SVB Financial Group (SIVB) Q4 2018 Earnings Conference Call Transcript

SVB Financial Group (SIVB.Q -1.96%)
Q4 2018 Earnings Conference Call
Jan. 24, 2019 6:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Welcome to the SVB Financial Group Q4 2018 earnings call. My name is Adrienne, and I will be your operator for today's call. [Operator instructions] Please note, this conference is being recorded. I'll now turn the call over to Meghan O'Leary, head of investor relations.

Meghan O'Leary, you may begin.

Meghan OLeary -- Head of Investor Relations

Thank you, Adrienne, and thank you, everyone for joining us today. Our President and CEO Greg Becker, and our CFO Dan Beck, are here to talk about our fourth-quarter and full-year 2018 financial results and will be joined by other members of management for the Q&A. Our current earnings release is available on the Investor Relations section of our website at svb.com. We'll be making forward-looking statements during this call, and actual results may differ materially.

We encourage you to review the disclaimer in our earnings release dealing with forward-looking information, which applies equally to statements made in this call. In addition, some of our discussion may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release. We expect the call, including Q&A, to last approximately an hour.

And with that, I will turn the call over to Greg Becker.

Greg Becker -- Chief Executive Officer

Thank you, Meghan, and thanks, everyone, for joining us today. Our fourth quarter was a strong finish to an outstanding year. For the quarter, we delivered earnings per share of $4.96 and net income of $266 million, driven by healthy loan growth, higher net interest income and interest margin, robust core fee income and stable credit quality. These results also reflect $8.5 million of expenses associated with our acquisition of Leerink, which represents approximately $0.11 of EPS.

For the full-year 2018, we nearly doubled our profitability, with earnings per share of $18.11 and net income of $974 million. We also delivered exceptional return on equity of 20.6%. It was an excellent year marked by strong growth across the business. Net interest income increased by 33% to $1.9 billion, driven by robust balance sheet growth and higher interest rates.

Average loans grew by 21% to $25.6 billion, reflecting particular strength in our private equity business, as well as the private bank, life sciences and our global businesses, and credit quality remained excellent. Client liquidity was robust with average total client funds growth of 31% to $123 billion, reflecting 12.5% growth in deposits and 46% growth in off-balance sheet client investment funds. Core fee income grew by 36% to $516 million due to investments in and strong execution by our FX team, as well as growth in our client investment funds. Our gains from VC-related investments and warrants increased nearly 50% to $177 million, $140 million net of controlling interest, another effect of healthy fundraising and markets in 2018.

The health of our industry was a major factor in our performance. Venture capital had a record year, with $131 billion invested and $55 billion raised, as well as record levels of dry powder still to be invested. While later-stage companies received the majority of dollars invested, early stage venture investing remained very strong, with aggregate values reaching all-time highs. The IPO market improved significantly over the prior year, with 85 venture-backed IPOs, the highest number since 2014 and the highest aggregate IPO value since 2012.

SVB's clients represented 67% of these companies. Secondary offerings remained robust, with more than $14 billion raised in 198 transactions. And overall private equity deal activity surpassed $700 billion, the second best year in history on a record number of deals closed. The strong supply of liquidity helped fuel our growth and contributed to healthy client activity across the board, including a nearly 5,000 new core commercial clients added in 2018.

Looking ahead, 2019 is expected to be another vibrant year for VC investment and fundraising. And undoubtedly, our VC clients tell us they anticipate good growth from their portfolio companies, and they expect the funding environment and opportunities to remain healthy. 2019 is also expected to be a strong year for IPOs, assuming the government shutdown is resolved soon and the broader economy remains stable. A growing number of highly valued venture-backed unicorns have either publicly announced – or expected to go public, and IPOs are expected to make up the majority of exit dollars.

In terms of our challenges, many of them have to do with the macro environment. These challenges include the ongoing U.S. trade battle, a potentially flat rate environment in 2019 and beyond, intense equity market volatility, the prolonged government shutdown and a closed IPO market. Beyond these macro factors, competition for loans, deposits and clients remain fierce.

We continue to compete effectively, as you can see from our results, and we gained traction in our deposit initiatives, although that has come with higher deposit cost. But the competition and rate market cycles have always been part of our equation. We remain optimistic about our prospects for solid growth in 2019 as long as the markets remained relatively stable. We're confident, in part because of our high-quality balance sheet, strong capital liquidity and the fact that our client funds franchise provides us the flexibility through a variety of strategies to drive deposit growth.

We're also confident because of our investments we're making to support and drive our growth, which I talked about at our investor day and want to reiterate today. First is our investment in driving growth across the business. Much of our growth in 2018 came as a direct result of investments in our private bank, our global business and private equity services, to name a few. More recently, our acquisition of Leerink Partners has broadened our product set and will expand our fee income.

Second is our investment in creating a better, richer client experience including a robust digital platform that will enable us to engage with clients in more meaningful ways. Third is our investment in improving employee enablement through tools, systems and mobility to allow our employees to focus on their highest value activity. Fourth is our investment in risk management, creating robust systems and structures to support our global operating model so that we can grow at the pace that we want. And fifth is propelling business transformation through our investments in systems and processes across the bank, from client onboarding and loan processing to data infrastructure.

