Q1 2021 SVB Financial Group Earnings Call

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[music].

Good day and thank you for standing by welcome to the S V. B financial group Q1, 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

If you require any further <expletive>istance. Please press star zero, we used to be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your speaker today must make on LD Lee the head of Investor Relations. Please go ahead.

Thank you Mei and thank you everyone for joining us today are president and CEO, Greg Becker and our CFO, Dan Beck are here to talk about our first quarter 2021 financial results and they'll be joined by other members of our management team for the Q&A. Our current earnings release highlight slides and CEO letter had been filed with the SEC and are available on the <unk>.

Investor Relations section of our website, we will 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 on 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 and now I will turn the call over to our President and CEO Greg Becker.

Thanks, Meghan and thank you all for joining us today.

As you can see from our earnings announcement and slides, which we filed a few hours ago FCB had a great quarter of exceptional growth and profitability.

And it was our best quarter in history.

And were notably increasing our outlook for 2021.

Our Q1 performance was marked by continued outstanding balance sheet growth.

Strong net interest income.

Incredible work and investment gains.

Standing Seb Leerink revenue.

Solid core fees and stable credit overall.

So we'd like to go right into Q&A and I'm going to ask the operator to open up the lines.

As a reminder to ask a question you will need to press star one on your telephone switch on your question press the pound key please standby, while we compile the Q&A roster.

Yeah.

We have our first question.

Yeah.

From the line of Ken Zerbe from Morgan Stanley. Your line is now open.

Alright, great. Thanks, good afternoon, everyone.

Hi, Ken.

Greg I would agree with you it was a fantastic quarter shame.

Well I think that's too low to me actually looking through the <unk>.

The materials with the very large increase in the held to maturity securities portfolio. It looks like on an end of period basis is up about $25 billion.

No I guess I'm not overly surprised that you're investing in some of these excess cash into <unk>.

Securities, but can you just talk about like why held the maturity versus available for sale and what exactly are you investing net thanks.

Hey, Ken it's Dan.

I'll take this one so obviously you have seen just incredible liquidity growth.

Coming through the end of last year and continuing through the quarter.

Based on your view of that liquidity and overall market conditions and how much incremental liquidity remains in the market.

We are comfortable being able to put some of that money to work.

And longer duration.

In the held to maturity category. So thank you in the three to five year range. One of the things that gives us comfort with being able to do that is that in our available for sale maturity. We're also targeting a much shorter duration.

Think about something along the lines of two year duration, so that helps us reduce.

The other comprehensive income risk also frees up liquidity for us to the extent that we need it but based on the trends that we continue to see.

Stability of the liquidity in the market, we're comfortable putting that type of money to work now what are we investing in.

Continue to invest in agency Securities. This is also a mix of agency mortgage backs as well as agency CMO from that three to five years.

Maturity rank.

Got it okay that helps.

And then I.

I know this is going to be a tough question.

May not want to answer, but just in terms of the investment security on warrant gains.

But again fantastic growth certainly surprise, Steven everyone versus despite your pre announcement.

A little while ago.

But when you look at the portfolio.

Is there any reason not to <expletive>ume that this continues because I think both ourselves and probably the rest of the street sort of caught a little bit flat footed quarter after quarter. After quarter, just the amazing growth that you guys have been able to put up or gains in that portfolio and I'm. Just wondering should we just.

Assume at least for the near term that this level of gains continues over the next several quarters. If you have that level of visibility.

This is Greg I'll start and Dan may want to add.

We've had this quarter was extraordinary last quarter was incredibly strong in the quarter before that as well as you as you highlighted Ken.

Obviously, we do not expect Q1.

To be repeated.

I mean, I guess it could happen, but that's certainly not in our forecast.

No.

What drives the warrant and securities gains are obviously from IPO as public offerings and it's also driven.

Driven by M&A.

And right now it's you know the market is being driven by Ipos clearly we have.

And warrants and securities gains that are benefiting from that but.

To say that would continue at this pace is just it's just unlikely do we expect that we're still going to have some gains for the balance of the year absolutely.

But not to the extent, we just we just had just been extraordinary in.

Many many many ways.

