SVB Financial Group (SIVB) 2017 Q4 法說會逐字稿

Welcome to the SVB Financial Group Fourth Quarter 2017 Earnings Call. My name is Brandon, and I'll be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded, and I will now turn it over to Meghan O’Leary. Meghan, you may begin.

Thank you, Brandon, and thank you, everyone, for joining us today. Our President and CEO, Greg Becker; and our CFO, Dan Beck, are here to talk about our fourth quarter and full year 2017 financial results and will be joined by other members of the 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 1 hour, and with that, I will turn the call over to Greg Becker.

Thank you, Meghan, and thanks, everyone, for joining us today. Our fourth quarter was an excellent finish to an outstanding year. We delivered earnings per share of $2.19, net income of $117 million, driven by healthy balance sheet growth, higher net interest income and net margin, solid core fee income and stable credit. Our results also reflect the impact of $38 million in tax expense related to the Tax Cuts and Jobs Act and a $9 million loss related to the sale of securities as part of our treasury and tax management objectives. Together, these items equate to $0.80 per share.

For the full year 2017, we had earnings per share of $9.20 versus $7.31 in the prior year, and we grew net income by 28% to $491 million. 2017 was marked by strong growth across most aspects of our business. Net interest income increased by 24% to $1.4 billion, average loans grew by 16% to $21.2 billion, average total client funds grew by 15% to $94 billion, and for the first time, period-end total client funds exceeded $100 billion. Core fee income grew by 20% to $379 million, and we delivered a healthy return on equity of 12.4%.

Our strong performance indicates that the environment for our business remains positive. We are enjoying one of the largest market expansions in history with the best performance across the Dow, the S&P 500 and the NASDAQ in 4 years. Venture capital just finished one of its best years ever with $84 billion invested, the highest level since 2000, and more than $30 billion raised for the fourth year. This positive activity translated into growth capital and liquidity for innovation companies, which contributed to strong new client activity and growth in our business.

We added nearly 5,000 new core commercial clients in 2017, growing our net early stage client count and our total net client count by 15%. This included 25% net new client growth in private bank and 21% growth in private bank loan balances and 17% net new client growth in private equity, with 29% growth in loan balances. It also included a win rate of middle-market corporate finance clients that was nearly double the rate of any prior year. We had an outstanding year in core fee business as well due to strong market conditions and a focused plan to improve our outreach and client engagement. We exceeded $30 billion in FX volume, a more than 30% increase year-over-year and ended the year with a record-breaking quarterly revenue of $34 million. We surpassed $4.5 billion in annual card transactions for 2017, a 31% increase over 2016, and we now rank as the 15th largest commercial card issuer in the United States.

Altogether, we processed nearly $1.3 trillion in payments volume in 2017, a 25% increase over 2016. We are proud of these results and our momentum is reflected in our outlook for 2018, which Dan will go into detail in a few minutes.

For the first time in years, we're enjoying a number of meaningful tailwinds. The first tailwind is interest rates. After several dovish rate hikes in 2017, the more confident tone of the Fed's commentary around December's rate hike was a welcome change. While SVB's outlook for The Street assumes no rate increases, given our high asset sensitivity, we are likely to benefit from each successive rate increase.

The second tailwind is the new corporate tax rate, which took effect January 1. We expect our normalized tax rate to go from 40% to between 27% and 30% in 2018. The majority of these tax savings, 75% to 80%, will go to our bottom line. The remaining 20% to 25%, we plan to invest in our growth, infrastructure and employee enablement and neutralizing some of the negative impacts of tax reform on our employees. The final tailwind is regulatory reform, specifically the potential of lifting the threshold for CCAR compliance. While we will continue to be subject to many other regulatory requirements of being a global bank, we believe this change will enable us to focus more management time and attention on some of our growth and client engagement activities.