We think now is the time to make these investments, and we believe they'll enable us to continue to deliver strong growth. Another reason for our confidence is the uniqueness and power of our business model. We have always been focused on the innovation economy, which represents the fastest-growing and most active companies and the ones most able to attract investment and funding. Our longtime focus on the innovation economy has enabled us to create the broadest set of products and services tailored for innovation clients and to continuously enhance these products and services.

We have an amazing team, including many career SVBers, as well as many newer hires who bring world-class skills and expertise. We're able to hire the best people because they're attracted our strong performance, our culture, our values and our clients. And finally, we have unique approach to client relationships, leveraging our networks and expertise to help our clients succeed through good times and challenging times. This consistent approach over 35 years has earned us our clients' trust and cemented our reputation as a true partner.

We believe our model, our people and the investments we're making in our business will enable us to deliver strong, high-quality, sustainable growth and profitability over the long-term, including: ROE of 15% in a low rate environment and 20% in a normalized rate environment; normalized in this case means fed funds above 2.5%; and core EPS growth of at least 10% in a flat environment and at least 20% in a rising rate environment. We are seeing good momentum across our business and expect continued opportunities for growth and expansion in 2019, assuming current market conditions hold. Although we're paying close attention to the challenges I outlined earlier, we have a long history of disciplined growth and the ability to execute effectively under a variety of market conditions. In addition, our high-quality balance sheet, strong capital liquidity will provide stability and flexibility in the event of a market downturn.

We remain focused on aligning ourselves with the best companies and investors and delivering high-quality growth and strong returns that we can sustain over the long-term. Thank you, and now I'll turn the call over to our CFO, Dan Beck.

Dan Beck -- Chief Financial Officer

Thank you, Greg, and good afternoon, everyone. Our excellent quarterly and full-year results were a continuation of the key trends we've seen throughout the year: a strong venture capital and private equity environment driving substantial client liquidity and continued strength in our core business despite the impact of turbulence in the public markets. The quarter included the following highlights: first, solid growth in net interest income due to healthy loan growth and higher loan yield; second, strong off-balance sheet client funds growth and flat average deposits; third, outstanding core fee income growth, mostly from foreign exchange and client investment fees; fourth, continued stable credit quality with solid underlying trends; fifth, solid gains on warrants and investment securities; and sixth, a decrease in expenses related to the decline in compensation-related costs. I'll start with the balance sheet.

Average loans increased by $1.2 billion or 4.4% to $27.5 billion, driven primarily by continued strong momentum in private equity capital call lines, as well as growth in life sciences and our private bank. Average total client funds grew by $5.5 billion or 4.3% to $134.1 billion, driven by off-balance sheet funds and reflecting growth across all portfolio segments. This was due to healthy funding environment and IPO activity Greg talked about, as well as robust secondary offering, particularly for our life science line, as well as our continued success at client acquisitions. Average off-balance sheet client investment funds increased by $5.5 billion or 6.9% to $85 billion.

Average on-balance sheet deposits held flat at $49.1 billion. Our mix of average -- our noninterest-bearing to total deposit accounts remains stable at 82%. On a period-end basis, deposits increased by $0.7 billion or 1.5% to approximately $1.5 billion of new deposit flows into interest-bearing accounts from our deposit strategy, the majority of it occurring in late December. As we indicated at our investor day, higher yearend distribution by our PES clients and lower growth in Asia offset some of these inflows throughout the quarter.

During the quarter, we also announced the $500 million common stock repurchase program. Through year-end, we used $147 million of cash on hand to repurchase approximately 715,000 shares of common stock at an average price of $206 per share. Finally, our acquisition of Leerink Partners closed on January 4 with cash paid at closing of $280 million. Now I'll move on to the income statement.

Net interest income on a taxable equivalent basis increased by 4.3% to $517 million, primarily due to loan growth and the impact of higher rates on loan yields offset by higher funding costs. Higher loan balances and higher interest rates drove an increase in loan interest income of $26 million to $379 million. Overall, loan yield increased by 16 basis points to 5.47%. The increase is primarily due to the benefit of the September rate hike and higher LIBOR rates.

Loan prepayment fees increased by $2.7 million and accounted for 1 basis point of the increase. Interest income from cash and cash equivalents increased by $7 million, reflecting a $1.1 billion increase in average interest-earnings Federal Reserve cash balances and higher market rates. We intend to continue to manage our cash balances higher for now to ensure we have the flexibility to manage our business and meet our clients funding needs. In our fixed income investment portfolio, average balance decreased by $1 billion as a result of portfolio cash flows and the sale of $475 million of available-for-sale securities to fund loan growth and repay short-term borrowings due to the timing of the deposit flows, resulting in a decrease in interest income of $3.7 million.

Interest expense increased by $8 million, primarily due to an $835 million increase in average short-term borrowings to fund loan growth based on the timing of loan funding and deposit flows. We may still use short-term borrowings in the future, but our intent moving forward is to limit their use and to rely on our larger cash positions and cash flows from our securities portfolio for medium- and long-term cash management needs. Total deposit cost increased by 3 basis points to 9 basis points in the fourth quarter due in part to the growth in interest-bearing accounts. Net interest margin increased by 7 basis points to 3.69%.