Yeah.

Understood and if I could just fit one last question.

Reagan your written remarks, you mentioned that you were interested in growing.

The business through targeted acquisitions and hiring teams with special skills.

Could you just elaborate in terms of what kind of skill set you are looking for.

Either through team hires or through acquisitions.

Yes.

That point was mainly related to two specific areas.

One and this is really realistically post <unk>.

<unk>, probably been Boston private integration and the deal closing <expletive>uming everything goes as we expect it will go so looking at wealth management teams that fit into our our strategy either from both a cultural fit and a targeted market perspective. So that's one areas that we'd be looking at in the second area. We've talked about this for quite a while.

L as in technology investment banking.

So we executed this past quarter on bringing in a health care services.

Digital health team with Barry Blake, leading that.

<unk> seen the announcements that we made about those those hires so that would be an example.

But two other things that could happen.

Our one in the wealth space and the second one in technology investment banking outside of that it's mostly <unk>.

Target did hires.

In many areas across the platform, but it really isn't what I would call a team based team based approach.

Alright, Thank you very much.

Yes.

Yes.

Yeah.

Next is ebrahim I'll put it on.

<unk> from Bank of America. Your line is now open.

Good afternoon.

Hey, Brian just a.

Dan quickly wanted to follow up on the I guess.

Positioning of the Securities book is that completely.

Given the move I understand the big swing in the OCI this quarter going forward, if we get another 50 basis points moving to tenure.

It is the book protected where you don't have as large and you will see a hit can you just talk about that and in terms of how protecting against higher rates and forms just how you're managing the liquidity on balance sheet.

Yeah.

Sorry about that so yes, ebrahim, we are certainly positioning at this point.

For the potential for higher rate so in the quarter, we put on close to $10 billion worth of swaps on that available for sale portfolio.

And we're going to continue to do more to protect against that.

To mitigate the impact of potential further rate movements. So.

You take a look at our target duration on that book, we're going to cut that in half here pretty quickly while at the same time as I mentioned again, taking the rest of our investment dollars and held to maturity, where we're more protected.

Are you able to do more long duration. So net net we're still going to be able to invest.

New money.

At anywhere between let's call it $1 35, and $1 45, while protecting against that OCI risk. So we're not going to be able to isolate for all of it but it will be.

And that should be your duration much more protected than it was in the early first quarter.

And just day to that Dan.

$18 billion in cash liquidity, which was earning seven bps does that continue to grow until we get to a higher rate because it doesn't look like the liquidity and flow is going to flow anytime soon.

And is that kind of flow.

Something that you're comfortable with.

Ebrahim, we put a lot of money to work in the quarter.

No.

As you can see Jeff on the held to maturity.

Purchases thats up close to.

Of $20 billion.

In the quarter. So, we're certainly putting money to work, but with the continued deposit growth in the quarter.

There are still certainly.

Do you have a lot of liquidity is still sitting in cash now our intent is to progressively as we talked about before work that down throughout the rest of the year to that $7 billion to $9 billion range and strategically positioning part of it into that held to maturity as well as continuing to.

Shorter.

In the available for sale category to protect against that OCI risk again, net net investing at about 135 to $1 45.

Got it and I guess, just one separate question around the Boston private acquisition.

Greg you once again highlighted the $400 billion client opportunity.

Just give us a sense of once the deal closes how quickly can you start bringing in net.

Mark.

Net opportunity on the back on the balance sheet in terms of market share.

And where do we see that do we see it in the private banking mortgage loans growing significantly how much do we see on the fee revenue side, just give us sense of the timing and the magnitude of how we should sort of look for Boston private adding with the private banking strategy.

Yes.

A couple of things one is one is that look we're still we'll still early we are very very focused on.

Integration and getting things closed and getting all the approvals.

Cross across the board. So that's that's the number one thing, but obviously as part of our discussions we're talking about.

What what's going to be.

What's the when we when we closed the deal like what's going to happen and how long it will take.

We're spending a lot of time talking about the go to market strategy and how that will work and we're optimistic but lets just <expletive>ume for the second to the deal close as we.

Specced it too.

We're looking at making sure we've got the rate.

