Q4 2019 Earnings Call
Welcome to the STB Financial Group Q4, Twain 19 earnings call. My name is Adrian in out of your operator for today's call.
At this time.
It's hard to listen only mode.
Later, well conduct a question answer session.
The question answer session. If we have a question. Please press Star then one on your Touchtone phone.
Please note. This conference is being recorded an alternate I called Meghan O'leary head of Investor Relations, making Larry you may begin.
Great.
Thank you everyone for joining us today, our <unk> CEO , Greg Becker and our CFO Dan back are here to talk about our fourth quarter 29, <unk> financial results and they'll be joined by other members of management you anyway.
Current earnings release.
In summary, your letter and fly are available on the Investor Relations section of our web site.
Uh huh.
We'll be making forward looking statements. During this call 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 the meeting Oh.
Some of my discussion.
non-GAAP financial measure.
Not that measures, including reconciliations to GAAP measures maybe found in our filings in our earnings release and now I will turn the call over to Mark.
Okay, great. Thanks, Megan thanks, everyone for joining us today as we review our Q4 2018 and full year 2019 result, as well as reviewed the outlook for 2020. We're pleased to report we had an excellent fourth quarter earnings per share a $5 a six cents net income of 263 million.
And a healthy are are we have 17%.
Our presentation and stakeholder letter detailed these Brazil.
And as we have started to do at the end of 2019 are going to not go through scripted remarks, but just opened up the called two questions.
So that'll turn it back to the operator to start the acuity.
Thank you. So now begin what's your name Sasha.
The other question. Please press Star then one on your Touchtone phone.
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Okay.
In the first question comes to cancer before Stanley. Your line is open.
Great. Thanks, good evening everyone.
Again.
I wanted to start off with expenses clearly little bit higher than I think what most people were expecting this quarter. Yeah, I guess I'm just trying to figure out maybe could place to start is he just break that up I know theres, a number of sort of nonrecurring charge or something like 10 million of comp some software impairments father stuff, but then there was tough.
Such as like your your investments in your global like the digital banking and infrastructure initiatives. You have you just help us understand like how much of the.
<unk> expense growth is sort of to grow your business versus how much is sort of unusual one time in nature type charges.
Yep and this is Dan I'll start and others might want to jump in so first as we look at expenses. The overall just looking at 2020 in total we haven't moved off of our preliminary expense guidance that we issued last quarter. So still in the high single digits.
For 2020, and when we look at expenses for the first quarter were expecting those expenses to be and [noise].
430 $450 million range. So just wanted a baseline there and as we then start to talk about Q4's expenses.
You're right.
First a 30 million again of that increase that we saw in the first quarter was all revenue driven mostly from our mirroring very strong performance Oh. We also like these that had some some one time related items and compensation as well software impairment and.
And finally, the the items that are really driving the business are around the further development of or digital platforms and to continue to transform and modernize our technology and delivery organization.
That's spend is consistent with that message that we've been talking about investing more in the franchise and our digital and scalability initiatives, though if you look at at the 28 million comp revenue related 13 more.
You know exceptional one time for this quarter and that 14 is really that increased spend around the growth in the business.
Got it okay. Okay that does help a little but and just to be clear, though the high single digit guidance because it was the same last quarter and this quarter, but this quarter includes call. It I don't know 50 $60 million higher than what are we were expecting art does are you, implying or try to imply that your expense that.
Total expense base mixture is now higher.
And not I, Shouldnt say base, but the total expenses next year now higher than what it was.
Or what you expected last quarter, because the base is higher.
So do you think about it the expense range, we give you know there there's room within it so.
So to say that it's a materially increase the I don't think that so that's true.
But it has likely increase on a year on on from last guidance for this guy.
Gotcha, Okay, and then just last so question if I may sorry go ahead.
We're going to say, but still within.
At that high single digits right.
Understood. Okay, and then just last question in terms of Leerink, obviously, they're very good quarter I saw you I'm gonna say, they maybe be us by less than 20 million, but I saw your the compensation expense pretty Leerink I think it's hard to incentive my goal by more than 20 million around 20 million like it seems like theres excuse help us understand that because I.
It seems like there's a bit of a disconnect between what they're earning versus what you're paying them and I'm trying to make sure I fully understand the dynamics of the big jump in their compensation.
