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Edited Transcript of SIVB earnings conference call or presentation 25-Apr-19 10:00pm GMT

Q1 2019 SVB Financial Group Earnings Call

SANTA CLARA Apr 29, 2019 (Thomson StreetEvents) -- Edited Transcript of SVB Financial Group earnings conference call or presentation Thursday, April 25, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel J. Beck

SVB Financial Group - CFO

* Gregory W. Becker

SVB Financial Group - President, CEO & Director

* Meghan O'Leary

SVB Financial Group - Head of IR

* Michael R. Descheneaux

SVB Financial Group - President of Silicon Valley Bank

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Brocker Clinton Vandervliet

UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap

* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* David John Chiaverini

Wedbush Securities Inc., Research Division - Senior Analyst

* David Joseph Long

Raymond James & Associates, Inc., Research Division - Senior Analyst

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jared David Wesley Shaw

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Kenneth Allen Zerbe

Morgan Stanley, Research Division - Executive Director

* Steven A. Alexopoulos

JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks

* Tyler Stafford

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Welcome to the SVB Financial Group Q1 2019 Earnings Call. My name is Erin, and I will be your operator for today's call.

(Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Meghan O'Leary. Ms. O'Leary, you may begin.

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Meghan O'Leary, SVB Financial Group - Head of IR [2]

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Thank you, Erin, 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 first quarter 2019 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.

I'd also like to mention that beginning in July, we intend to change the format of our earnings calls. Rather than reading our prepared remarks and then conducting Q&A, we will issue a short document with our commentary on the quarter in conjunction with the issuance of our earnings release prior to our call. We ask that you review the document before the call begins as we plan to start the Q&A immediately. We hope this will make the timing of our call a little more manageable for you, given that it occurs late in the day during what we know is a long couple of weeks for most of you.

And now I'll turn the call over to Greg Becker.

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [3]

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Thank you, Meghan, and thanks, everyone, for joining us today. We had an excellent first quarter of 2019, continuing some of the key trends we saw in 2018: a strong venture capital and private equity environment driving substantial client liquidity and continued strength in our core business, plus the added benefit of a positive shift in momentum in the public markets.

We delivered earnings per share of $5.44 and net income of $289 million. These results reflect healthy loan and deposit growth, continued stable credit quality, robust core fee income and strong gains from warrants and VC-related investments. While the success of our interest-bearing deposit initiatives put pressure on net interest income during the quarter, our liquidity and client liquidity remain exceptionally strong. We continue to perform well across the business and are seeing solid momentum in both client activity and our pipeline.

Highlights for the first quarter included: annualized growth of 14% in average loans; 9% in average total client funds, including healthy growth in interest-bearing deposits; 20% core fee income growth, excluding $64 million of revenue related to SVB Leerink; and as Dan will talk about in a minute, we are raising our core fee income outlook for the full year; we also saw notable higher gains from VC-related investments and warrants of $50 million, fueled by strong investment and exit activity; and finally, a return on equity of 22%.

Our results speak to the continued health of our clients and the broader innovation industry, and the most recent investment in fundraising numbers suggest that 2019 is starting off on a strong footing. Venture capital investment maintained good momentum in the first quarter of 2019 with $32.6 billion invested, the second best quarter in a decade following a record 2018. While VC fundraising slowed somewhat in the first quarter, it is expected to be strong in 2019 given the number of VC firms that are currently raising $1 billion-plus funds and the expectation that more will follow suit, resulting in a lot of money looking for investment.

Exit markets also showed healthy momentum, although Q1 IPOs were off to a slow start due to the government shutdown. But the IPO pipeline has been filling up and a large number of unicorns that have IPO-ed or are preparing to go public is expected to create significant liquidity or limited partners to invest in coming years.

Our 10th annual Startup Outlook, which we released in February, underscores the positive trends we're seeing in the markets. The majority of the nearly 1,400 startup founders and executives we surveyed in the U.S., the U.K., China and Canada told us they expected even better conditions this year than last despite more pronounced geopolitical uncertainty and the ongoing challenge of finding and retaining top talent.

At SVB, we remain focused on execution, in particular on our investments to scale our business in support of our continued growth. We continue to make progress on the -- on our investments in the 5 key areas we've discussed before: creating a richer client experience, including a robust digital platform; improving employee enablement through tools, systems and mobility; enhancing our risk management systems and processes to support our global growth; propelling business transformation through investment in process and systems; and driving growth across the business.

One significant investment was our recent purchase of Leerink Partners, now SVB Leerink, which closed in early first quarter. We believe SVB Leerink, a leading investment bank in the health care space, will help deepen our health care client relationships by expanding the capabilities and capital options we can offer them throughout their life cycles. Our cross-team collaboration with SVB Leerink is off to a strong start.

Some of the highlights of the quarter included: SVB Leerink's 8th Annual Global Healthcare Conference, which brought together 1,300 attendees from public companies, institutional investors and industry experts to examine trends shaping the future of health care; and the inaugural SVB Leerink China summit, a collaboration between SVB Leerink, Silicon Valley Bank and our joint venture in China. Both of these events resulted in many new connections and referrals. While we're still in the early stages, we're excited about the momentum we are seeing across our commercial banking and investment banking teams.

Our commercial banking platform continues to do well, and our investments there are contributing to strong growth and a high pace of activity over time. Commercial bank loan balances have grown by 18% year-over-year with the particularly strong performances by private equity with 28% growth and life sciences with 30% growth. As you know, growth in commercial bank client funds has been exceptional, with total client funds increasing by 24% year-over-year. Technology and life science client funds have grown at an even faster pace due to the strong fundraising and exit environment, plucking 28% year-over-year growth and surpassing the $100 billion mark in the first quarter. And of course, core fee income has been strong across commercial bank platform with 34% growth year-over-year; that's without fees from SVB Leerink.