Team is focused on the right opportunities and making sure that those referrals theyre going to come from the commercial bank.

Youll see that in <unk>.

Mortgages, which we expect to expand clearly from where we are and where Boston private is so that's one big area, we look to expand in specialty lending that's lending.

To these high net worth individuals on the innovation economy, and then there's obviously the wealth the wealth opportunity and that's one of the key reasons. It's fee income are around around well.

How fast that will come.

We're not ready yet to share that plan.

But clearly at the next earnings call.

We will take a more focused approach in rolling that out.

As we get closer to the the announcement date and the.

The final the final close again, <expletive>uming everything goes well.

Got it thanks for taking my questions and congrats on completing 10 years as CEO.

Thank you thank you Ram.

We have our next question from the line of Steven Alexopoulos from Jpmorgan. Your line is now open.

Hi, everybody.

Hi, Steve and Greg I'll Echo Ebrahim as comments congrats on 10 years on the CEOC.

Thank you.

Hard to believe you guys had 30 billion of client funds and how you took over now your 300, that's pretty good.

Yes.

But along those lines this might seem like a crazy question, but when.

When we think about the client funds, where they move to <unk>.

How large could that go given the infrastructure of the company today.

You go to 500 billion for example, with your current infrastructure.

Well, so I'll start Dan may want to add.

It's not as if the infrastructure has been static you've continued to add capabilities and we do.

Kind of every quarter look to reinforce and add to it but the growth that we've seen over the last 12 months.

Once we started seeing it we started to really start to double down on.

More on infrastructure thinking about getting ready for <unk> large financial institution.

Moving our risk management infrastructure across the board from a technology perspective.

This has been what we have been working on for quite a while it's just gotten accelerated given the growth that we have seen over the last 12 months.

And so it's.

I would just say could we get to the $600 billion on what we have right now today. The answer is no probably not.

But we know that which is why we're making investments so we've upped our guidance on expenses.

Part of that is going to again building out infrastructure supporting growth and on slide 11, you see all of the areas that we're investing in and those are important but there is both what our capabilities are and what the market opportunity and the market opportunity over time clearly.

Is substantial.

You can you guys read this every day the attention that's being given to the broad innovation economy, both domestically and globally.

Never been this high and while it may be volatile.

I'm certainly betting we're betting on it continuing to go up into the right over the long run.

It's a huge market, it's getting bigger and we're doing everything we can to support our infrastructure to be able to capture that growth.

Okay.

Its helpful I actually saw that language.

Your statement on the large financial institution compliance on the UK business is there.

Essentially you guys now thinking you were in across a new regulatory threshold given the overseas deposits.

Is that an outcome.

Yes, theres two pieces to it Steve So one is.

One is domestically.

Domestically, obviously, when you cross a $100 billion.

You move on to Lofi.

And so we've obviously done that done it faster than we thought we were going to and we saw that coming and we started preparing for it last year on that will be things that we're doing that Dan can give you more perspective on a better perspective in on over the next.

<unk> and years to make sure that we're.

Client with all the <unk> requirements, but then globally. There's also different requirements when you hit certain thresholds in the U K one.

One of those thresholds is the amount of deposits you have two smaller companies net definition is.

There is a revenue definition, there's other definitions and as you know we have companies that are both substantial in size, but actually have very low revenue and so that still contributes to crossing that threshold. So as we head down a path to create a subsidiary of <unk> in the U K.

That is also building our capabilities and so we have lofi domestically and we have the subsidiaries Asian.

In the U K, all of which is building infrastructure to support our longer term growth.

Okay.

That's helpful.

And then Greg what about the exit markets clearly supported your business results across the board, but the IPO market has been a little bit weaker recently rights back to have had a bit of a challenge is this having any immediate impact on client flows.

Client flows obviously had been incredibly strong.

As we've said in prior quarters when the market gets.

It gets very strong.

Isn't usually stay that way well it doesn't stay that way indefinitely.

So I think all of US would have expected some a little bit of a slowdown in the market.

Starting to see that but the pipeline and you know this and many other people do as well is still incredibly strong.