Yeah. So if you look at them from a gross or an operating margin or operating profit perspective.
They they delivered a 2019 and that's gone 18% operating margin.
We look at the earned a comp ratio a is that that that that is more consistent with what you'd see it other investment bank, what you're seeing come through the expenses and this quarter is that there was an expectation that the ended the third quarter.
Financial performance would be lower.
And what was delivered so the incentive compensation increased in the fourth quarter, because those are improved expectations in actual delivery in the fourth quarter.
Okay, great. Thank you very much.
And your next question comes from Ebrahim Poonawala from Bank of America. Your line is open.
Hey, guys I'll, just one quick follow up Dan first on the expenses. If you take the midpoint of the means you gave for 32 450 for the first quarter.
Oh and annualize that.
Or the 1.6 billion for 2019 gets you do a 9.9% expense growth. So is it safe to assume that.
You're going to be.
In that theme here know what sequentially for most of all of 2020 .
So.
We communicated to us and earnings presentation. So in the first quarter, we also have higher seasonal compensation related costs.
The expectation is that that comes off in the second quarter and the cost the decrease.
In in the second quarter.
That that's the right way to think about it.
Got it and I guess, when we should anticipate as much of it actually being up in expenses as we saw in 2019, yes based on yeah, you're right.
[laughter].
That's right. That's our guidance. This is Greg the only really only exceptions I just a caveat. It is performance base as we talked about in prior years. So.
To the extent either.
The banks overall performance SVB lyrics performance actually exceeds forecasted a meaningful way you could see some incentive compensation taken over there.
And at some point in the year, we may again from an investment perspective.
We may take up investments in digital platform et cetera, but I'd say right now again with the outlook we've given you.
Right in the range that we talked about.
Got it.
In terms of.
Hey, good loan growth guidance implies a meaningful desalination just when you look at the dollar amount of loan on loan growth that you had im going to 18 2019.
Is that you just being conservative in terms of your outlook on loan growth or do you expect some seasonality pay off early part of the year.
This is Greg I'll start and Dan and Mark May want to May want to add to it.
So we did have a really strong.
Fourth quarter, and especially a period end.
And most of that's from capital call lending right. So when you when you look at that there is the possibility that that will decline in the first quarter. So you get back to that that level.
If it sticks if it stays in the first quarter plays out in a way higher than expectations again, where it stays where to be a probably in the next range category.
But again, we kept at the same because it's mostly capital call lending and it may not be as sticky so I'm just.
Just I guess watch and see how the first quarter plays out.
Got it and just get kilcoyne going on.
Investment would love to get a little bit of all sand sounds like you've made tremendous investments in people a little bit expansion technology like how does this translate into faster stronger revenue growth balance sheet growth.
Give us a sense of what we should expect beyond just 2020 guidance as we think about.
Good to see timeframe as a function of all the investments.
Yes, so I will start I'm sure Mike is going to want to add a few things.
Im going to piggyback on some of the things that Dan has said.
When I when I think about where we are as an institution I think.
Would give us incredibly high marks for our people are our service.
And broadly speaking our bar products.
Where we continue to improve and get better isn't the digital platform. We have an okay digital platform, we need to actually have a much better digital platform. So work, we're investing in that in that business heavily new expect us to see are you should expect to see more investment in that we expect to be releasing an early.
Digital enhanced digital platform in the second quarter.
And so there's a lot of investment in there. In addition on the product side, almost every category or product, we're paying attention to and investing in whether its FX or the card platform part of that is to.
Expand the opportunities that we we have both domestically and globally, but if you look at that as well. We're also using that as a way to push back on the competition that we're seeing in the market as well. So we're looking at both from a defensive perspective and also an offence perspective, and we want to continue to grow our core fee income at a healthy.
Pace.
On the people side, we're continue to invest globally.
And that's a business, where you put more money into it and the growth growth at a higher higher pace, but your margin isn't as high you really investing for the long term growth. So it's both product and it's the global business and so that's kind of a one way to think about it but I'll, let Mike add add more sure.
Yes, he them I think it the way to think about it is a lot of our efforts are going around the client experience. So when you think about user interfaces, whether it's what Greg was talking about the early stage banking application.