While we believe the year ahead holds positive opportunities, we continue to monitor the more challenging aspects of the environment. A challenge for all banks is fierce competition from banks, from nonbanks and from equity. The availability of equity, in particular, has been a headwind for loan growth and we believe this state of things is here to stay. We continue to win our share of deals and the majority of deals we won, but we remain focused on smart growth and making the most of our unique advantages in the market.

Another challenge is the exit markets, which have not returned with the strength many, including us, had predicted in 2017. Later stage companies took advantage of large private equity infusions rather than go public. While the availability of capital for these companies is a positive story overall, the lack of public exits could become an issue for venture capital investors if it continues. In addition, the lackluster pace of exits, combined with these large private equity infusions, is driving valuations for some private companies to levels that are hard to justify.

If we were to see a significant decline in VC funding or a growing trend of exits below the last private round, it would likely affect the broader universe of venture-backed companies, which could mean higher credit costs for us. Despite these factors, we remain positive about our prospects for 2018. We have 5 top priorities for the year, areas where we'll be focusing and investing. First, raising the bar on client engagement by investing in systems, process and improvements, people analytics that will enable us to connect with clients in a more meaningful way. Second, improving our process, procedures and technology to help our employees do their jobs more efficiently and effectively. Third, continuing to invest to support long-term growth across the platform, including private bank, global, life sciences, private equity and early stage client acquisition. Fourth, growing our fee income by improving product penetration, enhancing the ability of our teams to meet the needs of specific client segments and partnering with, and leveraging the capabilities of, our innovative fintech clients. And fifth, enhancing risk management across the organization.

We are pleased and proud of the results for the quarter and the year and are very optimistic in our outlook for 2018. We are fortunate to have an amazing group of dedicated employees who live SVB's mission every day. We work with the most innovative, creative clients anywhere. And we're at the center of a robust and resilient ecosystem that continues to grow and expand. Thank you, and now, I'll turn the call over to our CFO, Dan Beck.

Good afternoon, everyone. Our excellent quarterly results were a continuation of the trend we've seen throughout the year, the healthy venture capital and private equity environment and a strong overall economy are driving robust client liquidity, and we're executing effectively on our strategy.

The quarter included the following highlights: one, strong growth in net interest income due to healthy balance sheet growth and higher yields from our investment securities portfolio; two, strong client funds balance growth; three, higher core fee income, driven primarily by foreign exchange transaction volumes and higher total client fund balances; four, stable credit with solid underlying trends; five, somewhat higher expenses related to incentives tied to our strong performance; and six, continued strong levels of capital and liquidity, with some slower growth in on-balance sheet deposits.

As Greg indicated, these results were partially offset by certain items related to tax reform, including a $37.6 million tax expense from a one-time valuation adjustment of deferred tax assets to reflect the recently enacted change in the corporate federal tax rate. In addition, we had pretax losses of $8.8 million on the sale of $573 million in investment securities for treasury and tax management objectives. I'll refer you to the 8-K that we filed in December and our earnings release for further information on these impacts.

Now let's turn to our operating results. Starting with the balance sheet, average loans increased by $859 million or 4% to $22.4 billion, driven primarily by private equity capital call loans and technology lending, despite continued competition and abundant liquidity in the market. Average total client funds grew by $5 billion or 5.2%, a total of $102.4 billion, due to continued, strong new client acquisition, a robust equity funding environment, along with a better IPO activity and secondary public offering activity for our clients. The rising rate environment and the wide availability of equity funding for private companies mean that we are seeing a heightened awareness among our early stage clients of options for their excess liquidity. In the fourth quarter, that translated into more early stage clients proactively moving excess funds into higher-yielding off-balance sheet options than what we experienced in a no rate increase environment. These are clients who we would fully expect to see move off the balance sheet, those with excess cash balances, but they are now doing so with less lag time than earlier this year in the early stages of the rate increase cycle. We expect this trend to continue as rates increase. This trend was reflected in average deposit growth of $731 million or 1.7%, an average off-balance sheet client funds growth of $4.3 billion or 8.1%. We expect this shift towards off-balance sheet growth to continue and believe with the loan-to-deposit ratio of 50% and extremely strong client liquidity overall that we have substantial liquidity to support our growth.

