SVB Financial Group (NASDAQ:SIVB) Q1 2022 Earnings Conference Call April 21, 2022 6:00 PM ET
Company Participants
Meghan O’Leary – Head of Investor Relations
Greg Becker – President & Chief Executive Officer
Dan Beck – Chief Financial Officer
Marc Cadieux – Chief Credit Officer
Mike Descheneaux – President, Silicon Valley Bank
Conference Call Participants
Manan Gosalia – Morgan Stanley
Ebrahim Poonawala – Bank of America
Casey Haire – Jefferies
Bill Carcache – Wolfe Research
Jared Shaw – Wells Fargo Securities
Steven Alexopoulos – JPMorgan
Chris McGratty – KBW
Brian Foran – Autonomous Research
Andrew Liesch – Piper Sandler
Jennifer Demba – Truist Securities
John Pancari – Evercore ISI
Chris Kotowski – Oppenheimer
Jon Arfstrom – RBC Capital Markets
Operator
Ladies and gentlemen, thank you for standing by. And welcome to the SVB Financial Group Q1 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Meghan O’Leary, Head of Investor Relations, you may begin your conference.
Meghan O’Leary
Thank you, Josh, and thank you everyone for joining us today. Our President and CEO, Greg Becker; and our CFO, Dan Beck are here to talk about our first quarter 2022 financial results, and will be joined by other members of our management team for the Q&A.
Our current earnings release, highlight slides and CEO letter have been filed with the SEC and are available on the 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 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 maybe 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.
Greg Becker
Great. Thanks, Meghan, and thanks everybody for joining us today. We’re pleased to be reporting an excellent quarter of strong earnings and profitability, driven by healthy core fee income, solid balance sheet growth, and a significant lift from higher rates. Based on this momentum, we’re raising our 2022 revenue outlook and our outlook for loan growth and have meaningful revenue upside, if the forward rate curve plays out.
Also, really excited to be introducing our new brand which highlights the power of our four business strategies so really hats off to our entire marketing team, who’s done a great job rolling that out and we’re getting really positive feedback around that.
So we know you have questions and we want to make sure we get to all of them. So I’ll ask the operator to open up the lines.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Manan Gosalia with Morgan Stanley. Your line is open.
Manan Gosalia
Hi. Good afternoon. I was just – a quick confirmation on the NII guide. So that includes just the March rate hike and the improvement in the long end so far. Is that correct? It does not include the eight additional rate hikes we have in the forward curve?
Dan Beck
Yeah. Hi. This is Dan Beck. It does not include any additional increases in Fed funds.
Manan Gosalia
Got it. So can you help us just think through the puts and takes if we do get the eight additional hikes in the forward curve this year? I know, you’ve given us the rate sensitivity metrics in the deck, but how would that impact your guidance for loan and deposit growth as well?
Dan Beck
Yeah. I think it’s better just I think about that sensitivity in net interest income. Obviously, there are a lot of variables. So the expectation with additional 25 basis points and we do have the growth assumptions in there or that $100 million to $130 million worth of annualized net interest income. And now with every subsequent increase in core fee client fund fee income, you would see another $20 million to $50 million annualized. So that’s the best way to look at it. That takes into consideration the dynamics of the balance sheet. And we think for the rate increases and what’s in the forward curve ahead of us that’s a good set of assumptions.
Manan Gosalia
Got it. And how should we think about just the loan growth in general, just given, I know you’re seeing strong demand from both the fund banking and the tech and health care clients as well. But any more color on like what you’re seeing there that gives you the confidence that there is upside to your guide on growth guidance even with the rate expectations moving higher?
Greg Becker
Yes, this is Greg. I’ll start and Mike may want to add. I think about it on the commercial bank side and then also think about it on the private bank side. So, if you start to see those rates play out on the commercial banking side, we’re seeing kind of what we’re seeing now which is we believe there’s going to be some softness in the venture capital levels. And so equity may be a little bit harder to get as rates pick up. And what we see on the opposite side is we do see a stimulation of loan growth on the high tech and the life science side. So that we believe has some upside.