Whether it's with our credit card or Onboarding clients, whether it's for loan onboarding or just deposit products. It's all about eliminating friction in making sure that the clients have a really good experience at the same time, what that does it also helps out with scale. It also helps out with reached in reaching out to more clients and be able to get more penetration. So that's why you see us doing a lot more investment in those areas.
And the cards world as well too again user experience very heavy on the reward loyalty programs FX areas like small small payments areas global payments, making again easier frictionless ways to do business with us as well too on deposit products, making sure that we have many different types of products that serve all of our different clients.
Needs because as you now we have many different segments. Many different life expenses are different stages, they and they all require different type of products. So we've been investing in expanding our solutions for our clients needs and so you're going to continue to see that but again I think Greg summarized that pretty well essentially moving more to the digitization of that an expense with their clients.
Got it thanks for taking my questions.
Yep.
Your next question comes from Steven Alexopoulos JP Morgan Your line is open.
Hi, everybody.
Hey, Steve.
I want to start first with a big picture question.
If I look at the IPO market in 2018, there was a pretty wide divergence and the performance of what I think of is pure tech companies and then other companies that were trying to go tech multiple but there were really an old economy type industry right I'm thinking about overlift.
When you look at your startup clients are companies that are not impure heck now struggling today to raise funds and maybe seen like down rounds or anything like that.
Okay.
So, Steve I'll start and Mike and Mark loan they want to add.
Yes leased from my standpoint, I have not seen.
Anything significant that would say there would be a trend whether it's hard core tech versus.
What are called business model innovation on our distinguish the too.
That way.
Do I think that devaluation as some of the business model companies that had rapid growth that maybe didnt have something has differentiated the valuations are coming down or it's a little bit more difficult to get these high valuations I think thats true, but I think also those companies are the ones that.
Didn't have as clear path to profitability and I think one of the question do we get on a regular basis is regarding we work and what was the impact.
I actually think the impact is positive for our market for the following reason the ucaas companies to take a look back on say, let's look at our fundamental business and the path to profitability, which I think is a healthy thing and actually created more sustainability for the continuation of this kind of trajectory that were on because if we were headed content.
To head down that path and again my bias. If we work would have gone public and seen a master valuation I actually think you would start to see more bubble is type of valuations happening and so I look at it is taking a little bit of air out of what could be an over hyped market. So.
It's a little bit harder to get valuations you do have to have a better path to profitability, but I wouldn't say, it's any dramatic change right now.
Yeah, I haven't been seeing any heavy amounts of down around either out there as well quite quite the opposite I think we saw that probably about a year year and a half ago a lot of downtown but around this kind of time I'm not really hearing much about down okay. That's helpful.
And then on thanks for that on the buyback you didn't buy back stock in the quarter.
And you have 350 million authorization left for 2020, how much do you think you'll buyback of that.
Hard to say in total, but the that's a dozen whereas the issuance of the preferred.
It is helpful.
We now have the ability to really optimized the capital stack.
And you know exchange some more expensive common equity tier one.
As a result, so hard to say exactly what we would do.
In terms of the amount that there's an expectation that we would we will use some of the authorization.
Okay.
Thanks, and then finally, if I look of the deposit mix the interest bearing deposits are now about 34% of total looking at average.
Do you see that mix trending in 2020.
Yeah, I think on a full year average basis will be in.
The low to mid mid Sixtys full year average.
I think the trend continuing to mix more to towards interest bearing is going to continue.
And you could see us leave 2020 in the let's call it the lower Sixty's.
From.
From from.
Noninterest bearing deposit perspective, that's generally in this rate environment, how I think it's going to continue to trend.
And in terms of the strong growth this quarter and interest bearing or you just offering more attractive rates.
And what clients can get me off balance sheet product is that what's driving that.
No if you've taken a look at our overall client liquidity over the last couple of years.
Especially with the increase in rates you saw a material movement towards off balance sheet.
Now what we're doing is positioning more on balance sheet product that at a competitive rate and you're seeing that.
Some of the features that Mike talked about from a product perspective attract folks to want to beyond the balance sheet and a deposit product. So.