Average assets grew by $1 billion or 2% to $50.8 billion and period-end assets were $51.2 billion. We expect to cross the trailing 4 quarter $50 billion SIFI threshold in Q1 2018 and to be subject to the Enhanced Prudential Standards starting in Q2 2018. This means we expect to file a public CCAR in 2020.

While we are positively inclined to believe that there will be some regulatory relief on the SIFI threshold, as a growing regulated entity, we are subject to multiple regulation and anticipate the continued expansion of our regulatory requirement. To that end, we remain focused on the SIFI threshold and monitoring our level of foreign exposure, specifically the $10 billion threshold for internationally active banks. As we continue to see strong growth in our foreign operations, we have strategies to optimize our exposure without curtailing growth and we're also engaged in discussions with regulators and legislators on this topic.

As of December 31, 2017, we have approximately $6 billion in foreign exposure, as defined by the rule, leaving a healthy amount of headroom for continued growth.

Now I'd like to turn to the income statement. Net interest income increased by $20.7 million or 5.5% to $395 million, due to strong balance sheet growth and higher rates, particularly from reinvestment in our fixed income portfolio. Higher loan balances and higher interest rates drove an increase in interest income from loans of $11.4 million to $280 million in the fourth quarter. In the investment portfolio, higher balances and higher yields drove an increase in interest income of $10.8 million to $122 million. Average gross loan yields, excluding interest recoveries and loan fees, increased by 2 basis points to 4.32%, primarily due to previous rate increases. Our net interest margin increased by 10 basis points to 3.2%, due primarily to higher loan and investment yields.

Now I'll move to credit quality, which remains stable with good underlying trends. Our provision for credit losses was $22.2 million compared to $23.5 million in the third quarter. This consisted of $10.8 million in net new specific reserves for nonaccrual loans, $8.2 million for loan growth and $3.5 million for unfunded credit commitments. Net charge-offs were $12.9 million or 23 basis points of total average loans compared to $10.5 million and 19 basis points in Q3. Charge-offs came primarily from early stage software loans. We continue to see good overall performance across the portfolio, although high valuations and soft exit markets still pose a risk for early stage credit.

Now I'll turn to noninterest income, which is composed of core fee income, gains from private equity and venture capital-related investments and gains from warrants. GAAP noninterest income was $152.3 million compared to $158.8 million in the prior quarter. Non-GAAP noninterest income, net of noncontrolling interests, was $144.5 million, a decrease of $8.7 million from the prior quarter. This decrease was primarily due to lower warrant gains in the fourth quarter relative to the strong gains in the third quarter and was partially offset by increases across most core fee income categories. Core fee income increased by $3.7 million or 3.6% to $106.4 million. This growth was driven primarily by foreign exchange fees, which increased by $4.1 million due to robust levels of activity, particularly from clients actively managing currency exposure and client investment fees which increased $3 million due to higher client investment fund balances from our clients' strong liquidity. These increases were partially offset by a decrease of $5 million in lending-related fees, primarily due to a nonrecurring $4.5 million adjustment in the third quarter from prior-period fees and unused lines of credit.

Net gains on investment securities, net of noncontrolling interests, were $8 million compared to $9.7 million in the prior quarter. This was primarily due to valuation gains from IPO and M&A activity. These gains were partially offset by net losses of $5.6 million from our available-for-sale portfolio sale, which included the $8.8 million loss on sales related to our treasury and tax management objectives that I noted earlier.