There may be some softness in private equity and venture capital, but there’s a lot of dry powder there. And as they continue to do deals, we certainly don’t believe rates are going to have that much of an impact on the velocity around it. So, that’s I would say is neutral to positive.
On the private bank side, clearly, if rates start to pick back up, we’ve already seen 30-year rates pick up and seen some slowness there. If they continue to accelerate and they get higher, we should expect I think all banks that are looking at mortgages to see some softness there. So, it’s one way to think — at least that’s why I think about the loan forecast on a go-forward basis with the — if the forward rate curve plays out over the balance of 2022.
Mike Descheneaux
This is Mike Descheneaux. And the only thing I would add is you did see strength in the lending in tech and life sciences in Q1. And then when we look about the future the pipelines, the pipelines are at near or close to all-time high. So, we are still seeing some strength in the pipelines.
Manan Gosalia
Very helpful. Thank you.
Greg Becker
Yes.
Operator
Your next question comes from the line of Ebrahim Poonawala with Bank of America. Your line is open.
Ebrahim Poonawala
Hey good afternoon.
Greg Becker
Hey, good evening.
Ebrahim Poonawala
First question maybe Greg just big picture, obviously, it’s been — a lot happened during the quarter. Give us a mark-to-market, means it was a fairly strong quarter. I think your guidance is better than I think most people feared what would play out. Give us a sense of — I get that late stage has been tougher. IPOs have been tougher early stages still moving along. When you talk to folks sort of in that VCP ecosystem, is it still wait and watch? And like if we get another 10% sell-off in the markets, would that negatively impact sentiment? Just give us a sense of where things stand and like the downside risk to sentiment appetite for VCP investment?
Greg Becker
Yes. Ebrahim that’s about five questions in there. I’ll try to pick it apart. Let me just start with client funds and I’ll talk about what happened in the quarter. And then again as much as I can crystal ball it there and then just the general kind of sentiment what we’re engaging with when we talk to venture capital is or private equity partners.
So, in the quarter if there’s — if you think about four sources of funds flow, you’ve got venture capital, public funds, international, which isn’t an in the US venture capital numbers, obviously, and then private equity.
Venture capital was generally healthy in the first quarter and part of that is just a carryover from the end of the year. We saw more softness in health care than technology so — but relatively flat. So, the flows there were pretty decent. The biggest decline as you would expect is in the later-stage public, so public fundraising. That was down roughly 85% and that was most pronounced in healthcare. And you know we’ve got a really great practice in healthcare. And so we did see a lot of softness in funds flow from public equity capital markets transactions. International was a little soft. Private equity was a little soft. And so when you add all that up that’s where you get kind of a just a really modest growth in total client funds. But kind of gives you a sense of where it came from.
My view is that if the public market continued to be soft, right, and you probably have a kind of perspective on that as I do on what that will look like that will more than likely continue to play out. But there’s some really positive parts in there I think it’s important to note, right? One is that when you think of the venture capital flow and activity levels in the early stage incredibly strong. We had roughly 1,700 new clients in the quarter which is one of the highest maybe the second or third highest numbers that we’ve had.
And you can look at the venture capital numbers there’s a lot of great flow in that market. My — as I spend time in the market and hear from our teams there is an incredible amount of activity. And so I think even if we saw volatility through the balance of the year the level of start-up activity, the level of Series A, I think it’s going to be good.
Look there’s just going to be softness in the later-stage markets until there’s what I’ll call a price discovery that kind of finds the right balance. And I don’t think it’s — personally I don’t think it’s going to be that far off, a quarter or two quarters out because I think the public markets in my view are going to be soft at these levels maybe a little bit higher for a little while. And then we recalibrate into the later-stage private market.