It's not just about the rate it's about the product the product positioning and how we're moving forward with I would say that we retention safety going into the market, making sure that we're keeping in line with the market because if you out out of market right now if it makes a lot harder. So again the in the market ranges is certainly really really helpful and as you know there.
Just a significant amount of liquidity going on there that people are fighting for the where no doubt getting more than our fair share.
Okay, great. Thanks for taking my questions.
Yep.
Your next question comes from Jennifer Demba ask with Suntrust. Your line is open.
Thank you good evening.
Hey, Jennifer.
Hi.
Question on Leerink.
Can you just expand on.
On the outperformance in 19 in fourth quarter of Whats gone really well what do you feel like the opportunities are still in and 20 in the next couple of years.
Jeff This is Greg.
So I look at.
2019, so our first year of.
To be living be part of the organization and I would characterize it as being a very strong year.
I would look at it from the standpoint do you did it slightly exceeded but it's always good to exceed our expectations for the year from a revenue and contribution perspective number one.
But actually more importantly, I would say.
The team has come together from the cultural fit that we hoped would exist.
As as advertised and maybe even little better than expected. There. So I feel really really good about that than the last part is a collaboration with the life science and healthcare commercial banking team and again because of that cultural connection in the cultural fit.
It is really a seamless partnership between our commercial bankers and the healthcare investment bankers at Sep Leerink and I look at that and look at the deals that are being introduced to the commercial bankers I'd look at the deals that are being reduced from the commercial bankers to actually be leerink as a very very positive sign now.
Was it working perfectly in 2019, no but that gives me.
Optimistic outlook for what I see going forward in 2020.
Part of the revenue when you think about capital markets. It is mostly a function of what happens in the market and the market share. They have the market share. We think is going to hold steady maybe increase a little bit but at the solid market share in the target market that go after so.
If anything my my my Hope my anticipation is that the collaboration will be even better and so the commercial bank on the life Science side, we'll see.
And even stronger 2020 over 2019, so I would characterize that is a very very good year.
And just to.
I really want to say thanks to the team at SVB Lane repurchase being such great partners, and maybe well add onto that Greg is with Jennifer when we look back about the inside and knowledge that did leerink Pete team brings to the table when you having those discussions with our clients dairy inside analogy is best in class. It just makes it brings a level discussion to.
Completely different level and really adding value for our clients I think there's been lots of great receptivity from our clients as well as EDA inside here at Sep just been quite surprised with their depth of knowledge.
At what point nearly fan.
The technology sectors and investment bank.
Yes, it's a great. It's a great question.
I think I think for the most part there there are two different markets.
What I mean, but that is you to look at the technology space, which is interesting and life Sciences I'll start with that.
You have some small players you.
You have really have SVB leerink as being.
Right in the middle and incredibly solid when you look at economics and everything else. They do a really really good job in the economic differentiation for capital markets is very very close to the bulge bracket firms.
And then they had to bulge bracket firms and the technology side as we've looked at that market, where you really end up with is.
The bulge brackets, and then everyone else and so from my standpoint, it's hard for me to see.
Jumping in to capital markets and technology will what that leaves his advisory.
And I know I'm sure you know that the number of firms that have gotten into the M&A advisory business and technology has increased dramatically. So thats a very competitive space. So before we would do that we would have to be confident that we had synergies on the commercial banking side and technology for buyouts or something and sponsor finance that we.
Could capitalize on an advisory business and technology. So that's what we're looking at we're making sure that before we make any movement in that area that we can really make it work across the platform. So.
Nothing to share right now, but it is something we're looking at but it'll probably be if we do something it on the advisory side.
Great. Thanks for the call.
Yes.
Your next question comes to Chris Mcgratty from KBW. Your line is open.
Great. Thanks.
Greg maybe a question on just overall credit quality.
Performing very well maybe interested in kind of some thoughts of portfolios or sectors that you might be keeping an eye ad.
Yes, Chris I'm going to turn over to Mark as he is the expert in that area and he is dying to answer a question. So.
Thanks for asking your question.
Yeah, it's mark and.
The answer your question Theres, No particular sector credit quality as you noted has been very strong for quite a while now.
And reflective in that is no adverse.
Emerging trends that we can see having said that the segments of our portfolio that always bear the closest watching.
