becker:]

Great, I just want to thank everyone for joining us today. We're closing at a great year and looking forward to continued growth and expansion in 2018. It's great, it's been a very long time to have some nice tailwinds, always feels like when these calls we're talking about headwinds and having three nice tailwinds with taxes and rates and hopefully more regulatory reforms going on. That's great and you couple that with the performance that our outlook clearly that's what gives us confidence in 2018. So I just want to thank all our amazing clients for their support in us as they do each call every - just we do have the best clients without question. I want to thank all our employees for doing such a great job of taking care of our clients, bring their best every day and thank everyone for joining us in the call. Have a great night.

[Operator:]

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