But just in general, I think, there’s still a lot of positive momentum. People are feeling good. We’re seeing incredibly strong deal activity. The pipeline for lending is strong. Pipeline for new deal activity just bringing clients is strong. So I’m actually relatively optimistic in this environment that we’re dealing with that. Again we always talked about the long-term innovations where it’s at money still wants to be here and that’s a good thing.
Dan Beck
Greg, one thing that – sorry, back to Ebrahim one thing to add as we think about what we also did within the quarter not only do we have those factors Greg mentioned in the quarter we started to really put products to work that allowed for us to also open up some of the off-balance sheet client funds to have them where it made sense for clients to move on to the balance sheet. So it’s just another lever for us especially in the short-term rate environment that’s so strong to be able to help from a liquidity perspective. So with all that we’ll probably still be in the lower end of that 40% growth range from a guidance perspective. But again lots of levers and good flexibility to be able to manage.
Ebrahim Poonawala
And just to that point if I may follow up with one then. Talk to us about what you assume in the mix shift for deposits on balance sheet. And how quickly do we start seeing the deposit beta kick in for the interest-bearing piece if the Fed hike 50 basis points May, 50 basis points June. Do we get to a 30% 40% beta or will it take time?
Dan Beck
Yes, Ebrahim. I think it’s going to take a little bit of time for us to see the betas kick in. Obviously, the timing it looks like we’re going to see a 50 basis point hike here in May. I still think it’s going to take time to get to our assumptions of 60% deposit beta that we’re using at least, for our net interest income guidance. So, I think we’ll see that play out, and it’s going to be a progression to get to that full 60% deposit beta.
In terms of movement of non-interest-bearing to interest-bearing, I think that if the forward curve were to play out, we’ll probably migrate into the 40% range of interest-bearing to non-interest-bearing accounts. And that’s up from where we are in the 30-ish percent range. And that’s all factored into our sensitivity from a 25 basis point rate hike. So, hopefully that gives you enough color there.
Ebrahim Poonawala
That is helpful. Thanks both. Thanks for taking my questions.
Greg Becker
Yeah. Absolutely.
Operator
Your next question comes from the line of Casey Haire with Jefferies. Your line is open.
Casey Haire
Thanks. Good afternoon, everyone.
Greg Becker
Hi, Casey.
Casey Haire
I wanted to dig in on the deposit growth guide. In the letter, you guys referenced help from liquidity solutions, which looks to be taking money from off-balance sheet on to the balance sheet. Just curious how much was that this quarter? And then, how much of that is contemplated as a lever for your — for sustaining the deposit growth guide in 2022?
Dan Beck
Yeah. Casey, this is Dan. As we look at the quarter on an average basis, it was in the, let’s call it, $2 billion range so a smaller part of what we saw from a quarterly basis. In terms of the full year, we’re not relying only on that from a growth perspective. We factored in some growth along with what we’re seeing from traditional organic liquidity activity. So this is really looked at as a tool for flexibility. And effectively a tool that where we can utilize the rate environment that we’ve got in front of us and really help clients all at the same time.
Casey Haire
Okay, very good. And the distributions you also made mention of that, is that — was that a significant headwind in the quarter? And what’s the outlook going forward? Is that something that picks up or slows down for what we saw in the first quarter?
Dan Beck
Casey, it was one of the factors in the first quarter. Traditionally, fourth quarter, first quarter are the biggest quarters for distribution, so we think most of that is behind us at least for the year.
Mike Descheneaux
This is Mike Descheneaux. The one thing I would add is when you think about deal activity and you think about the distribution right so deal activity creates new dollars coming in. And as we talked about earlier Greg mentioned, the slowdown in exits to slow down in IPO, so you don’t have as much money coming in. And so with these distribution is going up, that’s what is getting a fair amount of headwinds and challenges in that particular area.