On the international front, we continue to invest in order to drive expansion and growth. Earlier this month, we celebrated the opening of our Canada branch in Toronto. Moving forward, the team will be focused on meeting the needs of Canada's growing population of innovation economy entrepreneurs and investors and leading our growth there.

Part of our investment in our business is ensuring that we continue to grow and innovate alongside our clients. This involves increasing our focus and resources on key areas of business, diversifying our services, bolstering our capabilities and aligning our teams to better serve our clients at every stage of their growth. To that end, during the quarter and as recently as this week, we announced a number of important organizational changes.

We appointed Phil Cox as our Chief Operations Officer, replacing Mike Dreyer, who retired on April 1. Phil led the launch of our U.K. branch 6 years ago and has been instrumental in establishing SVB's leadership in the U.K., Europe and Israel. His experience in global operations and management and in meeting the challenges of SVB's rapid growth in Europe makes him an ideal leader to support this next phase of our growth across the business.

We named Erin Platts, a 14-year SVB veteran, to succeed Phil as Head of EMEA and President of our U.K. branch and oversee our continued expansion in the region. Erin was most recently Head of Relationship Banking in Europe and brings a deep understanding of our clients and their needs through her leadership of our EMEA operations.

We also appointed John China, SVB's former Head of Technology Banking, as President of SVB Capital. John will lead the group which has $4.5 billion under management in this next phase of growth and transformation. As part of his role, John will continue to be responsible for the business ecosystem that SVB Capital is part of, including our early-stage practice.

Finally, we named Dave Sabow Head of Technology Banking in addition to Life Sciences and Healthcare Banking. Bringing these businesses together under Dave, who has led our life science and health care practice for the last 5 years, will allow them to share best practices more effectively, leverage the networks and better collaborate. We believe this move will enable us to move faster, remain even more competitive in a rapidly evolving market.

These developments, our positive results, the health of our clients in the markets and our continued strong execution on our priorities and goals, all of these things make me optimistic about the current environment and our future. The global macro environment and the current rate outlook remain challenges, and competition continues to intensify not just from traditional sources but from new entrants, raising the cost of winning and keeping clients.

The competition and rates and market cycles are all part of participating in the most vibrant segment of the economy. Competition also forces you to raise your game, and that's what we'll continue to do. And while there are many factors we can't control, we have demonstrated our ability to execute and grow over the long term under a variety of market conditions.

Our long-term success is partly due to our focus on innovation and innovators, our approaches to helping our clients to succeed and our long experience in these markets. But it's especially due to our unique culture and exceptional employees who view our clients' success as the best measure of their own success. These elements are at the heart of our business, and they are very difficult to recreate.

We believe our focused differentiation and strategy will enable us to continue to grow in 2019 and over the long term. We feel good about our 2019 outlook and believe our strong financial and capital position will give us flexibility to adapt to changing market conditions as necessary.

Thank you, and now I'll turn the call over to our CFO, Dan Beck.

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Daniel J. Beck, SVB Financial Group - CFO [4]

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Thank you, Greg, and good afternoon, everyone. We kicked off 2019 with a strong performance featuring continued profitable growth across all of our segments against the backdrop of positive market conditions. Our growth story remains strong and our deposit initiatives are clearly succeeding. Although we lowered our net interest income outlook based on the impact of lower rate expectations on our securities portfolio and higher deposit cost, we also raised our fee income outlook and lowered our expense outlook. The net is that our expectations for 2019 overall financial performance have not changed.

Now I'd like to talk about the quarter's results relative to Q4. The quarter included the following highlights: first, continued strong loan growth; second, good client liquidity with growth in deposits and off-balance sheet client funds; third, continued stable credit quality despite higher nonperforming loans; fourth, strong gains on warrants and investment securities; fifth, outstanding core fee income mostly from client investment fees and lending-related fees as well as positive results from our recent acquisition of SVB Leerink, which contributed approximately $0.11 to earnings per share and was in line with our plans despite the government shutdown impacting the IPO market; and finally, an increase in expenses related to SVB Leerink, also in line with our expectations.

Now we'll get into the details, starting with the balance sheet. Average loans increased by $0.9 billion or 3.3% to $28.4 billion, driven primarily by continued strong momentum in private equity capital call lines as well as growth in life sciences and our private bank. New lending commitments to our technology clients remained strong during the quarter, although the robust funding and liquidity environment remained a headwind to technology banking loan growth.

Average total client funds grew by $3 billion or 2.2% to $137.1 billion, reflecting continued strong off-balance sheet fund growth as well as on-balance sheet deposit growth. This growth in client funds overall was due to the healthy funding environment and exit activity Greg talked about as well as our continued success at client acquisition.

Our on-balance sheet growth was driven by interest-bearing deposits and was a result of our initiatives to attract deposits on balance sheet as well as continuing trends of larger fundraising rounds and stronger client demand for interest-bearing deposit accounts for their excess cash. Some of that growth momentum was offset by continued distributions from our private equity clients and slower growth in Asia.

Average off-balance sheet client investment funds increased by $2.4 billion or 2.8% to $87.4 billion. Average deposits increased by $0.6 billion or 1.3% to $49.7 billion. On a period end basis, deposits increased by $3 billion or 6.1% to $52.3 billion.

The strength of our interest-bearing deposit growth, coupled with lower average noninterest-bearing deposits, drove an increase in our total cost of deposits this quarter from 9 basis points to 23 basis points. Despite this increase, our total cost of deposits remains at an industry-leading low level. We expect our deposit cost to remain low compared to peers and believe our deposit strategy will enable us to drive continued strong, profitable growth with organic liquidity.