This reflects the increase in loan yields offset somewhat by increased borrowing cost during the quarter and higher deposit cost related to our deposit growth initiatives. Moving to credit quality. It remains stable with solid underlying trends. Our provision for credit losses was $14 million compared to $17 million in the third quarter.

This amount primarily reflects reserves of $7 million for a period-end loan growth and $5 million of specific reserves from new, nonaccrual loans and a $3 million reserve for higher unfunded loan commitment balances. Now I'll turn to noninterest income, which is composed of core fee income, gains from venture capital-related investments and gains from warrants. GAAP noninterest income was $187 million compared to $210 million in the prior quarter. Non-GAAP noninterest income, net of noncontrolling interests, was $178 million, a decrease of $26 million from the prior quarter, reflecting lower market-related gains.

Net gains on investment securities net of noncontrolling interests were $1.8 million, driven primarily by valuation increases from our venture capital-related fund investment of $12 million and offset by $7 million of losses from our public equity securities portfolio. Equity warrant gains were strong at $17 million driven by healthy round updates and strong IPO and acquisition activity among our clients. I want to emphasize that gains and losses from our warrants and venture capital-related investments are primarily unrealized and subject to a variety of factors including market volatility, valuation fluctuations and sales restrictions such as lockups. Moving on to core fees.

Core fee income increased by 10.9% to $146 million. This growth came from all core fee areas, but was driven primarily by the $5.6 million increase in foreign exchange fee from higher transaction level and spreads as a result of increased currency market volatility and a $5.5 million increase in client investment fees related to higher rates and client investment fund balances due to the healthy funding and exit environment for our clients. Now turning to expenses. Noninterest expense was $308 million compared to $309 million in the third quarter.

Compensation and benefits expense decreased by $12 million, mostly due to lower compensation-related costs as a result of broader market decline and lower warrant incentive compensation. These decreases were partially offset by higher professional services expense consisting primarily of $9 million of legal and consulting expenses associated with the acquisition of Leerink Holdings. Turning to taxes. We saw a higher effective tax rate of 28.3% due in part to lower share-based compensation tax benefits.

Our full-year effective tax rate was 26.5% compared to 42% in 2017. Moving on to capital. Capital and liquidity remained very strong and our capital ratios increased across the board. Our bank tier one leverage ratio increased by 28 basis points to 8.1%.

In light of current market volatility, we feel very good about the flexibility provided by our strong capital and liquidity position. Now I'd like to discuss our 2019 outlook and update our preliminary outlook we've provided in October. As a reminder, this outlook is for the full-year 2019 versus the full-year 2018. This means balance sheet growth rates are based on full year averages not quarterly averages.

Our outlook reflects the impact of fed funds rate increases to date, but assumes no further rate increases in 2019. In the categories of core fee income and noninterest expense, we've provided our outlook with and without the impact of SVB Leerink. Finally, our outlook is based on our current forecast and assumptions about market conditions and is 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, based on good traction with our deposit initiatives so far, we are maintaining our growth outlook of the high single digits. We estimate about half of the growth will be in interest-bearing deposits, which is higher than the range we discussed at our investor day. A variety of market factors to drive the proportion of higher or lower.

These include funding and exit trends and the success of our deposit initiatives. All of this is factored into our outlook. We expect the net interest income to grow at a percentage rate in the high teens. This is also consistent with the preliminary outlook and reflects our expectation of higher deposit cost, albeit industry-leading low funding cost overall.

We expect our net interest margin for the full year to be between 3.8% and 3.9%. We expect credit quality to remain stable and comparable to 2018 levels. Specifically, we expect net loan charge-offs of between 20 and 40 basis points of average total gross loan. We expect nonperforming loans to be between 30 and 50 basis points of total gross loans and we expect our allowance for loan losses for performing loans to be comparable with 2018 levels, although we do not foresee it staying at this all-time low of 99 basis points.

We are increasing our outlook for core fee income growth to the mid-teens -- from the mid-teens to the high teens, driven primarily by stronger off-balance sheet client-funded balances and the impact of the December rate increase. With SVB Leerink, we expect core fee income growth in the high 60s. This reflects our expectation of slow investment banking revenues in the first quarter due to the impact of the government shutdown on the SEC IPO review process. We are maintaining our outlook for noninterest expense growth in the mid-teens.

This outlook reflects continued investment in our growth, infrastructure and employees. With SVB Leerink, we expect expense growth in the mid-30s. Finally, we expect our effective tax rate to be between 26% and 28%. This outlook reflects our expectation of lower tax benefit from share-based compensation than we saw in 2018.

In closing, we are proud of our strong performance for the quarter and the year and pleased with our momentum going into 2019. Our clients are thriving and we're expecting healthy growth and solid credit in the year ahead. We have a robust capital and liquidity position that gives us flexibility to manage our anticipated strong growth. We also have sufficient flexibility on expenses, in particular, incentive compensation, hiring and the timing of certain projects to adapt to changing conditions if necessary.

For now, though, our outlook is positive, and we remain focused on execution on our growth plans. Thank you, and now I'll ask the operator to open the Q&A. 