Casey Haire
Okay, great. And just last one for me just to clarify. On slide 32, you guys talked about that further rate hikes is not going to take your expense guide higher. So this high 20s could be a ceiling in terms of expense growth unless you guys really — I mean, what else could drive that higher? I guess fee outperformance or should be securities?
Greg Becker
Yeah. Casey, it’s Greg. I’ll start and Dan will add. As we said last quarter that we’re — and if we saw some rate increases, we’re going to build some of that in or expense growth just from an investment perspective. And we feel really good about the numbers that we’re putting out there that they’re real significant investments. And so that’s why we basically have kind of said that, we weren’t going to cap out at the high 20s. Of course, we’ll caveat it. And the caveat will be pay for performance is the biggest one. And that’s either with SVB securities, it’s the institution overall. And so I think my guess is that you all would be happy, if we end up having to pay more expense out and we go above that, because it would mean for the most part that the performance overall is even stronger.
Dan Beck
And Casey just one thing to add to that. So if you think about performance relative to rate increases, if the forward curve were to play out that expense guidance satisfies what we would do from a interest income performance perspective. So just wanted to be clear about that, that guidance range incorporates what the pay-for-performance on just range sensitivity would be contemplated.
Casey Haire
Got it. Thank you.
Greg Becker
Yes.
Operator
Your next question comes from the line of Bill Carcache with Wolfe Research. Your line is open.
Bill Carcache
Hi. Good afternoon. Thank you for taking my questions. I wanted to ask about the outlook. And at a high level, how – how – would love to hear your thoughts on how a scenario where the Fed is forced to push the economy into recession to tame inflation how that would impact your outlook?
Greg Becker
Yeah. This is Greg. I’ll start. And I think because we have the four business units now, I think it’s important to kind of talk about them a little bit in separation. So, on the bank side, it’s important to note that, the clients are better positioned than they ever have been with lots of liquidity. They’re in really strong position. And so we think we don’t – wouldn’t expect any material change in credit quality based on the fact that, we continue to have a smaller percentage of the loan book in the higher risk from a historical perspective lending portfolio.
And again, our clients from a lending perspective aren’t as rate sensitive on the commercial side. So you’re not going to see much of a change there. Obviously, if you see rate declines we’re rate sensitive. But Dan and the team are working on ensuring that we’re as protected as we can be if rates – I know, it’s funny we’re talking about potential rate decline, when we’re just not having really seen the rate increases, but you have to think that way being prepared for that. And I have a huge amount of confidence and Dan and the team that they’re going to make sure that we are protected as much as we can be there. So that’s the commercial bank at SVB, Silicon Valley Bank.
On the private bank could you see, if rates go down the long end goes down because there is word about the economy. Could that stimulate growth potentially? It depends upon what happens with prices and so forth. Securities, again, I think you’d probably similar to where you are price softness in ECM. But M&A probably would pick up. And it’s important to note on the SVB security side, when we talk about M&A, we’re starting from such a small basis that we do believe, there is a significant upside over the next few years as that team really starts to hit stride their pipeline is strong now and they feel – I feel really good about it.
You can look at leveraged finance. That looks like it would also have upside there as well. And I think, there’s still going to be an interest in money flowing in into SVB capital from our fund side. So I think the balance sheet is much different than it was in prior economic downturns. The levers the finance team puts in place to protect the balance sheet to protect, net interest income is better than ever has been. So will there be an impact? Sure. But certainly, in my view is going to be more muted than it normally would be, if you hit a recession five, 10, 15 years ago. Dan, what would you add to it?
Dan Beck
Yeah. I think everything Greg said, plus if you think about potentially a lower liquidity environment, again looking at the total pool of client liquidity including off-balance sheet solutions in the products that the teams are putting in place, obviously doing the right thing for customers and clients gives us just more flexibility. It’s just part of a different toolkit that we have had from previous downturn scenarios.