And so we expect the exit market, Steve still be healthy for the balance of the year could it be bumpy.

Probably we would expect it to.

But my view is then the other part of the market may pick up more than the than the capital markets. It could be M&A and it probably will be M&A. So when we think about.

Growing the business.

From an exit perspective, it is M&A and capital markets equity capital markets and if it slows down.

Maybe we'll see.

Loan growth in the technology and life Science portfolio, that's usually what happens we're competing right now as much with liquidity coming from public markets.

Large private round as we are anything else and so it has slowed on the met.

Would expect at least show some pickup in loan outstanding. So we feel whichever way. It goes we're positioned well to take advantage of those opportunities.

Greg if I could sneak one more in is that crowding out the reason you're not seeing the early stage balances grow despite that the new client adds are accelerating.

Well.

The early stage, so thinking about the whole the whole portfolio rate, we actually saw in this last quarter nice growth in Outstandings in Tech and life Sciences, and so the team is doing a great job.

Fact, our win rates are incredibly strong the pipeline is incredibly strong theyre doing truly an amazing and amazing job is it being credit up on liquidity the answer is absolutely.

So there is no slowdown and our desire to.

To drive more loan growth in those in those segments and maybe one other point that you've seen and maybe this is driving the question is the percentage of early stage lending relative to total lending it's down to 3%.

It has still been growing it's just the rest of the portfolio is growing at such a rapid pace.

That it becomes a lower percentage of the overall loan portfolio.

And so.

It's just it's a matter of our growth and it's a matter of.

Liquidity being incredibly strong out there.

Okay.

Helps thanks for taking my questions.

Absolutely Thanks, Steve.

We have our next question from Bill <unk> from Wolfe Research. Your line is now open.

Thank you good afternoon.

A lot of focus on pent up demand dynamics across the broader economy. As we look ahead to continued vaccinations.

Can you discuss how you see the impact of these pent up demand dynamics across your customer base and is there potentially an opportunity to remix more of your earning <expletive>ets to higher yielding loans either in the U S or internationally on the back of this.

<unk> economic growth.

Your results are exceptional.

Good day, but just curious.

Here your thoughts against that backdrop.

That changes.

Yes, Bill this is Greg I'll start and Mike <unk>.

Silicon Valley Bank, President and Marc Cadieux may want to add some commentary.

We clearly believe that there is a.

A lot of pent up demand and you're hearing about that as you said and kind of everyone's talking about it we believe for the consumer.

Our economy.

It's going to create a very very strong second half of the year with with very strong GDP growth.

How does that impact us clearly some of our clients are seeing that are in e-commerce.

Tumor facing.

Industries.

We're going to benefit from that.

Will that allow us to reposition our lending portfolio I guess I don't really see that driving much change from the direction that were.

Headed in right now I, just don't I don't see a big I don't see a big change there do I think it is going to be healthy for the market. Overall, yes, I think it'll be healthy I don't think its going to have much of an impact on our loan portfolio.

If mark or Mike had a different point of view on that.

Yeah.

And Mike you are on mute.

Okay can you hear me now Greg.

Yeah I'll go ahead, I'll start and Mark will jump on here.

Lately the pent up demand I think is a real factor and I think that is excellent in terms of potential going forward and there's a few different things that we think about the ripple effect of that clearly I think there could be some pull through on loans. I mean, when you think of AD Tech industry, when you think of hospitality and travel.

Innovative companies that we have that center on to serve those areas again, I think you could certainly see some pickup obviously, it's not huge.

Huge piece of the on the loan portfolio.

It will lift boats theyre moving on to kind of the fee income when we start to see more pent up demand will opening the economy, you're going to start to say credit card fee right. So people spending and traveling and moving around so we should potentially benefit from the credit card activity as well as potentially some of the FX and deal activities, whilst if people start to move around there or is this.

Certain groups of people that maybe been holding back in terms of deal activity, maybe they start to do more deals cross border deals as well too. So again since there has been some limitations on travel international So I think that could certainly open up some cross border deal activity. So again I think the opening up the economy. The pent up demand is a pause net net positive overall.

And as Mark I think Mike and Greg covered the waterfront there nothing further to add here.