Questions and Answers:

Operator

[Operator instructions] And our first question comes from Ken Zerbe from Morgan Stanley. Your line is open.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. Good evening.

Greg Becker -- Chief Executive Officer

Hey, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

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

Dan Beck -- Chief Financial Officer

Yes. Yes, Ken. So where we are, we've seen a continuation of what we talked about in the fourth quarter with fund distributions in both the private equity and the venture capital deposits. So that trend has continued.

But at the same time, we reaffirmed our guidance on deposits as we continue to have strong confidence in the level of liquidity in the markets in which we operate. And second, with our product positioning, we've made strong progress in being able to, one, position appropriately for the client, but two, be able to position both on and off balance sheet. So we think in a market with strong client fund flows and this product placement options that we have that we have the ability to grow and to reaffirm guidance at the level. But I think, Mike, you have some further guidance there.

Mike Descheneaux -- President

Yes. Ken, it's Mike Descheneaux. Maybe just a little bit more color. I mean, you're correct, right, as we talked about at the investor day about being down I think with something around $500 million or so is what we were saying.

So it's really nice to see that we didn't start to rebound toward the end of December. And certainly here, obviously going into Q1, it looks like it's starting to come back as kind of we had suspected. But you have to step back and think at some of the fundamentals of why as we said during the IR day that we felt pretty comfortable that it would come back. And when you look at the level of VC investment dollars, I mean, coming again off of Q4, another high.

When you look at what PE is doing in the deployment there, when you look at the dry powder that they actually have, all the dollars raised, you feel really good about the backdrop there. Now the other thing to think about is our off-balance sheet funds. I mean, we actually did grow it quite healthily in Q4. We added like $5.5 billion.

And so it now means we have about $85 billion in our balance sheet. So from the various initiatives, the various focus on the teams, they were able to tap that and to try to redirect some of that on the balance sheet. So it's a really good position to have. Some other things to think about is just with our channel checks with our clients out there, whether it's a CEO or VCs or PE firms, they're feeling pretty good about 2019 that they're not seeing anything that's going to derail us yet.

And I'm going to talk a little bit about some of the things that we're going to be watching. I mean, some are pretty obvious. So -- but again, I think when you add all these things together, we're feeling pretty good going into it. But when you think about the things to watch, obviously with the government shutdown, that's something we're keeping a very, very close eye on.

With the IPO market being shut down, as you can imagine, we do get a healthy amount of funding coming from IPO. So that's definitely something we're watching. No doubt what's going on in China and Brexit and with the tariffs and etc, that's always something we're watching. But again, it's nothing that we're not really used to.

I mean, uncertainty has been kind of the certainty for the last year, it seems like. But again, when you look at what business we're in, the innovation economy, right, we know that's going to be resilient and strong over the long-term. So those are just some of the few things to think about.

Ken Zerbe -- Morgan Stanley -- Analyst

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

Is that correct?

Dan Beck -- Chief Financial Officer

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

Ken Zerbe -- Morgan Stanley -- Analyst

Perfect. And then just one last question. We've obviously heard a lot from some of your competitors such as Signature, for example, getting into the capital call lending space. A pretty good quarter for driving capital call balances.

What do you see from your perspective? Like are you seeing a noticeable impact from these new competitors coming in? Or is it business as usual for you guys?

Mike Descheneaux -- President

Ken, we're not seeing any deterioration in the portfolio. In fact, I feel stronger in our belief in our team than ever before. I mean, we have great leadership with our PES team. There's -- it's such a large market.

That's why it's always going to be a very competitive market out there, particularly on the East Coast. There's just so many banks that are involved. So again, nothing new. We're more than holding our own and continuing to add to the balance.

And so feeling pretty good about our capabilities there.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Great. Thank you very much.

Operator

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

Ebrahim Poonawala -- Bank of America / Merrill Lynch

Hey, guys. Good afternoon.

Greg Becker -- Chief Executive Officer

Hi, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

So just the first question on the margin in terms of -- it seems like this -- the balance sheet mix in the fourth quarter muted some of the expense at least a little to what I expected. I was wondering if you can talk to in terms of -- when we look at your guidance, what incrementally we should expect to the margin in the first quarter tied to the December high? And from then on, would just -- would love to get your thoughts around how you think about the margin given that the asset mix shift should be helpful and also the reinvestment security. So any color there, Dan, would be helpful.

Dan Beck -- Chief Financial Officer

Yes. So trying to unpack that. First, as we look at where we were in the fourth quarter, the borrowings position that we had on muted the net interest margin expansion by something close to 6 basis points. But as we look ahead into the first quarter, especially with the growth in interest-bearing deposits at the end of December, that funding cost is going to carry into the first quarter.

So that is not going to drop to the bottom line from a NIM expansion perspective. That being said, with the balance sheet mix and the payoff of some of the lower yielding securities, what you're going to see is expansion of NIM into the first quarter because of that, as well as the fed funds rate hike in December. You can see a NIM expansion, but at the same time the overall average earning assets will be slightly up or less up as we repay the borrowing position on an average basis out of the fourth quarter. So there was a lot there, and we'll see if you have any follow-up questions.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

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

Dan Beck -- Chief Financial Officer

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

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

And just on a separate topic, one quick question on like non-interest-bearing deposit. They declined a fair bit, $1.4 billion year-over-year guidance. Would love to get, Greg, if you have any thoughts around how this environment compares given 2015, '16 when we had a little bit of equity markets correction. Like, are we at a point where slowing deposit growth is more a function of the rate environment? Or could this be a precursor where we start seeing small credit issues pop in as VCs lose confidence around investments?