As a result of our 2018 adoption of the new accounting standard related to financial instrument that eliminates cost method accounting for equity investments, we will record approximately $100 million on a pretax basis as positive fair value adjustment to equity, reflective of previously unrecognized gains for the impacted investments. In the past, gains on these investments were recognized as income only when there was a monetization event. As a result of this change, going forward, we anticipate a reduction in gains on investment securities in the range of $2 million to $3 million per quarter, as the aggregate value of the gains have now been captured in equity. Effective January 1, 2018, we will mark these investments previously held at cost to fair value, with all changes in value being recognized in the income statement.

Moving to equity warrant gains, they were $12.1 million compared to $24.9 million in the third quarter. The notable item for equity warrant gains is our positions in Roku, which contributed $4.8 million in gains for the fourth quarter and $16 million in gains for the third quarter.

Given the size of our holdings in Roku, I'd like to provide some additional color. We hold, directly through the exercise of warrants previously held by us, and indirectly through interest in certain fund investments, approximately 1.7 million shares of Roku's common stock. As noted in our earnings release, for the full valued -- full year 2017, we recognize approximately $70 million of total value appreciation related to Roku, of which approximately $30 million was recognized for the income statement, with the remaining $40 million recorded in equity on our balance sheet based on its closing price of $51.78 on December 31, 2017. However, the value of these holdings remain subject to market fluctuations that will continue to flow through earnings until the sale of the position.

Turning to expenses. Noninterest expense was $264 million compared to $257.8 million in the third quarter. This increase is primarily related to higher incentive compensation cost due to our strong performance and higher professional services costs associated with our global digital banking initiative. As we said previously, we expect our efficiency ratio to trend down over time and we are committed to drive scalability and efficiency in our back office to make that happen.

Now turning to taxes. Our effective tax rate in the fourth quarter was 53.5% compared to 39.6% in the third quarter due to the revaluation of tax assets, as I mentioned earlier. Normalize the write-down of these tax assets, our effective tax rate was 38% for the fourth quarter.

Now moving on to capital. Capital and liquidity remained very healthy, although growth in risk-weighted assets due to loan and investments and higher unused loan commitments lowered risk-based capital ratios somewhat. The Tier 1 leverage ratio with the bank was 7.56% and remains well within our target range.

Now I'd like to move -- to discuss our 2018 outlook and update the preliminary outlook we provided in October. This outlook is for the full year 2018 versus the full year 2017. Balance sheet growth rates are based on full year averages. Our outlook reflects the impact of Fed Funds rate increases to date, but assumes no further rate increases in 2018. Finally, this outlook is based on our current forecast and assumptions about market 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, we are lowering our outlook to the mid-single digits from the low double digits. Liquidity among our clients remains robust. However, we expect clients will continue to proactively seek higher yields for their excess deposits and our off-balance sheet offerings as I described earlier. We expect net interest income to grow at a percentage rate in the high-teens. This is at the low end of our preliminary outlook range based on expected deposit growth. If rates were to rise according to the forward curve, we'd expect net interest income growth in the low 20s. We expect our net interest margin for the full year to be between 3.35% and 3.45%. If rates were to rise consistent with the forward curve, we'd expect net interest margin to be between 3.45% and 3.55%. We expect credit quality to remain stable and comparable to 2017 levels. Specifically, we expect net loan charge-offs between 30 and 50 basis points of average total gross loans. We expect nonperforming loans between 50 and 70 basis points of total gross loans, and we expect our allowance for loan losses for performing loans to be comparable to 2017 levels. We have narrowed our outlook for core fee income to the high end of our preliminary range of growth at a percentage rate in the high-teens, consistent with 2017.

As Greg indicated in his comments, we plan to use some of our tax savings for investments in growth, infrastructure and employees. As a result, we are raising our outlook for noninterest expense from the high single digits to the low double digits. That said, we still expect 75% to 80% of the tax reform benefit to translate to earnings. As Greg also indicated, we've added an effective tax rate outlook for 2018 of between 27% and 30%.