That's super helpful color.

Thank you all.

Separately, Greg you mentioned being cognizant of the risk of deposit outflows, how do you view the stickiness of the deposits on your balance sheet today versus history is there anything in particular that you'd call out.

As being a greater risk today.

So the short answer is no other than the growth and the size has been so dramatic we haven't seen that historically, but if you do go back and look at.

History.

And this is a chart eight and the <unk> in the deck. We've tried to help answer that question a little bit. We go back to 2006, all the way through this quarter and during that period of time, we only had one quarter or one year, where client funds dropped.

Little bit and that was a minor drop from OE to one nine but on.

Other than that through cycles.

We've been we've been up into the right. It's more of a question of what piece of growth that we had seen so could there be some softness in deposits on a quarterly basis or maybe even a few quarters, possibly if the market really started to soften but I'll go back to what I said in answering a few other questions which is <unk>.

About the innovation economy, and how you really do.

Look at this.

This innovation market domestically and globally.

And my view is this market is the place to be it is going to continue to be.

What pace, most if not all other markets and that in turn will drive liquidity and deposits on our balance sheet funds and so from that standpoint, we're still very optimistic about the upper trajectory.

Understood if I could squeeze one last one in for Dan.

As you look to deploy more and more of your liquidity into securities as you've described.

Is there any constraints on how high you guys are willing to take that mix relative to your average earning <expletive>ets. We saw the investment securities portfolio reach a peak of 74% of average earning <expletive>ets back in 2014 versus the 58% where you guys finished this quarter. So first is how high can that go and then as your decision on when.

To deploy that liquidity at all influenced by potential changes in tax policy. For example would you be more interested in growing our municipal bond portfolio.

We do see higher and higher tax rate.

Yeah. Thanks for the question I think you know as we take a look at the deployment of liquidity our past practice on our continued objective is to.

To continue to progressively put that excess liquidity to work.

And you continue to see us credit to work on at the same time, you see now every quarter close to $3 billion of that portfolio of cash flow coming off and I think that creates a lot of flexibility for us to be able to just continuously deploy.

The.

Excess cash into investment securities in terms of no hard limit of how we go.

We don't have one and I think what we would continue did you just take the practice that we have and put that excess liquidity to work again understanding that we've got about $3 billion of cash flow coming off of that portfolio at the same time, we've got enough short term liquidity and that <unk>.

Available for sale portfolio that to the extent that we need to dip into that liquidity. We can certainly do it. So we're protecting at least on the short term with what we've got in available for sale and were certainly investing off and on.

<unk> duration and held to maturity and what we're doing in the available for sale portfolio now to your question on how do we look at deployment.

We've certainly added more to the municipal bond portfolio, that's close to.

On a $3 $5 billion book at least at this point and I think we have continued room to grow that.

Especially with the potential for tax reform coming here.

In the coming year or so so.

On a continuing to deploy <unk> got the room to do it and that benefit of liquidity coming back from US every quarter gives us gives us a lot of flexibility to be able to do it.

That's very helpful.

Thank you all for taking my questions Thats great color.

We have our next question from Jonathan <unk> from Evercore ISI. Your line is now open.

On the securities.

Investments again, sorry to another question around that.

Can you just talk about the pace of incremental additions from here I know you just mentioned the three to $3 5 billion in cash flow.

Yes.

Youre clearly putting incremental liquidity.

Into the book as well so how should we think about the pace of the incremental investments maybe quarterly as we go through the year into the portfolio.

Yes, John This is Dan I think the way to look at it.

We certainly came out of the quarter and a very healthy cash position and our objective is really remain the same which is to bring that cash position down.

Let's call it the 7%.

Of $9 billion range by the time, we get to the end of the year. So.

We're going to Opportunistically.

Deploy that there were certainly a substantial amount of deployment in the first quarter.

And that was occurring on the backs of a very strong deposit growth quarter.

And obviously seeing the deposit trends into the first quarter.

We thought that we had the ability to be able to put that to work faster than we otherwise would.

Based on our forecast for the remainder of the year I think you'll see us more aggressively put that money to work.

Or the.

Coming quarters so.