Turning to the income statement. Net interest income decreased by $1.6 million to $516 million, primarily due to 2 fewer days in the first quarter compared to the fourth quarter. The shorter quarter meant lower net interest income of approximately $9 million. In the first quarter, we benefited from the impact of higher rates on our loan and investment securities portfolio as well as from strong loan growth and higher interest-earning Federal Reserve cash balances. These benefits were offset by higher deposit cost as well as by lower average balances in our securities portfolio due to portfolio cash flows and the sale of $1.2 billion of available-for-sale securities to fund loan growth and repay short-term borrowings.

Net interest margin increased by 12 basis points to 3.81%. This reflects the increase in loan yields and the repayment of our short-term borrowings, partially offset by higher deposit costs.

Now let's move on to credit quality, which remained stable despite higher nonperforming loans. Our provision for credit losses was $29 million compared to an exceptionally low $14 million in the fourth quarter. This amount primarily reflects new specific reserves of $24 million, mostly attributable to 2 new nonperforming loans in our life science and health care portfolio, which we do not believe are indicative of any trend. We also had additional reserves for period end loan growth offset partially by lower reserves for our performing loan portfolio. Since the end of the first quarter, our nonperforming loan balances have decreased by $16.7 million due to the repayment of one large nonperforming loan, which also resulted in a recovery of $4.4 million in principal and $1.4 million of interest. This repayment and recovery will show up in our second quarter results.

Net charge-offs were low at $7.6 million or 11 basis points compared to $13.9 million or 20 basis points in the fourth quarter.

Now I'll turn to noninterest income. GAAP noninterest income was $280 million compared to $187 million in the prior quarter. This increase reflects strong gains on investment securities and warrants, our first quarter of investment banking revenue and commission from SVB Leerink, and healthy growth in our core fee income lines.

Net gains on investment securities net of noncontrolling interests were $26 million, driven primarily by $15 million of valuation increases in our venture capital-related fund investments and $10 million of gains from the sale of one investment in our public equity securities portfolio. This also includes $2 million in gains from SVB Leerink investments.

Equity warrant gains were strong at $21 million, driven primarily by healthy valuation updates. I want to remind you 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, excluding SVB Leerink, increased by 5.6% to $154 million. The increase to our core fee income came primarily from strong performance in lending-related fees and credit card fees as well as higher client investment fees from higher rates and balances. SVB Leerink core fee income totaled $64 million. That excludes approximately $4 million in aggregate investment securities gains and other income. That was composed of $50 million in investment banking revenues and $14 million in commissions. The $50 million in investment banking revenues included $36 million from public equity underwriting fees and $12 million from M&A transactions. These results were in line with our expectations and in spite of the shutdown of the IPO market in the first half of the quarter.

Now turning to expenses. Noninterest expense was $366 million compared to $308 million in the fourth quarter. The increase reflects $61 million of additional expenses from SVB Leerink. Noninterest expense, excluding the cost associated with SVB Leerink, were slightly down by less than 1%, primarily due to lower professional service fees.

Moving to capital. Our capital ratios remained strong. Risk-based capital ratios at the holding company decreased by approximately 64 basis points during the quarter due to the acquisition of SVB Leerink. Our bank 1 -- Tier 1 leverage ratio increased by 28 basis points to 8.38%, and we will continue to feel good about the flexibility provided by our strong capital and liquidity positions.

Turning to our stock repurchase program. We repurchased 116 million of our common stock in the first quarter and have used $263 million of cash on hand since the beginning of the program to repurchase approximately 1.2 million shares of common stock at an average price of $219 per share.

Now I'd like to discuss the details of our 2019 outlook which remains positive overall, as I mentioned at the start, with a few upside and downward changes that result in no net change to our overall financial expectations for 2019. We are lowering our outlook for full year net interest income growth from the high teens to the midteens. This change reflects 2 factors: first is our expectation of lower market rates for investment securities purchases given the flatter yield curve; second, we expect higher deposit costs driven in part by lower noninterest-bearing deposit balances coming out of Q1.

In addition, as a part of our deposit strategy, we are adding more interest-bearing deposit products in order to meet our clients' needs. That strategy is succeeding. We are forecasting continued deposit growth in both noninterest and interest-bearing deposits for the rest of the year. However, as a result of these factors, we expect the majority of our full year average deposit growth will come from interest-bearing accounts.

Also related to these trends, we are adjusting our net interest margin outlook down by 10 basis points to a range between 3.70% and 3.80%. On the plus side, we are increasing our outlook for core fee income growth from the high teens to the low 20s excluding SVB Leerink. With SVB Leerink, we expect core fee income growth in the low 70% range. This increase is driven primarily by stronger off-balance sheet client fund balances and strong first quarter trends across other core fee categories.

Finally, in light of lower compensation-related costs associated with lower net interest income expectation and lower expected expenses from professional services, we are decreasing our outlook for noninterest expense growth from the midteens to the low teens excluding SVB Leerink.

In closing, we are pleased with our strong performance in the first quarter. And while there is impact from lower rates on our investment securities portfolio purchase expectations and higher deposit costs, our overall outlook and opportunities are still very much intact. We continue to deliver strong ROE and profitability, and we'll do what we need to do to retain clients and make the right decisions for our long-term growth. Our clients and their markets continue to thrive, and we expect solid growth and stable credit in the year ahead even as we position ourselves for the potential lower rates in the near future.

Our capital and liquidity remain strong and give us ample flexibility to manage our growth. And as you can see, our flexibility on expenses to adapt to changing conditions, if necessary, is real. Overall, we believe our outlook remains positive, and we remain focused on execution on our investment and growth plans.