Greg Becker -- Chief Executive Officer

There were several questions underneath that one question. I'll bring it back to 2015 and early '16. So if you go back and look at all the data back to that time period, there's several things going on. One is if you look at the number of companies that we're invested in, they were significantly higher than they were today.

I would argue there were too many companies that were funded, which then created – you combine that with the market, a dislocation that happened at the end of the year beginning in the first -- '16. You had a higher credit cost, you had venture capitalists that actually slowed down funding, right? So there was a lot of things going on. It was short-lived but for that basically 90-day period, that was actually a pretty big and quick slowdown, although it improved. Contrasting that to today, what is the number of companies that are raising dollars is actually fewer, meaning there's higher dollar balances going to the average company, which creates kind of a healthier company today than it was back then.

That's No.1 . No. 2, and Mike said this, in last couple of weeks, I've spent time with a variety of different venture capital groups and asked the question really, we haven't seen it, so is that getting their temperature on how they're feeling about it? And the feedback to a person was we actually feel very good about '19. You may see a slowdown in some of this -- the larger ones.

It depends on what's going to happen with the IPO market. Some of those companies should definitely get big fundings, maybe public, so it wouldn't show up in venture capital dollars. But the funds are still flowing. They've raised a lot of money and they feel very good about the outlook and the opportunity in front of them.

So that's the context, which is why we believe that this is going to continue, this nice deposit liquidity engine. Credit quality, I sort of commented on that briefly, we don't see anything right now that would cause us concern when we think about it because we're not seeing a slowdown. So if it does happen, if we do see a slowdown and it's prolonged, that's when you're going to start to see -- you could see some gyration in the quality of the early stage. But again, it's a decreasing percentage of our portfolio and we're coming from an incredibly strong base right now.

So I'll pause there and maybe see if Marc has anything to add on the credit side and then if I answered your question appropriately.

Marc Cadieux -- Chief credit Officer

Yes. Pretty thorough answer. The only thing I would add is to your point about the channel checks recently and the very optimistic investor sentiment. Contrasting that to Q1 '16 when -- what we were hearing was a chorus of winter is coming.

And so that right there I think is indicative of a very different outlook, at least starting into the year, recognizing that things could change.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

That's very helpful. Thank you.

Operator

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

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, good evening.

Greg Becker -- Chief Executive Officer

Hi, Jared.

Jared Shaw -- Wells Fargo -- Analyst

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

Dan Beck -- Chief Financial Officer

Yes, Jared, it's Dan. So in the fourth quarter with the deposit position, we weren't buying. But from a roll off perspective, we did execute close to $0.5 billion worth of security sales and did have our securities mature. The yield on the securities maturing are in the kind of 1.50% to 1.60% range.

So that's what's rolling off at this point.

Jared Shaw -- Wells Fargo -- Analyst

OK. So you should still see a little bit of a pickup then from the portfolio there?

Dan Beck -- Chief Financial Officer

Yes.

Jared Shaw -- Wells Fargo -- Analyst

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

Dan Beck -- Chief Financial Officer

Yes. So coming out of the fourth quarter, we're 20 basis points. And if we were to get additional rate hikes, I think that we could get another couple of basis points worth of spread out of that. So I don't think we're capped out at this point.

But 20 basis points coming out of the fourth quarter, which was one of the reasons we saw that strong growth in core fee income. So that's sustainable getting into next year.

Jared Shaw -- Wells Fargo -- Analyst

Thanks. And just finally for me on the buyback, with that coming into play in November, were you in the market consistently through the quarter with like a 10b5 plan? And should we expect to see a stable level of repurchasing going into the beginning of the year here?

Dan Beck -- Chief Financial Officer

So it's obviously all dependent upon market conditions. So we have authorized the $0.5 billion repurchase. We've made good progress against it, continued to watch market conditions and continued to execute on that.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. Great. Thank you.

Operator

The next question comes from Steven Alexopoulos, JP Morgan. Your line is open.

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

Hi, everyone.

Greg Becker -- Chief Executive Officer

Hey, Steve.

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

The first, follow-up on the conversation regarding the health of your start-up clients. At the investor day, I'd asked Mike Descheneaux, "Have you had seen start-up clients adjusting cash burn?" and he really said they were holding steady. Since then we've seen a tremendous amount of market volatility. Are your start-up clients holding steady still in terms of cash burn? Have you seen any reduction?

Mike Descheneaux -- President

So Steve, this is Mike Descheneaux again. It's still pretty consistent. We have nothing to show one way or the other. So right now, it seems to be steady.

Again, people are feeling good about 2019 as I said, and Greg said as well too here. But again, clearly everybody is watching what's going on in the backdrop of the market and the microenvironment as well too. But at this point, yes, I would say it's steady.