Bill Carcache
That’s really helpful. If I could follow up on sort of the credit side of that. Even if the credit environment remained relatively contained and the level of actual losses that you’d experienced within sort of your expected range, could we still see you add to reserves a little bit more aggressively, just to reflect sort of a greater uncertainty, or is the fact that you would expect losses to remain relatively contained, would that lead to you not having to build reserves?
Marc Cadieux
So it’s Marc Cadieux I’ll start. Dan may wish to add. Recalling that the reserve of today is driven by economic forecasts, the recession scenario you speak of likely would trigger a reserve build, hopefully not like we saw in the early innings of COVID, it would certainly depend on the degree of the downturn in front of us. But I think in that scenario, sort of irrespective on whether a seeing a deterioration in credit quality, the economic forecast would probably take the reserve higher. Dan, anything to add?
Dan Beck
No, I think that’s right Marc.
Bill Carcache
And then if I may squeeze in a final follow up on your comments around the proactive interest rate risk management and sort of in that scenario, I mean, it’s impressive like in this quarter where we’ve seen many banks, setting aside the larger ones where there’s a direct impact to the regulatory capital and buyback capacity. Some of the others that are outside of category one and two that don’t have to recognize OCI headwinds for regulatory capital purposes. We’ve seen 12%, 15% tangible book value hits. And they’ve sort of been okay with it, because there’s no impact on regulatory capital or buyback capacity or earnings. And so they haven’t really been as focused on tangible book value, but you guys — maybe could you speak to SIVB’s I guess to the extent that you protecting tangible book value is something that you hold as important? And how important that is to you? It seems like your hedging strategy has made that a focus. I just love to hear you kind of speak high level on that?
Dan Beck
Yeah. That’s really high level associated with it. We like to manage to ensure that we have flexibility and this is another area where we provide ourselves flexibility by reducing sensitivity to significant movements like that. So especially with the amount of liquidity that came in last year, being able to protect again, what would have been a higher rate environment that’s not now played out, which we think even though it’s not counted for regulatory capital, it’s still important to be able to manage capital from a strength perspective all-in.
So we manage for flexibility. And even as we’re thinking about the higher rate environment today that’s what Greg was talking about, thinking through how to sustain the rate environment that we’re seeing today and to be able to protect against downside risk is the shift in how we’re starting to think about things. So yes, yes it’s important and continuing to just make sure that we’ve got flexibility.
Bill Carcache
That’s very helpful. Thank you again for taking my questions.
Dan Beck
Yeah.
Operator
Your next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is open.
Jared Shaw
Hey good afternoon, evening.
Greg Becker
Hey Jared.
Jared Shaw
I thought it was interesting you said, you have — your companies and you have the option to increase lending if some of the equity support cuts off. Did you see — what did the utilization rate do this quarter among those tech and health care companies? Did you actually see some of that happen this quarter? And I guess, how much of the loan growth projection is due to maybe a shift in lending into that sector?
Mike Descheneaux
This is Mike Descheneaux. Yeah, the utilization rates did not increase much at all. So it’s been pretty stable. It was up a little bit in this quarter, but certainly not significant or not really the huge driver of growth.
Dan Beck
And Jared, this is Dan. On a forward-looking basis, the growth forecast is still primarily driven by capital call lending and lending exposure. There’s a small increase from what we’re seeing on technology, health care and life sciences. But there, again, is a lot of new business there in the pipeline that’s driving it. So less from commitment utilization usage versus new and what we’re seeing from a private equity global funds banking capital call lending perspective.
Jared Shaw
Okay. Thanks. During the quarter, I think there’s been a lot of investor concern or disconcern that higher rates would really have a detrimental effect on private equity venture capital investments and need for capital call lending. But when we look at where everything was in 2018, we were at Fed funds of $250 and things seem pretty healthy there. From your conversations with, I guess, the GPs, what level do rates really need to get to before you think that has a meaningfully negative impact on capital call demand?