Thank you. And now I'll ask the operator to open the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Ken Zerbe with Morgan Stanley.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [2]

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I want to start off in terms of looking at the deposit flows, specifically sort of the -- I guess the relation between noninterest-bearing and the interest-bearing. Obviously, you're having very good success bringing in customers going into the interest-bearing side. But is that coming at the expense of noninterest-bearing outflows? Or are they just -- or are we talking about 2 very different customer sets?

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [3]

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So Ken, this is Greg. I'll start and then Dan, I'm sure, will add on to it. So I think you said this right, which I think is very important to note. We are fortunate that we have an incredible amount of client inflows for client funds, right? So on an average basis, we're up $3 billion. If you look at it on a period end to period end basis, we're up $5.2 billion. So there is good momentum with our clients, and we're able to bring that client flow in, right? So as we saw this cash -- and a lot of it is becoming more concentrated. So if you look at the number of financings out there, there are fewer than there have been over the years, so bigger dollar amounts. And so when those dollars come in, they want to get excess cash or a yield in the excess cash. And the choice is, for us, should we direct that off balance sheet or should we direct more of it on balance sheet. And obviously, that means you've got to pay a certain yield which is going to be comparable to what they can get off balance sheet. And so we made that choice during the quarter that we wanted to drive more of it onto the balance sheet. And for that, we have to have a more competitive yield for that. So that's kind of the background. But I think it starts with the fact that there is an incredible amount of client funds flow that we have coming into the organization. So, Dan?

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Daniel J. Beck, SVB Financial Group - CFO [4]

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Yes, and Ken, I'll add to that. So we're paying a lot of attention to the inflows and what's happening from an outflow perspective on noninterest-bearing. And what we found in the quarter were distributions from our private equity fund as well as some slower growth in our Asia business related to the China trade tensions and our Europe business we think somewhat related to Brexit. So we're paying close attention to that. What we're seeing coming into interest-bearing is more related to new flows from primarily our technology business and other sectors. So there's a distinction between what's flowing out of noninterest-bearing and coming into interest-bearing.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [5]

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Got you. Okay. So it sounds like that they're not -- you're not necessarily cannibalizing your current noninterest-bearing customers. They're just -- they are 2 different groups of people. Am I understanding that right?

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [6]

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Right. That's correct. That's correct.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [7]

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Okay. Perfect. And then in terms of Leerink, the $50 million of fees and obviously the $15 million of commissions, was that negatively affected at all by the government shutdown? Or is that a fairly good run rate to think about over the next few quarters?

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [8]

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So this is Greg, and again Dan may want to add onto it. So they ended up doing, I think, an incredible job considering the government shutdown. And so I would say they were kind of on track with what they expected to deliver in the first quarter, which I would say we are a little surprised by how strong it came out given the government shutdown. So the team -- there's a huge amount of credit for just jumping on it when the market did open back up. And they had some great listings during the first quarter. The first quarter does tend to be a higher -- a better quarter. And so I think I would just go back to the guidance that Dan gave as far as the overall core fee income or fee income level that obviously SVB Leerink is baked into.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [9]

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Okay. That helps. And then just if I can, just one last question. Dan, I think you did mention, talking about the general partner, sort of paying out some of the money to the LPs, which we expected going into the first quarter. Do you think we're close to being done with that? Or do you still see potential for that to continue into second quarter?

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Michael R. Descheneaux, SVB Financial Group - President of Silicon Valley Bank [10]

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Ken, this is Mike Descheneaux. It looks like things are certainly strengthening when we look at towards the end of March. Pretty much across the board we're starting to see strength in life sciences. As you know, when the government shut down, the life sciences world was impacted. PS seems to be coming back strong and nicely as well, too, even in the U.K. as well, too. So I think definitely, the economy is looking really good, feeling pretty positive about the outlook going forward. And you see that kind of in the earnings that people are releasing on the Street here as well. So definitely, the outlook looks good.

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Operator [11]

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And your next question comes from Ebrahim Poonawala from Bank of America.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [12]

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So I just wanted to follow up on loan and deposits. So I think, Dan, if I recall correctly, last quarter you talked about total cost of deposit being 11 to 15 basis points was the expectation for the year. Clearly, we've seen a big jump in the interest-bearing deposit cost. What's the updated expectations? And I heard what you said about average deposit growth being driven by interest-bearing. Do you still expect on a period end basis deposit growth to be 50-50, 75-25, interest-bearing versus noninterest-bearing?

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Daniel J. Beck, SVB Financial Group - CFO [13]

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So I'll just tackle it. If we look at overall average growth of deposits based on how we started the year, my expectation is that the overall average deposits are going to be weighted much more heavily towards interest-bearing. So putting a percentage on it, I would say the majority on average would be interest-bearing. At the same point, we will -- we have expectations that we're going to be growing our noninterest-bearing deposits. And as Mike just mentioned, we're seeing some positive trends there already as we look at what's happening here in the second quarter. So we will see growth in noninterest-bearing. It's really just a function of what happened in the first quarter that's driving more of this expectation towards interest-bearing.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [14]

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And the total cost of deposits, any thoughts?

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Daniel J. Beck, SVB Financial Group - CFO [15]

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The total cost of deposits, if we think about it -- and obviously, this is subject to variability based on what happens with interest-bearing deposit flows, but we think it would be approximately 30 basis points. So you won't see as big of a pickup as what you saw between Q4 and Q1.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [16]

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That's helpful. And just shifting to the asset side, so 92% of the loan book is variable rate. What's the expectation as we think about earning asset yields? Now there's a fair amount of cash buildup as well. If you can just talk in terms of what we should expect in terms of loan yields as well as just the size of the balance sheet.