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

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

Dan Beck -- Chief Financial Officer

Yes, Steve, it's Dan. So that's more product placement on our part as we have clients that otherwise would have gone off-balance sheet where we have continued to enhance our product set. We've actually been able to open a new product set with our needs on-balance sheet. So it's largely that versus clients opting directly from non-interest-bearing into interest-bearing.

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

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

Dan Beck -- Chief Financial Officer

Yes. So Steve, while on the line basis that's -- and it's a really important business to us, the bottom line impact is still small relative to the rest of the franchise. So from where that stands right now, obviously we've got the guidance for what we expect in 2019. On a go-forward basis, investment in those areas is really going to be dependent upon the opportunities that we see.

This continues to be an area of the market where we see strong growth and where we want to invest.

Greg Becker -- Chief Executive Officer

I'll add a little color to it. So we were actually just spending time yesterday with Jeff Leerink and Jim Boylan, the two key principals there. And we see this in our life science portfolio in the commercial banking side is that the outlook for the capital markets activity in '19 appears to be very, very strong. There's a lot of companies lined up and ready to go.

It's a great place to be. You can look at the venture capital numbers in 2018 related to healthcare and biotechnology life sciences. And it was an incredibly strong year. Very, very, very strong year.

And if you look at that investment, that was on top of a strong year in '17. So those big investments are kind of fueling the growth for the next companies to go public or be acquired. And again, we think it fits exactly where we want to be. So we feel very, very good about the business.

To give a little more color because it's the first quarter we will be talking about SVB Leerink. You can look at the outlook and you can do the math, I'll just help you along. If you look at the outlook, we're looking at kind of $250 million to $270 million of revenue. That's with that kind of math which show up.

And you can look at the pre-tax contribution, you're probably in that 10% to 15% range, right? Now, first quarter we said is going to be very, very slow because a big part of their business is equity capital markets. You know, as well as anybody and everyone else in the line does, that there's nothing happening right now in the equity capital markets business and it's going to be that way until the market opens up. But the pipeline backlog looks very robust, and we feel good about it.

StevenAlexopoulos -- J.P. Morgan -- Analyst

Great. Thanks for all the color.

Operator

The next question comes from Brett Rabatin from Piper Jaffray.

Brett Rabatin -- Piper Jaffray -- Analyst

I wanted to ask -- just going back to deposits and thinking about DDA. Can you guys just give us any color on what early stage makes up a DDA at this point? And then is that where you expect the growth in DDA this year is the early stage businesses? And maybe just any color on what you're seeing with DDA balances in early stage clients?

Greg Becker -- Chief Executive Officer

Hey, Brett, I'll start. I don't have that in front of me. I don't know if Dan or Mike do. But we really -- again, it's important.

We have not seen a behavior change when you think about the broad client base. We have seen -- where we've seen change, we've seen it when rates are low, we've seen some bigger balances with some companies that raised large rounds of financing and they just kept it in their DDA. Obviously as the rates have gone up, they have moved back to either off-balance sheet or they have moved it to the interest-bearing solutions that Dan was talking about. So I think what you're getting to is, have we seen anything really changed, and the answer is no.

I'll see if Dan or Mike have anything else to add.

Dan Beck -- Chief Financial Officer

Yes, it's running approximately on 25% to 30%, somewhere in that neighborhood from when you think about emerging tech and early stage start-ups, somewhere around there. That is deposits on-balance sheet as a percentage of total deposits.

Brett Rabatin -- Piper Jaffray -- Analyst

OK, great. And then the other question I wanted to ask is just you talked about continued success in capital call lines of business and -- or credit and not really seeing the competition stymie, which you're being able to do. There was a comment about pricing competition. Has anything changed meaningfully as it relates to that, either in that line of business or/and any of the other verticals as well?

Greg Becker -- Chief Executive Officer

Yes. I will -- I'll start and Mike may want to add something. Look, the market continues to be very competitive. And I would say the message that we have delivered in prior quarters about the competition and price compression is consistent with what we've described in prior quarters.

I would just say that the biggest differentiator we have, and it's not just in private equity services, it's across the platform, is -- it's the people, it's the product and it's the service levels. And all three of those things are very, very differentiated. So what we see consistently when we show up and we're priced at a certain level, it is very likely that we will get a win if it's a jump ball. And typically, we'll see even a little bit of premium.

That hasn't changed. And I don't expect it to change now. We have to continue to earn that every single day, but our teams are very much in tune with that and are doing an incredible job.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. That's great color. Thank you.

Operator

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

Aaron Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

Hi. Good afternoon, everyone.

Greg Becker -- Chief Executive Officer

Aaron.

Aaron Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

Just wanted to follow up on something else that came up at the investor day, which was the subject of kind of reducing some of your asset sensitivity over time. Looks like maybe some of the balance sheet actions you take in terms of holdings, more liquidity, does some of that. But just curious what other plans you are undertaking now or maybe in the future to reduce that asset sensitivity.

Dan Beck -- Chief Financial Officer

Yes. Aaron, it's Dan. So yes, the goal is to continue to reduce asset sensitivity. We talked about a target with a 100 basis point rate chop to bring that sensitivity, to downgrade to less than 10%.