Is the investor dependent and particularly the early stage segment of the portfolio given that that can change quickly depending on market factors investor sentiment et cetera.
Okay.
Okay, Great and maybe one more Greg kind of longer term question, you've had a lot of success with the capital call business the growth there's tremendous.
Maybe can you speak to diversification efforts that might be underway over the next couple of years I think you've talked in the past about private banking. Thanks.
Yes, Chris I guess I I think about your question is more broadly speaking about growth abroad, and I'm going to characterize one one thing for us because the capital call business.
When you think about it from a lending perspective that clearly has been.
The biggest driver of loan growth and that gets a lot of headlines because obviously banks focus on lending.
But I really would would ask everyone to focus on the overall business. The overall platform core fee income.
Deposits or client liquidity and the lending when you think about it from those three three avenues.
The Tech and life science part of the portfolio, even though the lending side has headwinds from the standpoint, the amount of liquidity that exists in the market.
The success that group is having about adding new clients, bringing loan commitments, bringing client liquidity. The majority of client liquidity came from technology and life Sciences.
With exceptional and core fee income FX cards, they have seen exceptional growth. So I would argue that we actually do have a more diversified growth story than mid and what is the headline in lending berlet regarding private equity services.
You've got global which is part of that and then you brought up private bank.
I am I am very bullish on on private the private bank in.
As I think about objectives for 2020.
We need to make a bigger boulder move in the wealth side.
That is both.
Organic in building it out, but we're also looking at inorganic opportunities as well and so that may come up during the course of 2020 so.
When I think about the growth trajectory. It is the whole business tucked life Sciences private equity services private banking.
All those combined that gives me optimism for the kind of future.
Great. Thank you.
Yep.
Your next question comes from Gary Tenner from D.A. Davidson Your line is open.
Thanks, Good afternoon.
Incurring.
Wanted to ask about what looks like a modest change to your guide on core fee income versus the preliminary guidelines last quarter it looks to be a little bit lower bound just wondering if it's the dynamic of bringing some more client funds on balance sheet.
Maybe a little bit of a negative impact on the.
Growth decline investment fees in 2020.
Yes. This is Dan I'll start my cat might have something to add but if we take a look at that change in the guide the majority of that changes related to the fact that our 2019 performance was even stronger than than we had anticipated.
That that just change the dynamic of the growth rate between 2019 and 2020.
Overall, we continue to expect solid liquidity from a client funds perspective.
Because of the environment that Greg and Mike mentioned earlier, so we're still bullish on the environment.
And the change in the guidance just more related to how we exited 2019.
Thanks, and then one one additional question in terms of the margin.
Good for next year, just modestly below where the fourth quarter ended up.
I'm wondering is this a question of kind of first quarter stepped down from some.
Additional repricing from the fourth quarter rate changes and then a stabilization or is it more of a kind of bleed over the course of 2020, as earning asset mix, maybe shifts more towards lower yielding assets.
Yes, I think if you look at how 2020 is going to continue to.
Our grass.
You're going to obviously see stabilization from our rate perspective.
But you are going to continue to see remixing of the deposit side of the port portfolio into more interest bearing deposits that that's going to be a source of some content of the source of growth, but at the same time some continued pressure on the margin.
We also continue to expect some competitive pressure on the lending side of the equation and I think those are the two factors that will continue.
The push margins lower.
Through 2020.
Overall, all those factors have already been included in our guide for the year.
Okay.
And your next question comes from David Shivani from Wedbush. Your line is open.
Hi, Thanks, my questions were answered.
Thank you and your next question comes from Jared Shaw from Wells Fargo.
Hi, good evening.
Yes, just circling back on Leerink.
With the separation of the core fee income guide show.
We expect we should expect that the growth rate at Leerink slows and 2020 is up the.
The right way to think about it given what we see here.
The growth rate in Leerink on a year over year basis. There there there is growth.
Yes on the revenue side of the equation.
And that's what's been factored in to the guide there the growth rates since I was the first year for us with them.
That we see.
Is consistent with what we had expected when we looked at the transaction.
The only thing I would add to what Dan said is.
It's not entirely comparable but it's more it's at least three it's more analogous to what you see in ward and securities gains, it's more market driven so if they keep their market share. The same it's part of its a function of what are the M&A and what is the capital markets for health care and so yes, we got.