To wrap up, we are pleased with the performance for the quarter and for the year. Our core business remains robust, reflecting the general good health of our clients as well as our access to funding and liquidity in a strong economy. We continue to deliver healthy revenue growth, solid ROE and efficiency ratios, all underscored by high asset quality. We expect these positive trends to continue through 2018, assuming the macro environment does not change materially. Should future rate increases materialize, we would expect to see upside to our current outlook. In the meantime, we remain focused on delivering high-quality growth, and we have ample capital and liquidity to support that growth.

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

(Operator Instructions) And from Morgan Stanley, we have Ken Zerbe.

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

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

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

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

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

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

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

And as we sort of think about -- I mean, it's clearly, if the forward curve plays out, and I should be more in the low to mid-20s percent growth rate, can you talk about drivers of what would push the expense growth guide higher? Because that tends to be sort of a point of, I guess, uncertainty when revenue growth picks up for you guys. I just wanted to handicap the risk of that expense growth moving higher as we move to 2018.

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

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

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

Yes, that's a great question. So as we're looking at overall duration, we saw a bit of extension in the portfolio in the last quarter, so we moved from 2.7 years up to 3 years. As we continue to purchase the bond portfolio, it runs off, let's say, roughly $1 billion a quarter, we're buying out in the, let's call it, 4- to 6-year range. So you'll see a general creep up in duration as we move into 2018. On top of that, as a part of those purchases, we're buying, let's call it, in a range of $200 million to $300 million of municipal bonds based on the availability in the marketplace. That also has a tendency to extend the bid duration as well as to improve yield and obviously provide the tax benefit. So that's what you should expect to see from the investment portfolio in 2018.

And can you also frame for us in terms of what's the new yield versus what's rolling off, just so that we get a sense of how much we're adding incrementally every quarter as this $1 billion gets reinvested, or some of that gets reinvested?

Yes, I think, the best way to think about it, it's about 100 basis points roughly, let's call it, 90 to 100 basis point improvement on that $1 billion every quarter.

From JPMorgan, we have Steven Alexopoulos.

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

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

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

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

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

Got it. Okay. Yes, that is a big difference. Okay. Greg, looking at the $5.5 billion in client fund inflows, which, I think, I've asked you the last 2 quarters because you've been over almost $5 billion for 3 quarters in a row, what's driving it at that such an elevated pace? And do you think it's sustainable?

Yes, so there are a couple of things, obviously. When you look at the overall venture capital fund flow for last year, again, it was $84 billion. So again, second highest on record going back to 2000. So you had to start there. So the pool of money that's available is, just from venture, is a big number. That's just part of the story, right? Because the other part of the story is you still you have corporates that are coming in bigger, you have more angels coming in bigger, you have sovereign wealth funds. The amount and breadth of availability of capital is very substantial. That's one piece. Second piece relates to -- I think we just -- our teams are doing an excellent job of just calling on the right companies with the higher balances. And so you look at both, right, you get a big population of money coming in and very good execution on our team's side, that's really been the driver of the incredible client funds growth. Your second question is, what does the outlook look like? We certainly believe that the outlook for '18 is still going to be healthy. It's obviously hard for us to predict, is it going to be higher than $84 billion or lower than $84 billion? I will just say, we feel pretty comfortable it's going to be another really, really good year. So that's kind of the context I'd give you.

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

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

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

From Wells Fargo Securities, we have Jared Shaw.

Maybe just thinking about the security side. When you look at the securities losses, that was just a tax opportunity restructuring, is that the way to think about that? Maybe taking some of the losses now? And then, was that basically restructure -- or reinvested in similar securities?

Yes, this is Dan. That's exactly what it was. We had an opportunity. We had some lower rate securities purchased before improvements in the rate, while at the same time having the tax opportunities. So the combination of 2 things. We thought it was a unique time to be able to execute sales in the portfolio.

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

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

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

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

From Evercore ISI, we have John Pancari.