There is no perfect answer to it but I think it's going to be more progressive based on the forecast of liquidity and what we saw here in the first quarter.

Got it thanks, Tim and then in terms of the progression of the duration towards that less than two.

Two years versus the current four three year duration.

Is that a similar timeframe that youre trying to get to that point or would that take longer.

No we're going to do that.

Pretty quickly I would say here over the next.

Over the next.

Month or so.

That's easier to do because we'll be able to use derivative instruments to do that.

Then legging in with progressive purchases in that portfolio. So we'll be able to as we did by putting $10 billion worth of swaps on.

In early March we'll be able to move pretty quickly to.

To shore up the duration there on at least move it to be shorter so you'll see that happen here pretty quickly.

Got it Okay and then.

On the.

Our loan book.

Just wondering if you can give us the updated new money loans yields that youre getting in the capital call portfolio.

Hi, it's Mark I'll take that question then.

Regrettably compelled to decline to answer the question.

Given.

Competitive forces in the marketplace on not wanting to disclose too much on this call about where our card pricing set.

<unk> for that.

Okay understood.

John I think yes, I think what we can say.

Overall.

When we take a look at pricing all of the new money yield on capital call lending the mortgage book as well as health care and Tech are included within our guidance of margin and net interest income for the remainder of the year or so.

We can't give you the specifics but.

Where we are on how would you expect that to progress is included in the guidance for the remainder of the year.

Got it okay.

And then just two other quick ones I'm, sorry from the multiple questions but.

On the credit front.

On.

Just a follow on the heels of the fraud could you just update us.

What changes have you implemented as a result of it just.

Just given that the fraud surfaced.

Pretty quickly after origination of loans.

Now that you've had a little bit of time too.

Implement what type of changes to your approach on have.

Have you implemented or.

There's nothing material needed to be to be done since it was more isolated.

Yes.

I'll start others may wish to chime in.

You nailed it with the end of the question as we've noted before we did a review of the low end question, our overall portfolio as well and concluded that our belief that this is an isolated incident.

Consistent with that I would just remind you and everyone else on the call that we've been doing capital call lending for 30 years.

I think very well over that period of time and during that period of time. This is.

On this potential fraud incident is the one on only incident that we have.

Encountered and so while we have of course in the wake of something like this.

<unk> taken a look at everything we do the conclusion, we ultimately come to us as a good opportunity to reinforce training and awareness.

We need to be on guard against this kind of thing.

And that really is the extent of it I will stop there.

Anybody else chime in if they wish.

Okay, Alright, well, thank you, Mike and I promise My last one is just on the operating efficiency ratio.

58, and a half year for the first quarter could you give us maybe your expectation on how we should think about.

The full year and maybe long term for that ratio of what your expectations are.

Yes, John I think the best way to look at it.

As we are clearly going to continue to invest in the franchise.

We are a growth company and it absolutely makes sense for us.

Put the money to work to be able to drive that and I think in the first quarter, you see us paying for performance across.

On the banking activity as well as the excellent performance of <unk> Leerink.

Investing in our initiatives and.

Thats certainly driving.

Higher.

Operating efficiency ratio. So I think as we look for the rest of the year.

Certainly see.

Continued higher operating efficiency, just because we are going to continue to invest because we see this gross growth opportunity ahead, exactly where thats going to end up is so dependent upon what happens with more net investment gains as well as what happens within the Leerink business, that's hard to say exactly what that long run.

Ron.

Operating efficiency ratio should look like but again the focus here is on investment and we're a growth company.

And it makes sense for us to put that money to work.

Got it thanks for taking all my questions.

Yep.

Next is Jared Shaw from Wells Fargo Securities. Your line is now open.

Hi, Good afternoon, Thanks, Hey, Joe Hey.

Maybe could you just.

Update us on on either the strategy of their preference for on balance sheet client flows versus off balance sheet, I guess, especially in light of.

Your capital utilization levels, obviously, great that you were able to raise capital to the extent you did this quarter, but you still have a TCE sequentially.

Sequentially down so any any thoughts I guess on on what that strategy is and the success of being able to.

Direct those flows.