Some growth built in but if next year or this year is a very very very strong year, they're going to have more upside. If there is softening and that market youre going to see a lower revenue when so when we first announced the acquisition of Leerink.
Beginning of last year or at the end of the 18, we said is going to be more of a market.
Tide business and so when you factor the doctor that and Thats, what you should not expect.
Okay, and then when we look at Leerink I guess, what's the.
What's the typical expense.
Relationship to revenues, excluding the incentive comp, what's the efficiency ratio I guess.
For Leerink as we.
As we looked at growth there.
So we look at their overall operating margin Theyre generally targeting 18% to 20% operating margins that.
The effectively the way to think about it.
Okay great.
Thanks, and then Greg maybe.
Talk a little bit about the.
View, the international view and how any potential trade.
Settlement could.
Could impact your business and how your how youre viewing the international side of the business overall.
Yes.
So the international business and again, you can break it down into.
The UK EMEA when you look at Asia, and then we have we have candidate as well.
The businesses all three of them have had nice growth in 2019.
There really wasn't a lot of impact from in the UK, we didn't see a lot of impact or maybe any impact from the Brexit discussions.
In China.
We didn't see a lot of changed change there and in you me here in the news about the venture capital activity in China, where it actually dropped pretty significantly in 2019, I think it's really important to distinguish what that drop or where that drop came from this kind of what I'll call two buckets of of venture capital in China one.
Is government supported RMB funds, where the government is putting money into venture capital funds and the other one is what I'll call more our type of venture firms, which are either use funds that are gone there and set up shop or.
Almost like a western style of venture capital model there.
Those were familiar with Thats, where our concentration isn't so we really didnt fee.
Much change so little bit of change, but not much change in 2019.
And so we have healthy growth expectations across all those businesses and.
I think the only.
At least expect positives.
From the fact that we had a phase one trade deal in China number one number to Brexit is clarified which I think it's a really really good thing so.
I look at as just being more helpful but.
2019 was a very good year.
Thanks for the killer.
Yep.
Your next question comes from Tyler Stafford from Stephens. Your line is nothing.
Hey, good evening guys. Thanks for taking the question.
Yes, Greg or Dan earlier, you mentioned just around the competition impacting the margin outlook and and.
Obviously, what within the capital call business, we've seen some newer market entrants in the fourth quarter and continued competition. There can gain Greg I guess, you just share your position I feel about sifys position within that business, how insulated or comfortable you feel about.
Texting and growing your market share within the capital call segment.
Yes, I'll start and Mike may want to add.
As he has he been even closer to it than I am.
We've had we've had great growth and that in that business theres been some margin compression, but I still believe no. We have we give a premium for what we do and and so the question is what wide would we get a premium or why would you expect to be in the position that were in which we believe well we know where the leaders in that space.
It's really several factors to one is the fact that were really the only global platform that covers private equity in venture capital across kind of all the global geography, So whether its Asia, which is a big big market, whether it's the U.S. and then you can look at Europe , but specifically taking that out of the UK. So we have.
We have more people covering this market than any other institution number one.
Number two all our products and services are tailored specifically to that market and number three the third thing is.
The client service.
Until it's not it's not one thing it is kind of all those things and if I were to say whats the outlook for us.
I know my objectives, and I know, Mike feels the same way that what we need to double down on is what are the other things that weve services that we can provide private equity firms and venture capital firms to be even more of a one stop show.
So that's what we're looking to to build out in 2020 2021.
But I feel I feel very good about our positioning in the market right now.
Okay. Thanks, and I guess, it's along the same vein can you shared maybe Dan we know what the current.
On balance sheet yields of the capital call portfolio isn't any commentary about new rigs in origination yields out of that book would be helpful. Thanks.
Hi, So it's mark I'll take that one so the interest only yield on that portfolio is creating high 3% low 4% is where it falls on average and Havent really in terms of recent originations are pretty consistent.
With the averages I just gave you.
And Mark maybe just to follow up so within your margin expectation would be no material change in that pricing that as as as originations I think as we already mentioned competition will take some margin right, we'll see some margin pressure from that.
But.
At the.
At the range I've talked about theres, not a whole lot of of room.
Left to go and and Tyler Dan based on what we've seen.