Greg Becker
Yeah. This is Greg. I’ll start, and Mike may want to add. It’s — I would say it’s far enough away that it’s hard to predict. And what I mean by that is, you referenced the last time when Fed funds were higher and it really didn’t have much of an impact. We may see those Fed fund rates later this year if the forward curve plays out. But there’s a lot of dry powder out there. And innovation, again, as I talked about, the start-up activity is incredibly strong.
The dry powder that exists in venture, the dry powder that exists in private equity is very, very, very strong. And they need to put that money to work. And maybe it slows down a little bit if rates pick up, but there’s just so much opportunity out there that it’s just — it’s far enough away that I can’t give you an amount that would be helpful.
Jared Shaw
All right. That’s good color, though. Thanks. And then I guess just finally, some great moves on asset liability positioning. Congratulations on that. You referenced there’s still $6 million — or I’m sorry, $6 billion of received floating hedges here. Is there any thought to unwinding more of that and continuing to see that shift in second quarter or not necessarily?
Dan Beck
Yes. Jared, it’s Dan. I mean we’re always going to be opportunistic, but there’s still, I think, a lot of risk of short rates moving higher from here. So if we think about the hedging strategy and just being able to provide optionality to be able to execute and to gain access to liquidity, that’s why we have such a large securities book to begin with, keeping some of that protection there really makes sense for us. So we’ll keep an eye on what happens from a rate perspective. If rates start to move, we may be opportunistic, but no plans right in front of us right now.
Jared Shaw
Great. Thank you.
Greg Becker
Yes.
Operator
Your next question comes from the line of Steven Alexopoulos with JPMorgan. Your line is open
Steven Alexopoulos
Hi, everybody/
Greg Becker
Hi, Steve.
Steven Alexopoulos
Wanted to start. So if I look at the first quarter, it was an unusual quarter more broadly, given that the IPO market dried up, but we still saw VC investment given all the dry powder, which you’ve referenced on the sidelines, but you also saw VCs raise a lot more money than they spent in the first quarter. So the mountain of dry powder didn’t even come down. Greg, what are you hearing from your VC partners that they’re able to raise so much money in a pretty tough quarter. And are you hearing that a slowdown in either fundraising or investing is coming?
Greg Becker
Yes. Steve, there’s — as you said, and I agree, there’s a lot of different things that are going around. So underneath, let’s say, the fund raising, it’s important to note, that it’s not equally distributed, meaning a lot of that money that was raised was raised by the strong funds, the ones — the notable funds that have a long, long track record upsizing their funds pretty significantly. And it was — I don’t know if anyone would ever say it’s easy, but it certainly was easier.
The one, the funds that are having a harder time are the smaller funds, the first-time funds, the funds that it’s Fund II or Fund II, but you really don’t have enough distribution in the first fund or two. And so there are some headwinds with that. So you’re getting a little bit of a mixed message, but the dry powder from the more stalwart firms is incredibly strong.
And so you are seeing, I’d say, a bifurcation, the large, large funds that have a — I’d say now the strategies that you’re employing are very different, meaning they have a large late-stage strategies. They have fed fund programs. They have niche programs. So they’re much more diversified in both stage and the markets they’re going after.
Then you have very successful funds that are very niche oriented. And the ones that are having a harder time are the ones that I have said, the ones that don’t have a long track record or there are more of a, what I’ll call a me-too approach, but they don’t really have a differentiated strategy. So obviously, you know this, we have deep connections into all those areas and the are staying very close to it. But the strongest funds clearly have been — have benefited from it.
And I think, personally, they’re going to continue to benefit from it. There’s a lot of money that still wants to come into venture, but they want to come in to the funds that are proven. And so I think it’s going to be a headwind for the emerging funds, and it’s going to be — continue to be more of a tailwind for the funds that have been around a long time that have built up a great track record.