This is Greg I'll start and then Mike and <unk>.

Dan May want to add add to it.

First of all it starts with the client and what makes sense for the client what we've said in the past really a year is that what we've done is built a much broader product set.

Allowing clients to choose.

Options. It makes sense for them. If you look at last quarter, we're kind of in that $50 50 on an off balance sheet.

And we have said in the past and that's a good that's a good place to be.

That being said could we see more of it move off balance sheet, just given where yields are and so forth.

Clearly, that's a possibility, but it starts with starts with client preferences and what they're looking for then.

And then secondly, it's the product set that we have making sure we give those options to our clients.

And then the third is we can look.

Very small way.

Change a little bit of behavior by moving some of spreads around but that's hard to do when rates are zero.

And so it really does boil down to product set and client preference.

So Dan or Mike anything to add.

Yes, Greg it's day.

Dan.

Go on to the capital topic and Jared since you brought it up when we think about capital we're really thinking about two things one is profitability and into the growth. What's really clear is that our profitability remains strong and that could support strong balance sheet growth the leverage ratios have been under.

Pressure from exceptional growth in the last few quarters and you obviously see that on the balance sheet that exceptional deposit growth. We saw on the first quarter continues to put pressure on the tier one leverage ratio at the bank. So as Greg was talking about we certainly are and you've seen it because 50% of the.

Client inflows for the quarter went off balance sheet. So, we're certainly where we can where it makes sense for the clients moving deposits off the balance sheet to help buffer some of that impact.

Our common equity transaction also in this quarter helps free up additional capacity to support our growth and the ways that we've done it in the past so that includes preferred debt issuance to support that tier one leverage ratio and.

And the markets have been open to us to do those transactions from that provides very low cost regular regulatory capital to us to be able to continue the growth. So when we look at all of those things that's the way, we're thinking about capital and on.

Our risk based capital measures remained very strong if you look at each of them on at the holding company, we closed the quarter at about 12, 2%. So all in.

That's how we're thinking about capital.

Okay great.

And then maybe just finally from me a broader.

Picture question, you know we saw the new.

We heard the news today about the potential.

Tax changes that were proposed I guess when you look at the.

Sure.

<unk> for higher <unk>.

Income taxes, but also higher capital gains how do you see that impacting the funding market and the appetite for.

Funds versus maybe potentially a higher appetite for traditional bank lending for some of these companies.

This is Greg I'll start and <unk>.

Dan you may want to add.

That was specifically about capital gains taxes related to individuals and I don't personally see that having any real material impact on a direct basis. So indirectly there's going to be lots of speculation over that over the next.

Few weeks about is that going to soften the stock market is going to call that valuations to come down and what could the ripple effect of that.

I think it's too early really to tell but I would just say on a direct basis I don't I don't see a lot of impact to our business.

Great. Thanks.

Hmm.

Okay.

Next is Chris Mcgratty from <unk>. Your line is now open.

Great. Thanks for the question.

Dan I just wanted to kind of combine a few of the questions that we've heard on on what Youre doing to the balance sheet, but you guys have obviously been one of the most <expletive>ets sensitive banks in the country. All the actions you are taking with the held to maturity in the swaps.

Adding the duration I mean.

Rodley speaking how much are you changing.

The rate profile of the company.

Yes, Chris we remain.

Quite <expletive>et sensitive and.

In effect.

On the actions that we're taking.

Held to maturity.

You can almost think of it as a barbell, what we're doing is extending the duration and the held to maturity book.

That three to five year range and shortening the duration on available for sale into that less than two year, but net net the overall position of the investment securities portfolio remains about the same so youre thinking.

In the three to four year range on an all in basis, obviously thats going to fluctuate.

Order to quarter based on what's going on with the rate, but all in the intent is not to change that.

The physician for the total portfolio, but to protect against.

Sudden rate movements in the available for sale portfolio. So.

If we look at the <expletive>et sensitivity, we have got that included within our slide deck. We are still in a good place from a sensitivity perspective and to the extent that we see rate movements, we would still benefit and a strong player from it.

Okay great.

And then on the on the reserve.

How do we think about.