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Daniel J. Beck, SVB Financial Group - CFO [17]

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Yes. So going forward, if we take a look at loan yields, the expectation for the remainder of the year obviously without additional rate hikes is that we won't see much more upward progression on overall yields. We are paying attention to the competitive environment and might see some small amounts of margin compression there on the loan side between here and the rest of the year. When we think about the treasury portfolio, and I made this remark in my comments, the yield environment has obviously changed a lot over the last 120 days and even more significantly, even as much in the last 30 days with a 30 basis point decline in the 5-year over that time frame. So we'll have ample dollars to invest. Those dollars will be invested at a lower rate, which is driving part of the reduction on our net interest income expectations.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [18]

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Great. But the cash balances, which is $4.6 billion, don't you expect them to be at similar levels as the percentage of earning assets go up, down?

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Daniel J. Beck, SVB Financial Group - CFO [19]

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Yes. We expect that those will fluctuate anywhere between $3 billion to $5 billion throughout the year.

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Operator [20]

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And your next question comes from Jared Shaw with Wells Fargo.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [21]

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I guess sticking with the growth in the on-balance sheet deposits, in this rate environment, is that trade right now from off-balance sheet to on-balance sheet net positive to EPS when you look at the alternative versus the fee income stream for that? Or is that more of a near-term investment to increase the balance sheet funding for the longer term?

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Daniel J. Beck, SVB Financial Group - CFO [22]

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Yes, Jared, it's Dan. So it is accretive from an EPS perspective, so that much is true, albeit obviously it's a mix of what we can do from a lending and an investment securities perspective. Even if we put in an investment security, it is accretive but obviously at lower margins. When we think about what we're doing on the deposit side, it makes sense for us to continue to offer these types of rates to our clients because the all-in relationship is obviously very important to us. And if we look at all the incremental and ancillary benefits from additional fee income and things along those lines, it not only makes sense EPS-wise to continue by offering these deposit rates but we get the incremental benefit of fees as well.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [23]

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Okay. And then shifting over to the tech side of it, do you get any sense of a feeling of urgency on the part of the sponsors, the VC, the PE community to push for exits given the strength of the market here? Or are they comfortable with keeping more of a stable investment horizon for their invested companies?

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [24]

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This is Greg. I'll start, and Mike may want to add. I think they're looking at it and saying if the markets open, it's going to be -- they are going to be opportunistic at looking it. I certainly don't feel that there's any sense of heightened urgency or anything that like that that's out there. I think they're always opportunistic, and I think they continue to be opportunistic. The market, as you can see with some of the IPOs, not all, the markets were receptive to it. And we got more coming. So I think they're looking at that as a good time. And we'll see how long it stays open. As you know, the market tends to be a little bit fickle. But right now, it's open and looking healthy.

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Michael R. Descheneaux, SVB Financial Group - President of Silicon Valley Bank [25]

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The only thing I would add is that everybody views -- as Greg is saying, it's a healthy market and 2019 clearly can be a really, really strong year for that. So I don't think there's absolutely any sense of urgency right now. But as we all know, no doubt they'd be happy if they can get out sooner than later. No doubt. That's just a natural reaction.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [26]

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And then are you seeing them have an appetite to put that money back into the system? Earlier -- I guess last quarter, you had said that from talking with the sponsors, they were very excited about the additional investment opportunity. So is that still the case, that money that they are getting back from the exits are going to be reinvested back into the system?

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [27]

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Yes. I think venture capitalists, for sure, are looking at this and saying they still feel it's a good time to be investing. We just have -- we have a bunch of data points out in the market as we engage with venture capitalists. And they are very active. We hear that from a standpoint of what they're telling us. But obviously, the numbers that I told you, $32.6 billion invested in the first quarter, validates that. But the numbers validate it and what they're saying validates it. I think they're feeling good. A couple of stories that I heard directly from venture capitalists is that they're surprised at how many, even in this environment, valuations are up. There are some really amazing high-quality companies out there still and they're looking to put more money behind it. So I think it's still a very, very good market.

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Michael R. Descheneaux, SVB Financial Group - President of Silicon Valley Bank [28]

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Absolutely. And when you also think about the so-called dry powder both from PE and VC are extraordinarily high level. So there's plenty of liquidity, plenty of cash for them to go invest and that's what they get paid to do. So they're definitely looking to deploy it into high-quality companies.

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [29]

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Now to add on to it, do I believe that private equity firms are looking and saying, boy, I would really like to see a downturn so I could pay less? Yes, we're hearing that too. They're ready with all this dry powder that if the market does turn down, I think they're going to look at it as a buying opportunity. So I think what's interesting about our portfolio today versus what it would have been many years ago when it was all venture capital is that it was so tied to the ups and the downs of the venture capital. But right now, because we're more balanced, even in a downturn, I think you're going to see a lot of activity in the PE side.

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Operator [30]

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And your next question comes from Steven Alexopoulos with JPMorgan.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [31]

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I wanted to start. So given the yield curve and the lower reinvestment opportunity on securities, which Dan called out, I would have thought that would have reduced your appetite to grow the on-balance sheet deposits. When I look at rates, money market is up pretty sharply. So are sweeps. So what drove -- it's not clear to me what drove the strategic shift here to emphasize that, given the reinvestment rates seem to be down quite a bit.

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [32]

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This is Greg. Clearly, we would have been better off if the -- what we can reinvest that money at would have been what it was at 120 days ago. We are working hard to not think so short term and think a little bit longer term. And so the view was as this money is coming in, it was -- it could go off balance sheet and we can let it go off balance sheet. But the question was, if it's accretive to bring it on balance sheet, what it would take it to bring it on the balance sheet. And that's the decision we made. And as you know from watching us closely for many, many years, when we focus on something, we can be really successful at it. We were really successful at it at the end of the first quarter.