So the actions we're taking, the continued extension on the investment securities portfolio, and secondly moving to a swap program, and as part of that swap program, extending duration. And that's in addition to adding interest rate floors where appropriate to our lending contracts. So all three of those options are in motion and the expectation is to get to that less than 10% sensitivity.

Aaron Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then a follow-up question on Leerink. I think Steven was maybe trying to get at this. But with the -- given the revenue outlook for that business and the guidance that you've given, just curious if the expenses -- if you plan to, say, accrue for those consistently through the year or if that's going to be more tied to deal activity in any given quarter.

Dan Beck -- Chief Financial Officer

It's Dan. It's largely tied to deal activity. So there would be a reduction on the expense side, assuming that we don't have the deal activity. But there is also just a standard amount of fixed cost that you'll see and continue to come through.

So assuming a weaker first quarter from a profit-all and profitability perspective, it could be net flat to the P&L in the first quarter.

Aaron Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Great. Thanks for taking my questions.

Operator

And the next question comes from Chris McGratty from KBW.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

Yes, thanks for the question. Dan, on expenses, I think for the reported number for this year, it was 1,188. Again, I just want to confirm that's the starting point. I know there looks like about $8 million of kind of one-timers in the quarter.

Dan Beck -- Chief Financial Officer

Yes, we're using the 1,188 as the basis.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

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

Dan Beck -- Chief Financial Officer

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

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

Great. And then maybe one more. CECL is becoming a more common talk on conference calls. Any initial comments? I know we're probably a couple of quarters away from getting specifics.

Greg Becker -- Chief Executive Officer

Yes. You're right. It's still early. And we'll probably -- we'll have our range view by the time we get to Q2 earnings in July of what we expect the impact is going to be in 2020.

So we have to hold until then.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

All right. Thank you.

Operator

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

John Pancari -- Evercore -- Analyst

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

Marc Cadieux -- Chief credit Officer

Yes, so it's Mark. I'll take that one. Yields, note all year the interest-only yields are in the high 4s and the historical spread between VC and PE has really narrowed to the point where they basically are around the same. In terms of further compression, nothing really material.

Notwithstanding that, as mentioned earlier, pricing competition continues to be fierce in that segment.

Mike Descheneaux -- President

Yes, we saw a bit of a pickup in Q4 obviously with the rate increases as well too. Because as you know, a fair amount of those were tied to variable rates as well, too.

John Pancari -- Evercore -- Analyst

Got it, got it. OK. And then separately, also on the lines. I know you've acknowledged in the past and we could see with the industry that funds using the lines are using them increasingly for return enhancement as the products become more and more popular not just for the bridge financing, but as return enhancements.

So as you have funds doing that, what does that mean in terms of -- does that have any implications for credit quality of that portfolio if they're using it for return enhancement? Does that have any implications in terms of the duration of the capital call lines? And then lastly, does that have any implications in terms of the rate that you're able to get? Thanks.

Marc Cadieux -- Chief credit Officer

Sure. So there's three questions in there. Maybe starting with credit quality, really no implications there at all. As we've talked about in the past, it's the PE fund borrowers that tend to borrow a bit longer than VC ones do.

But at the same time, they tend to have very high quality LP bases. We have an assignment of the right to call capital. Defaults have been 0. We have no loan losses there.

And so to the extent that a PE fund wants to keep it out a bit longer, you get some IR enhancement. That frankly is a good thing from our standpoint. As you might imagine, because the risk is no different, our ability to charge more for longer duration really isn't there for us or any other market participants. The rate is generally about the same, whether it's going to be a 90-day advance or longer.

And then the duration PE relative to VC really hasn't moved much. Yes, VC borrowers tend to be 60- to 90-day borrowers, historically speaking. Private equity can be in that 180 to 270, but that's been relatively stable over the last several years. I think I got all your questions.

I hope I did.

John Pancari -- Evercore -- Analyst

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

Marc Cadieux -- Chief credit Officer

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

Mike Descheneaux -- President

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

John Pancari -- Evercore -- Analyst

Got it. All right. Thanks, Mike.

Operator

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

David Long -- Raymond James -- Analyst

Thank you. Good afternoon.

Greg Becker -- Chief Executive Officer

Hey, Dave.

David Long -- Raymond James -- Analyst

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

Dan Beck -- Chief Financial Officer

So I think it would be consistent with what most folks are looking at, so continuing to pay attention to GDP, overall levels of inflation and expectations in the future markets of what's happening with the – with fed funds. So we -- and also, we're obviously paying attention to what's going on with short-term yields. So combination of all of those things are going to be able to help us drive. And again, this is not a periodic decision.

This is something you build over time. So we'll be building a portfolio, especially as we take a look at the interest rates hedging portfolio, building that over time to dampen that sensitivity.

Thanks, Dan. That's all I had.

Operator

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

Chris York -- JMP Securities -- Analyst

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

Greg Becker -- Chief Executive Officer

So this is Greg. I'll start. So we have -- to be honest, I'm not familiar with that situation. But we have had 0 issues with, I guess, both documents or losses, challenges, etc.

And when you think about it, it's critically important. And we have continued to enhance our structure over time, especially with the larger loans and especially around PE, where the assignment of calls basically can be given to us until we can deal directly to the borrowers. It's a direct obligation. So from that standpoint, we see no issue with how we're structuring our loans.