On the reserve going forward given the outlook on credit compared to day, one you've heard a lot of banks this quarter talk about getting back to day, one that by the end of the year and obviously you guys have worked to reserve down a little bit given the actions you took last year.

So I'll start Mark and Dan May wish to add so following this first quarter.

Recognizing that our loan portfolio composition has evolved a fair bit.

In the four to five quarters since.

<unk> arrives.

Probably largely back at this point to pre Covid levels and would not expect any significant reserve releases related to further improving market conditions going forward.

Great. Thank you.

Next is David Smith from Autonomous your line is now open.

My questions were answered thank you.

We have Brock vandervliet from UBS. Your line is now open.

Hello, Thanks very much.

So I think the team here.

Extremely adept in to these calls and communicating with the street.

And I, just kind of raised an eyebrow when I heard the comments on capital call on capital call pricing.

Some of the some of your competitors that are in this space.

Can you talk about it pretty regularly I think we all know.

Extremely competitive and.

Margin business, that's not new.

I'm just wondering if we should read into or if there's anything to add in terms of has there been a change or intensification of the competitor.

Competitive dynamic there that we should be aware of thanks.

So this is Greg.

No no change, it's an incredibly competitive market and we're sensitive I'm sensitive to when you are the market leader and you start sharing information I would say that we are we are pretty much the market and we command a premium just because we have.

Again, I give credit to our teams who do an exceptional job so.

There is there is no nothing has changed it's a competitive market.

At this point you can back into getting close to what it is.

By the analysis that Marc and team talked about so.

Again, I wouldn't read anything into it.

Okay. Good.

The client investment fees, and those kind of wound down with with lower rates.

How quickly with those.

Could those kind of claw back in the other direction, <expletive>uming we get some activity on the short end of the yield curve at some point.

Okay.

This is Greg if you look at slide 14, I think the team did a really good job of describing.

Describing the rate sensitivity in the third.

On the box on the upper rate it talks about the balance sheet client funds and.

What could happen with a 25 basis point increase in fees on the number is.

An expected increase of $90 million to $120 million.

Dollars of of growth in fees.

Based on a 25 or the initial increase of 25 basis points in short term rates. So it's a.

It's pretty clear there and.

Obviously, a very nice impact if that happens.

Got it okay. Thanks for the questions.

Yes.

Once again, if you wish to ask a question. Please press star one on your telephone and wait for your name to be announced.

Yes.

No further questions at this time I'll turn the call back over to Greg Becker for some brief closing comments.

Great. Thank you. Thank you all for joining US today, we are obviously pleased with our results not just the quarterly results, but our improved outlook for 2021.

And as we say on every call. We certainly believe the long term opportunity in this market is exciting.

And as we really refine our strategy.

<unk> really build out and capitalize on the growth of the innovation economy. These four businesses the commercial bank the private bank the investment bank and SCB capital.

Our intent is to to.

Port to grow too.

To expand each one of those businesses.

At FCB, we are focused on strong execution continuous learning and improvement and always focus on the client working better smarter faster to help our clients achieve what their goals are.

And <unk>.

As importantly, being focused on doing the right thing for our employees to ensure their professional success and well being is taken care of because none of this would be possible without our.

Great talented and dedicated employees.

Last last comment I would say is the following you have heard a couple of people talk about and congratulate me on 10 years as CEO and this is my 10th.

Year of our quarterly calls so we just wrap this up.

Obviously incredibly proud of what the institution has built over the last 10 years.

I would say on a regular basis, both internally and externally I'm confident I have the best CEO job and banking.

I believe I, probably have one of the best CEO jobs, many industry because of who I get to work with every day.

And our clients who are changing the world in a way that.

Is incredibly inspiring.

Get more energy and excitement from engaging with our clients and talking to our teams than than almost anything and so I feel incredibly fortunate. So do you really want to thank the exec team. Thank the board of directors. Thank the entire FCB team and our clients for allowing me to have such a great job and I couldnt be more excited.

Where we're going.

Thank you everyone for joining us and we will talk next quarter take care.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Okay.

Alright.

Net loss.

On.

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Yes.

Okay.

On.

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Please go.

Alright.

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