And so we're going to take a look at that and see what does the product offering need to be to make sure we have as many options as possible. And we're going to watch that to see if it should be more of a balance, off balance sheet. So if we're not getting a decent return, we're going to direct more of it off balance sheet. What we proved in this kind of quarter is that we can drive it onto the balance sheet. And that, I think, was a great lesson from our standpoint. So that's how we think about it, longer term and really how much do we want to keep on the balance sheet.

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Daniel J. Beck, SVB Financial Group - CFO [33]

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Yes. Steve, the only thing I would add to it is if you look at those decisions on a marginal basis, yes, it's much more thin from a spread perspective. But all in, the total cost of funds remains incredibly low. So we can continue to drive liquidity at a very low cost. As we start to grow that liquidity in and above loan balances, that's when we'll start to do some of the things that Greg talked about, about optimization and how to drive and make decisions to drive on or off balance sheet. But this is just part of the evolution of us with the power of the deposit franchise for us to be able to optimize and to drive it in the right way, and we've shown good progress.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [34]

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And are there rates where they need to be now to be competitive with the off balance sheet? Or do you see a need to further increase those?

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Daniel J. Beck, SVB Financial Group - CFO [35]

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So Steve, we're pretty close. I think that there may be just a couple of other small product changes that drive some incremental cost. So I'd expect that over the next quarter or maybe 2, they may see some small increases related to additional rate changes. But other than that, we're there.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [36]

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Okay. And then just so we can all understand the seasonal nature of the first quarter better, can you quantify what the private equity distributions were this quarter?

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Daniel J. Beck, SVB Financial Group - CFO [37]

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In total, it was roughly -- if we look at private equity balances, it was in kind of the $1 billion-plus range at least for what we're seeing in our data. It's hard to get super specific but it's at least over $1 billion.

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Operator [38]

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Your next question comes from Brett Rabatin with Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [39]

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Wanted to go back to just -- you mentioned Leerink did really well despite the IPO market being shut down, the government and all that. I wanted to make sure I understood sort of the guidance around -- the updated guidance around fee income and just your expectations and what you're building into that guidance in terms of how you're thinking about some of the bigger companies, the IPO market and just kind of what you're expecting versus what might be kind of cream on the top of what your normal business is.

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Daniel J. Beck, SVB Financial Group - CFO [40]

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Yes. So as we look at SVB Leerink, at this point on a full year basis, we left their guidance unchanged. They did have a good strong first quarter, as Greg said, in the backdrop of the market being shut for a part of it. But that's also a seasonal business. The first 2 quarters are generally their best and then it tails off a bit. So we felt it made sense to leave that where it was. Where you're seeing the improvement in core fees is really in the banking business, going back to what we're seeing with card transactions, FX. And if you look at where we are this quarter, it's actually a lower number of days than in the fourth quarter. If you look at that on an apples-to-apples basis, we're doing better in growing that business. So core fees and deepening with our clients is a big driver there.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [41]

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Okay. I appreciate the color there. And then just thinking about the margin guidance. Obviously, your core is flat and you got the dynamic that you have with funding. Just thinking about the guidance as we progress through the year. I mean, it would seem like you might exit 2019 below the guidance -- the low end of the guidance range. Any thoughts on that and just kind of how you're thinking about relative margins as we think about -- obviously, 2020 is far from now but just with the yield curve where it is?

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Daniel J. Beck, SVB Financial Group - CFO [42]

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Yes. So as we look at the rest of 2019 and heading into the second quarter with the substantial flow of funds in Q4 as well as Q1 in the interest-bearing, that's why we're seeing the big pickup in cost on interest-bearing deposits in the first quarter. So we expect that to slow down materially from the second quarter on. So you'll actually see the second quarter be much lower from a margin perspective, let's call it in the low 2.70% range. And as the securities portfolio continues to reprice, even though yields are down, we're repricing an incremental yield in and above that. That's going to help drive margin forward and slightly higher throughout the rest of the year.

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Operator [43]

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And your next question comes from Chris McGratty with KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [44]

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Dan, maybe a pivot to capital. At the current rate, you're going to be kind of complete with the buyback in, call it, 6 months. Can we talk about -- or can you elaborate on what your thoughts might be beyond that in terms of additional buybacks or use of capital?

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Daniel J. Beck, SVB Financial Group - CFO [45]

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Yes. So we're obviously in a good position capital-wise. And based on market conditions, we'll continue to look at the buyback. On a go-forward basis, as we head into next year, we'll have to see how the economy firms up first. I think that will be our first priority, continuing to look at growth opportunities and how we can deploy that. And then as we've shown this year, to the extent it makes sense for us to look at capital actions, buyback or dividend, these are things that we talk about, and we'll see where we end up at the end of this year.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [46]

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Okay. Great. And then maybe just on the expenses. I think at the Investor Day, I'm looking at my notes, you talked about 2020 expenses, I think, in the high single digits. I guess number one, is that still kind of your base case? And I assume that included Leerink. Any color would be great.

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Daniel J. Beck, SVB Financial Group - CFO [47]

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So high single digits, yes, is the plan for at least the target for 2020. As it relates to Leerink, that was somewhat of a later development. And their expenses are driven almost wholly by what's happening from a market activity perspective. So I think I'd look at the bank operations as where we're targeting that piece.

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Operator [48]

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And your next question comes from Aaron Deer with Sandler O'Neill.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [49]

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Sticking with the expense subject. Through the end of last year, I guess, and the early guidance for this year suggested a higher level of expenses. You guys were undertaking a lot of these investment activities. Now you brought down the expense guide. What's changed that's bringing that down?