And therefore, we see no issue with an increasing loss potential in that portfolio.

Chris York -- JMP Securities -- Analyst

Got it. And then you said that life sciences was a driver of loan growth in the quarter. This should be a good source of loan growth for you guys going forward, especially with Leerink. But non-banks appear to be a fierce competitor.

And I noticed a couple of them led senior loans to Leerink clients in the fourth quarter. So can you maybe talk about your thoughts about the market environment there and expectation for loan growth in '19 for this loan sub-type?

Greg Becker -- Chief Executive Officer

Yes. Over the course of '18, we had nice growth in life science portfolio, albeit a smaller portfolio. Clearly, one of the drivers of the acquisition with Leerink is being able to partner more with them and be able to show more value. So from the standpoint of our expectations for growth, we do expect to see solid growth in our life science portfolio.

It's a big market and what I would tell you is, as I said, the venture capital levels, venture capital is flowing into that market in a very substantial way. It's an increasing portion of the overall venture capital level. And there's more non-venture firms that are putting money into this space as well. So from that standpoint, we think the market is increasing at a very solid rate and we feel good about our prospects to get our fair share -- more than our fair share of that growth.

Chris York -- JMP Securities -- Analyst

Makes sense. Last one is -- maybe Dan, can you provide us with 4Q revenue and expenses at Leerink? And then how does your guidance for Leerink in '19 compare to Leerink's full '18 numbers?

Dan Beck -- Chief Financial Officer

Yes. So we have given at least our view of what we think is going to happen in '19 now that they're under the SVB umbrella. And I think from a guidance perspective and what Greg mentioned that gives you a good assessment of what we're expecting. It's a good market, a healthy and vibrant market, and obviously we're paying attention to what's going on with the government shut down.

But it's a strong business and the guidance reflects that.

Chris York -- JMP Securities -- Analyst

Could you provide us -- or are you not able to provide us numbers for Q4?

Greg Becker -- Chief Executive Officer

No, from -- this is Greg. I'll take it. So when we look at Leerink -- I mean, Leerink was a separate entity, private entity before we've acquired it and then we've given the outlook for 2019. Leerink had a very strong 2018.

And you'd see that just basically by how healthy the IPO market was for life science companies in 2018. So we believe it's going to be a robust '19 and we're using the numbers from '18 as the driver of the forecast.

Chris York -- JMP Securities -- Analyst

Understood. That's it for me. Thanks. Congrats on the year.

Operator

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

Brett Rabatin -- Piper Jaffray -- Analyst

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

Dan Beck -- Chief Financial Officer

Yes. I think if we look at the authorization that we have, obviously we're going to work through and based on the market conditions work first to consume that. And then based on continued expectation for growth, we should be in a good capital position. And at that time, we'll talk about what makes sense for us to do, either share repurchases, dividends or continue to use that capital for growth.

I mean, those are the options right now. We're executing on the share repurchase, assuming market conditions hold.

Brett Rabatin -- Piper Jaffray -- Analyst

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

Dan Beck -- Chief Financial Officer

We -- I mean, we disclosed the activities through Q4 and early this year.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. Thank you.

Operator

And I'll now turn the call back over to CEO, Greg Becker, for final remarks.

Greg Becker -- Chief Executive Officer

Great. So just to wrap-up, everyone. We had a great quarter, had a great year, our best year in history when you look clearly across net income, EPS, growth rate, really across the board. And good news, as we have described, we're expecting solid growth in 2019.

While we're keeping an eye on the broader environment, and I know we all are, we see lots of good activity. And the conversations we're having with clients, with investors, remains positive. So I know there was a lot of questions about, does this compare at all to 2015, 2016? And the answer was no. So we feel good about it, but we are definitely paying attention to it because we all know it could change pretty quickly.

The other part is just our capital liquidity. If it does change, we're prepared to respond to those with changes in the environment. So the investments we believe are paying off and that's going to help fuel the long-term growth. So I just want to thank everyone, as I do on each quarterly call.

Really appreciate what our employees are doing, because at the end of the day, they're the ones that are doing a fantastic job for our clients. So really appreciate what they're doing. And secondly, really appreciate the clients and what they're doing. And the fact they put their trust in us is such a big deal.

Finally, I want to welcome the Leerink team to SVB. As we talked about, we closed the deal on January 4. And all indications, the people we've engaged with, the whole team, we are -- we feel really good about the outlook. So with that, again, thanks everyone and have a wonderful day.

Operator

[Operator signoff]

Duration: 62 minutes

Call Participants:

Meghan OLeary -- Head of Investor Relations

Greg Becker -- Chief Executive Officer

Dan Beck -- Chief Financial Officer

Ken Zerbe -- Morgan Stanley -- Analyst

Mike Descheneaux -- President

Ken Zerbe -- Morgan Stanley -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Marc Cadieux -- Chief credit Officer

Jared Shaw -- Wells Fargo Securities -- Analyst

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

Brett Rabatin -- Piper Jaffray -- Analyst

Aaron Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

John Pancari -- Evercore -- Analyst

David Long -- Raymond James -- Analyst

Chris York -- JMP Securities -- Analyst

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