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

Yes, the downside's coming from the deposit forecast. So the movement in the deposit range to the mid-single digits is really the driver there. That offsets the benefit of the December rate move.

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

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

From KBW, we have Chris McGratty.

Hey, Greg, last quarter, I asked you about capital return. You've got this capital benefit, you've got taxes coming down and rates going up. How are you thinking about capital return given the balance sheet shift and the capital accumulation that's occurring?

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

In terms of when you do have those conversations, there's obviously 2, there's dividends and there's buybacks, do you have -- I know that neither are in place today, but do you have a preference? Or how are you thinking about potentially buying back stock? Obviously, multiple on book is pretty high, but also could be accretive to earnings?

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

From Sandler O'Neill, we have Aaron Deer.

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

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

The only thing I would add onto it is, these are investments that were made a while back, and because of the type of investments they were, they were held on our balance sheet at cost. And so that's what we're talking about. But the core, well, I'll call it, SVB capital business, and that's been a more significant driver of securities gains, that still is intact, that's not impacted by what we're talking about. So we're just -- we're trying to make sure we dissect those 2 or separate those 2, we wanted to give as much clarity as possible on what's happening with those investments that were held at cost.

Okay. And then, how about the corresponding impact on the noncontrolling adjustment? Will there then be a similar magnitude impact there?

No.

Yes, there isn't one because, again, these are investments that we would have held 100%. It's kind of -- it's ours. Therefore, there is no noncontrolling interest.

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

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

(Operator Instructions) And from Piper Jaffray, we have Brett Rabatin.

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

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

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

Okay. And then, I've seen on Twitter, Greg, you made some comments about bio pharma and some other industries. Is there a group in '18 that you expect might lead to growth outside of [TCPE] on the balance sheet in terms of loan portfolio?

Well, I don't know what tweets you saw but I don't tweet, so it wouldn't have come from me.

You threw an e-mail, I'm sorry.

Okay. So you look at it and you say it's brought -- my comments about higher valuation is pretty broad-based. Almost any industry that you look at, whether it's bio pharma or certain software, IA, et cetera, there's going to be some of the higher profile companies in those industries that are at higher valuations, again, priced for perfection. So my comments are, I would say, pretty broad-based. We don't expect anything to happen. That's not what our outlook is predicting, but certainly, the higher-profile companies are getting healthy valuations.

No, I'm sorry, I didn't mean in terms of credit as it relates to that, I just mean in terms of growth of the portfolio outside of the [TCPE].

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

Perhaps maybe the only other thing I would put on there or add or consider is the private bank. Again, we've been experiencing quite healthy growth over the last couple of years, so you'll definitely see some growth like that in 2018.

And from Stephens, we have Tyler Stafford.

Hey, just one last one for me, I'm just trying to, I guess, better triangulate to the NII guide, what with the loan and the deposit outlook and then the 3 35 to 3 45 margin. Can you help me with the size of the securities portfolio that's, I guess, more or less embedded in that guide? Does that assume securities balances down throughout the year?

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

Okay. So roughly, securities balances should be flat?

Roughly.

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

Yes, I guess, that's where I was going. Kind of first pass as I walk through it to hit that lower NII guide, it was kind of implying that the securities balances declining throughout the year, but I'll go back to that.

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

Great. I just want to thank everyone for joining us today. We're closing out a great year and looking forward to continued growth and expansion in 2018. It's great. It's been a very long time to have some nice tailwinds. It always feels like on these calls, we're talking about headwinds, and having 3 nice tailwinds with taxes and rates and, hopefully, more regulatory reforms going on, that's great. And you couple that with the performance and our outlook, clearly, that's what gives us confidence in 2018. So I want to thank all our amazing clients for their support in us, as they do each call, every -- it's just we do have the best clients, without question. I want to thank all our employees for doing such a great job of taking care of our clients, bringing their best every day. And thank you, everyone, for joining us on the call. Have a great night.

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