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Daniel J. Beck, SVB Financial Group - CFO [50]

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Yes. So first, it's a pretty small change in the grand scheme of our expenses. Our #1 priority continues to invest, especially as we're facing a flat rate environment and some would even say a downward rate environment. For us to be able to continue our growth, we absolutely need to continue to invest. So what we're doing here isn't walking away from investment. Some of this is just a natural outcome of the lower rate environment, and we also had some opportunities on professional services spend that just made sense for us to push out. But again, #1 priority for us is to invest for growth as we drive forward.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [51]

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Okay. And then going back to the balance sheet discussion, the -- I guess I understand the balance sheet trends we saw and kind of what's going on in the deposit side and the rate environment. But the -- previously through last year when the environment was better, we talked about continuing to leverage capital and the deposits that you have and see that you've reduced the securities book during the quarter. You've got a lot more cash and liquidity on the balance sheet. But would you not be better served to get that invested and -- I mean historically, you guys have been much more focused on net interest income rather than the margin, and by getting that invested, wouldn't that too help serve your goal of reducing asset sensitivity?

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Daniel J. Beck, SVB Financial Group - CFO [52]

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Yes. So we -- a lot of what we're talking about here is just dynamics of what happened during the quarter. The sale is really related to the borrowing position we were at the end of the fourth quarter. Since then, deposits have grown quite nicely. And it gives us the opportunity, as we exited the first quarter with this cash balance, to deploy those funds. I can say that we have been deploying investment securities purchases in the -- at the end of the first quarter and into the second quarter. So you'll see that. But the higher cash balance coming out of the year is really just -- out of the quarter is a function of the strong growth in deposits.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [53]

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Okay. And then just clarity on one of your earlier comments today. Did I hear you correctly to say you expect the margin to be coming down to the 3.70-ish range and then growing through the back half of the year? Did I mishear that?

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Daniel J. Beck, SVB Financial Group - CFO [54]

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That is correct. We think that would be second quarter into that, although 3.70s range and growing out from there.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [55]

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Okay. And that's reflective of that kind of reinvestment then, or partly so anyway?

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Daniel J. Beck, SVB Financial Group - CFO [56]

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Yes.

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Operator [57]

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And our next question comes from Gary Tenner with D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [58]

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Greg, I want to go back to the comment you made earlier that I think was also reflected in the Venture Capital Monitor this quarter. The idea of a lower number but larger funds being raised and that's -- as that continues to happen in the industry, what's your sense of what that means, a, for the health of the industry long term; and b, how it would translate into Silicon Valley's positioning to benefit?

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [59]

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Yes, it's a great question. We were actually having that discussion today. If you -- and we look at PitchBook as the database that we use to kind of track all the information. And you can look at the number of financings that have happened, and they go all the way from seeds up to late-stage private financings. But when they define seed, it actually is more institutional seed rounds, not seed from friends and family and all the other players where money comes from. And so when you look at that data, that's the more -- the bigger seed rounds and beyond, that actually the seed numbers are actually going down, the number of companies. So it's highly concentrated larger rounds.

My belief though -- because we see this in our own portfolio and our market share -- our market share is going up a fair amount, which could be the case, or there is more funding sources out there where money is coming into. And so in our early-stage portfolio, we again, we brought in another 1,100 new clients in, in the early stage. And we really haven't seen much of a change in that activity level. So it implied that there's money coming in from seed areas that are not being captured. So I think that we're going to continue to see a lot of upside. And as we expand our funnel and to look at other places where startups can be brought into the organization, we believe that there's, quite honestly, a lot more upside to come.

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Michael R. Descheneaux, SVB Financial Group - President of Silicon Valley Bank [60]

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I would say it's definitely healthy in Q1, particularly when we look at our category called the emerging technology clients. That was actually the predominance of the growth in our on-balance sheet deposits. So as Greg's describing, it actually is healthy. And again, we view the future prospects as looking good in that area.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [61]

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All right. And then secondly, just on SVB Leerink. I think last quarter, you provided some revenue guidance in dollars of $250 million to $270 million. And that, I think, contemplated sort of a slow first quarter, particularly on the commission and trading side of things. The combined revenue this quarter was right in the middle of that range on an annualized basis. So was the trading side of things stronger than expected too, or more so the investment banking fee side?

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [62]

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Yes, this is Greg. I'll start. I would say that they are on track with what we expected. As Dan said, we haven't changed the guidance for it. We're including it in the overall core -- the core fee income. But the last time we came up, when we closed on SVB Leerink, we gave revenue guidance for the year. And so as Dan said, we haven't changed that. I think what our comment is we believe when the government shutdown occurred that the first quarter would actually be -- end up being a bad quarter. It ended up -- they ended up making up their numbers and they actually hit their numbers despite the government shutdown. So as we said, we view that as a very, very big positive. So net-net, when you net it all out, they're on track despite the government shutdown.

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Operator [63]

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And your next question comes from David Long with Raymond James.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [64]

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The off-balance sheet yield, still moving a bit higher, maybe not to the same extent that we saw in prior quarters. In this newer rate environment, can you still expand what you're earning on the off-balance sheet deposits?

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Michael R. Descheneaux, SVB Financial Group - President of Silicon Valley Bank [65]

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So this is Mike Descheneaux. So you did see a 1 basis point tick-up in Q1. The predominant amount of the growth came in our off-balance sheet sweep account, which the yields on that, the fees on those was a bit north of the 20 basis points. So again, a lot of it just depends on a little bit of the mix and where the volumes are coming from. But again, you definitely see some slight improvement there, no doubt.