Over the last.
Six quarters now we've continued to factor in those margin declines into our forecast so that as already does expectations are already baked into our guidance.
Thanks for clarifying Dan appreciate it.
And your next question comes to John Kerry I Am Evercore Your line is helping.
Good afternoon.
Hey, John .
On the on the competitive.
Line of questioning are there other portfolios outside of the capital call lines, where you're seeing pricing pressures.
Capital call business. The primary area, that's weighing on your on your margin from that perspective. Thanks.
Yes. This is Greg.
It is the competitive market out there and it's not just in capital call lending it is literally across the across the business.
Our win rate is still exceptionally high or market share is exceptionally strong.
Yes, we have two we definitely have to compete.
Every single day.
And you're seeing it from banks Nonbanks, you're seeing it really across the board and and I guess, we really shouldn't be surprised by that I know I'm not surprised by it because.
Number one the target market that we have it has been exceptional market.
Our institutions want to see growth you got low rates and so people are looking for yield and maybe finally and this is where.
I think it'll be interesting deceiving, we do have a little bit of a downturn.
There hasn't been a downturn from a credit perspective for a decade.
And you see people coming in that are doing one covenant deals no covenant deals with low pricing in.
Is Mike has talked about on this call over the years, we want to focus on smart growth. So we are we're being aggressive were being competitive but there are situations where places we just won't go because.
We just don't think it's going to end well if there was a kind of bump on the road so.
Yes, it's competitive where sharpening your pencil.
And it's kind of hand to hand combat everyday.
But are you at the same time in terms of the margin compression. We are I would characterize as making it up from other products as well too right does it have really good margins were improving on how we deliver our client experience as well too so I'm quite okay with some margin decline, particularly as long as we continued to add to solutions and provide.
Decisions to our clients, where you make upward and fees.
And on that Mike.
As you look at the different.
Products for the wave to deepen your relationship and enhance profitability with.
Private equity firms and Vcs.
What are examples of those types of products and and who use poised to steel that business from like who's doing that business now and would you need to move upstream to larger PE firms in order to get greater access to different products that you could be offering. Thanks.
The as you know the market is massive in the private equity world, even though we are the largest global player largest player, but by and large in the United States Theres still a large market share for us to continue to go after so I'm not worried about in terms of market opportunity at all but yet with the you got mid size firearms, you've got large size from so we can go after.
All of them in terms of a specific products. The what we really have seen is FX foreign exchange as wealth client investment pieces, some off balance sheet cons and I'll give you. An example, like from FX for private equity we've been growing that business over the last five years about 30% per year. The FX world right continue to educate our clients we provide great insight.
Right Great solutions, Great service to our clients and so we continue to win.
Large mandate in that area simply on the client investment thesis while to the off balance sheet fund again lot of lot of deposits around that on in both off so thats why I would say is that where we are picking up on the margin and then at the very scalable business. As you can imagine the only thing I would add on to that is there's market share growth.
And there is market growth when I mean by that is.
Theres, a fair number private equity firms that historically actually havent use capital call lending and now as it's becoming more common to do that you're actually seeing the market growth.
So you're not taking share with many one it's just there just realizing this is actually a really good solution for them and for their Lps, So you're seeing growth both in us having market share.
And growth in product market share and your us having growth in the market overall and so from that standpoint, that's really been the drivers of the growth.
Okay got it caught it that's helpful. Then one last thing also on the on the same team I'm in terms of the competitive intensity, particularly around the couple of coal space as it is I mean, what would you say really reverses. It I mean, just given this is as it is a growing space and more and more entrants are.
Stepping in.
You really see that reversing in terms of pricing impact on the lines itself.
This is Greg I don't I don't see that market changing a whole lot from the competitiveness perspective.
You see more nonbanks competing with banks for for lending and what that does it with people want growth, they're going to be forced to compete on the lower risk spectrum.
And you're going to Pete and lowers risk spectrum bye bye, usually lowering lowering rate what what our focus is in a marks the this earlier, which has when I kind of follow up on the margins already already low so.
Whether it's an extra 25 basis points or or.
30 basis points to 40 basis points at some point and we see that companies say that's not the most important thing. The most important thing is I want to service I want certainty I want the product that I want value add and again thats something our team and the platform we provide.