Dan Beck
I mean, certainly, with the volatility that’s in the system that makes it difficult. And so, it’s something to keep an eye on. And the deals that we’re closing in, in Q1, as Greg mentioned, Steve, they are the large — they’re large funds and probably a lot of this is also agreed in 2021, right, as you kind of have these close come in the first quarter. But it’s definitely something to keep an eye on. But as Greg said, as well as having something like $3.4 trillion of dry powder out there. It’s just still a lot of dollars to get put to work.
Steven Alexopoulos
Yes. Okay. That’s helpful. I wanted to drill down into the capital call growth a bit. If I just look quarter-over-quarter, it trailed off in 1Q. Could you tell us in the private equity capital calls where you’re seeing activity slow down a bit, the capital call sign and maybe where it’s still a little bit more active? It looks like the other bucket went up and I don’t know what’s in there.
Dan Beck
Are you talking about just like particular segments, Steve?
Steven Alexopoulos
Yes. Within private equity capital calls.
Dan Beck
It’s an interesting, I would say, quarter. We started in the first quarter healthy, strong. February was a bit funky. It kind of slowed down a little bit, but then starting to pick back up in March. And it was across the board that we had — there really was no well outlier in any particular sector that was up or down in that particular — so there’s really nothing really to point to that I can tell you at this time.
Steven Alexopoulos
Okay. Thanks. And then, finally, it’s a little bit of a conceptual question. But, Greg, regarding the comment in the CEO letter, that you would expect any potential pullback to be short-lived. I tend to agree with that.
But if you think about all of these factors that really hit this first quarter, which are probably worse than what we saw in the first quarter of 2016, and the fact that VC still invested $70 billion in this backdrop, is it possible that we are living today in the exact period you’re describing? And given how much capital there is, we just will not see a pullback of any kind?
Greg Becker
Yes. I would love to tell you with absolute confidence exactly what’s going to happen, but I’m sitting beside our General Counsel, and he says I can’t do that. So the — Steve, I think that’s possible. I would say — I would just follow through with what I commented.
My crystal ball, right now with the information that we have, says that it’s going to be — we’re going to have some softness. It’s still a very healthy market, right? Early stage is going to be healthy for all the reasons I talked about earlier.
But there’s companies out there that are trying to figure out what’s the right valuation relative to public markets — and the question is, well, if I wait an extra quarter or two to raise that round, am I going to get back to that higher valuation.
So when you add all that together, I just — I do believe there is going to be just this softness, and I’ve put that with a lower-case s, not a capital S, because as you said, first quarter was still very, very healthy.
So it’s kind of a — again, that’s probably the simplest way for me to describe it. It’s a lower-case softness versus upper-case softness and a lot more will come out in the next 30 days, 60 days, 90 days, and we’ll be able to share that next quarter.
Steven Alexopoulos
Okay. Thanks for taking my questions.
Greg Becker
Absolutely.
Operator
Your question comes from the line of Chris McGratty with KBW. Your line is open.
Chris McGratty
Great. Just a quick one on the timing of the warrants. Greg, if we stay in this environment, is Q2 arguably just more of a step down in Q1, because it’s a little bit better than I thought this quarter.
Greg Becker
Yean. First of all, you got a very, diversified portfolio, number one. Number two, what anybody does really have thousands of companies that make up your on portfolio in your securities portfolio. And so, that’s one factor.
The second factor is, you’re right, in some parts, and there’s, multiple parts that make up the securities portfolio, right? So the warrants, we try to get, obviously, the most recent information from the quarter, and we used that.
We can’t always get that. So there is a little bit of a lag there, as we try to gather that information to value that. You also have it in some of the funds that there could be a lag in our fund to funds where it’s a quarter lag there in some cases.
So could there be some softness, higher softness in the second quarter or the third quarter relative to the first quarter? The answer is yes. And I think that’s a reasonable expectation to play out. But I would — so that’s the crystal ball.