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Operator [66]

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And your next question comes from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [67]

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I just wanted to start on the expense guide. I just want to make sure I'm understanding this correctly. So you lowered the expense guidance excluding Leerink to the low teens, but you're maintaining the mid-30s expense guidance including Leerink. So are you actually lowering the expense guidance if total expenses are still expected to grow mid-30s?

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Daniel J. Beck, SVB Financial Group - CFO [68]

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Yes. The way to look at it is obviously with Leerink and the total size of their expenses, it's a much bigger number. So to get a sense of exactly how much we're taking it down, focus on the bank's expense levels. And at the end of the day, when we look at that total range including Leerink, with this change we'd be at the lower end of that bigger number expense range. So there is a change. Look at the bank first. That's what's driving the majority of the change. But the all-in number would be at the lower end of that range.

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Tyler Stafford, Stephens Inc., Research Division - MD [69]

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The lower end of the mid-30s range is what you're saying?

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Daniel J. Beck, SVB Financial Group - CFO [70]

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Yes.

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Tyler Stafford, Stephens Inc., Research Division - MD [71]

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Okay. So then even with -- just coming in at the lower end of that range, there is still no net financial impact from the lower NII guide. Is that right?

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Daniel J. Beck, SVB Financial Group - CFO [72]

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What we're saying is a combination of that plus the positive increase on the core fees and the reduction of the expenses get you largely to net neutral impact.

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Tyler Stafford, Stephens Inc., Research Division - MD [73]

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Okay. All right. And then just going back to one of your earlier comments, Dan, the 30 basis point expectation for deposit cost, is that for the full year? Or is that by the end of 2019?

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Daniel J. Beck, SVB Financial Group - CFO [74]

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That is full year average expectation.

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Operator [75]

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And your next question comes from David Chiaverini with Wedbush.

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David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [76]

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I was wondering, so with the IPO pipeline ramping up, based on what you've seen over the past couple of decades for that matter, do you tend to retain the business of VC-backed companies after they mature and enter the public markets?

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [77]

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Yes, this is Greg. I'll start. I would say if you go back a decade or so ago, the percentage we retained actually was on the lower end. But over the last decade, every year it continues to improve because of our capabilities, what we can do from a balance sheet perspective, what we can do from a syndication capability. If you look at last year, we were -- in the middle market, as far as the number of syndicated deals done, we were #1. And so we did roughly $6 billion of syndicated loans last year. So when you look at that, our capabilities are just very different. So we can scale up with our clients a lot more. So yes, our ability to retain is a lot better than it was.

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Operator [78]

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And your next question comes from Brock Vandervliet with UBS.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [79]

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On the foreign deposits, they were up very strongly. I was just wondering if you could square that with your commentary about some slowing that you saw in Europe and Asia. And going beyond that, could you talk about the rates around those deposits which also stepped up?

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Michael R. Descheneaux, SVB Financial Group - President of Silicon Valley Bank [80]

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This is Mike. On the foreign deposits, I would say from our EMEA division, if you're just talking about on-balance sheet, it was probably up around $300 million and maybe in Asia a little bit up around $300 million or so in terms of the average balance sheet. So there was definitely some strong growth overseas if that's what you're referring to.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [81]

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And in 2 quarters, the rate on those have just gone from really nothing to something pretty material. Is that -- I think it was around 1.40% in this quarter. Is that likely to stabilize? I'm just trying to get a sense of what -- the drivers there since they are fund deposits...

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Michael R. Descheneaux, SVB Financial Group - President of Silicon Valley Bank [82]

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Yes. I think what you're -- maybe you're talking about an apple and a banana here. I think what you're referring to is the sweep deposits in foreign offices which is different than, say, Asia particularly or EMEA and those different things. So it's a little bit different. And so perhaps Dan might want to go and explain the difference if that would be helpful for you.

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Daniel J. Beck, SVB Financial Group - CFO [83]

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Those are just our -- as it says, our sweep deposits out of our foreign offices and different from the deposits that sits directly on the bank's balance sheet.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [84]

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Okay. And why the large step-up in rate in 2 quarters?

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Daniel J. Beck, SVB Financial Group - CFO [85]

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One of the reasons for that is that we were sourcing additional deposits from that population, and there were some changes in rates that we implemented in the fourth quarter. So it was one of the areas of increase in the on-balance sheet deposits.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [86]

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Okay. And just to clarify the NIM guide here, in terms of the step down in Q2, is that mainly driven by funding? Or is that also driven by adding back investment securities and redeploying it at lower rates, or a bit of both?

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Daniel J. Beck, SVB Financial Group - CFO [87]

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It's largely deposits, but there also is some impact of putting some of that investment security money back to work. So it's really a combination of those things but much more largely based on what's happening with deposits.

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Operator [88]

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And there are no more questions at this time. I would like to turn the call over to Greg Becker.

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Gregory W. Becker, SVB Financial Group - President, CEO & Director [89]

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Great. Thank you. Well thanks, everyone, for joining us. Just to kind of sum up, really happy with the performance in the first quarter and with the strength and momentum we're seeing in our business. Again, it was great to see -- continue to see client funds growth at the level that we saw it. Even considering the prospect of a flat to down rate environment, we still see a lot of opportunities for growth and we remain positive on the outlook for 2019.

As always, we want to thank our clients first for their trust and partnership, which we greatly appreciate. We feel incredibly lucky and fortunate to work with them and take their success very seriously. And also incredibly important is our employees. Their dedication to our clients and SVB overall is what makes us a special place to work and a special place to take care of our clients. So with that, I thank all of you, and have a wonderful night. Thanks.

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Operator [90]

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