It is doesnt exceptional job. So we're we're competitive on pricing, but we're doing as much as we can on the.
Called a wrapper value add that is really the key differentiator at the end of the deck.
Got it all right. Thanks, Craig.
Yep.
And your next question comes Tim Frac Vandervliet from yes.
Good evening, Thanks for the question going a little bit deeper into the footnotes here.
I was just looking at the high strength and.
I notice Theres mentioned on the loan fees could you talk about now whether there's a seasonality to that what types of lending that's coming from whether it's a capital call or tied to the mid stage.
Lending and kind of how we should think about long fees.
Going forward.
Yes. This is Dan I'll start and mark might want to add.
The loan fees that we see our.
Our seasonal we do see them just based on.
Standard payoff activity, but it's really hard to predict.
On a quarter to quarter basis, we did happen to have stronger prepayment fees in this quarter and that's why we noted them.
And the presentation traditionally the largest prepayment fees are coming out of our healthcare and life science lending portfolios and that was generally generate the largest more episodic.
The events.
Okay, great and separately regarding regarding seasonal I saw that saw that disclosure and more this is more focused on kind of the day to impact and I was trying to do the math myself, but how how should we look at this affecting.
Your provisioning.
Levels going forward.
So it's mark I'll I'll start Dan may want to add.
The as we noted in the in the slides we have the one time.
Yep range of $40 million to $60 million and from there on out we're expecting.
In the reserve for the funded a range of 95 to 105 is the guidance and what that reflects is the expectation that so long as the economy stays stable and thats an important caveat.
We expect to be within that range.
Okay, and then provisioned analyst.
Just hold up there okay.
Great. Thank you.
Yep Yep and our next question comes from QVC, Harry Your line is helping.
Great. Thanks.
Quick follow up on NIM, Dan the the NIM guide.
You guys had a very good job of working down the liquidity.
This quarter and its but it's still around 10% of of your earning asset based on what does what does the NIM guide presume how does that trend and 2020.
Yes.
It's a bit better than the NIM guide assumes that we get back to our cash targets and let's call. It the $3 billion to $5 billion range.
We've been consistently over the last couple of quarters above that which has been pressuring the NIM a bed.
Yes.
We've been putting money to work on that as quickly as we can but the same timing of the balance kind of cash needs of the company. So the expectation is staying in that let's call it $3 billion to $5 billion range.
Hopefully closer to the middle of that and to manage that down and Thats whats embedded.
Okay, and I would that be a gradual process from that smaller sure what six 6 billion now.
Yes, I mean, we.
We manage that every day.
And but put that money back to back to work the velocity of the fund flows.
It's pretty pretty strong so.
Every day, we're looking to manage down of that.
Down at that level.
Understood.
Just one quick one of them to on the expense side just to follow up earlier, so it sounds like.
The expenses are going to revenue.
Some leverage in the second quarter from whatever affordability to Fourfifty in first quarter.
The season, the powder and looking back is that there's still expense growth in the second quarter. It's just does those those seasonal.
Well taxes roll off the expense growth is more muted. So I'm, just wondering where where do you expect the expense leverage to come from in the second quarter.
Yes, and some of it it is obviously related to the seasonal components in some of its expected timing of spend from professional services. So the largest aspect, though is the roll off of.
Seasonal compensation expenses.
Got it thank you.
And that concludes the question answer session I'll now turn the call back over to Greg Becker.
Personally comments.
Great. Thanks, just want to thank everyone for joining us for our.
Q4 results and really is you look at Q4 was a great quarter 2019, the year was incredibly strong year.
And actually I'd like to even look back in the last decades since we're turning a new decade in.
It was really just an incredible period for us.
As we look at the the outlook, obviously 2020, we got a positive guidance, which we feel good about and probably most excited about is the team of people that we have what we're building out and so the overall long term outlook. So.
That gives me optimism I also want to thank our clients for supporting us and allowing us to support them.
The team that I mentioned earlier.
Incredible group of people that.
Hi, I believe are at the other day, the biggest differentiator both from a culture and values perspective and of course, our investors who.
Supportive.
And support our long term vision. So again, thanks all of US for all you guys for joining us and have an incredible 2020. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.