As far as trying to characterize how big it could be, that’s where I go back to the part about the diversification of the portfolio domestically, globally, there’s — it’s such a diversified portfolio that my view right now is the volatility won’t be as great, probably as many people may expect.
Dan Beck
Hey Chris, it’s Dan. Just one thing to also pay attention to, in the quarter, we did have fixed income securities gains close to $49 million. So that’s in that number as well. So backing that out, you certainly do continue to see the softness there, especially compared to the experience of 2021.
But I agree with Greg, the diversification factor and just thinking about the number of funds, the number of companies and just the different investment time horizons in those thousands of investments. So we really does protect from the quarter-over-quarter significant declines.
Chris McGratty
Okay, great. And if I could, one more capital levels are pretty stable, due to the mentions of the OCI limited hit there, maybe updated thoughts on just capital levels.
Greg Becker
Yeah. Chris, if you take a look at it, where — again, we’re capital constrained, Tier 1 leverage at the bank. We ended the quarter within our target range between 7%, to 8% but certainly on the lower part of that range.
Take a step back, when you think about how we’ve managed capital in the past, preferences, senior debt from there looking at preferred and then, obviously opportunistically from a common equity perspective. Just considering the market, we continue to look to add the potential for senior debt, preferred type transactions to manage that on a go-forward basis here.
Chris McGratty
And you also have the ability to move some capital down, right?
Greg Becker
Yeah. That’s correct. We have a good amount of cash sitting at the bank holding company that we can continue to use to manage Tier 1 leverage ratio at the bank.
Chris McGratty
Great. Thanks, Greg.
Greg Becker
Yeah.
Operator
Your next question comes from the line of Brian Foran with Autonomous Research. Your line is open.
Brian Foran
Oh, Hi. You kind of Dan done it all, but I think one of the concerns was is the 2016 all over again and recognizing you gave some of the puts and takes. But for people who are worried about the kind of 2016 style air pocket and growth, what would you say is like the biggest difference in your mind today versus then both for your business and for your clients?
Greg Becker
This is Greg. I’ll start, and then Dan may want to add to it. I’d say the balance sheet is very different compared to what it was back then. There’s a lot of differences. But it’s an interesting comparison. What I continue to reinforce on earnings calls and meetings internally is that what gives me comfort every day on top of a lot of things is the fact that the innovation economy is going to continue to be up and to the right over time. And so if you have a quarter or two of softness, the way our balance sheet is constructed now, our loan portfolio, the way it’s constructed, that I just — I feel very good about that.
And I also feel good that we shouldn’t overreact if there is a little more softness that looks more like in 2016, that again, my view is it will be short-lived. It could change. Maybe we’ll see something that is more severe than that. But again, my crystal ball would say that we’ll get to it on a faster pace and start back on that same trajectory based on the innovation economy strength.
Brian Foran
Great. Thanks for taking my question.
Greg Becker
Yes. Absolutely Brain.
Operator
Your next question comes from the line of Andrew Liesch with Piper Sandler. Your line is open.
Andrew Liesch
Hi. Thanks for taking my question. Just looking at Page 16 of the slide deck, just the international loan growth and this international core fee income growth. Just curious what was driving that any particular region? And what’s the outlook for both of those?
Greg Becker
On the fee side, you’re predominantly going to be seeing FX, foreign exchange. Those would be some of the key drivers. Investments securities client investment fees have been also strong.
Dan Beck
Yes. This is also the average balances. So we had really significant activity coming through last year or the end of last year, and you’re seeing really the continuation of those balance levels from the end of last year carry forward into the first quarter. So good growth there.
Andrew Liesch
Got it. And how is that turning so far as we move progress the first into the year?
Dan Beck
So I think as we look, as Greg mentioned, just all in from a liquidity and growth perspective, things are softer in the first quarter, and that was not different in the international market. So still growth, but clearly softer than the levels that we saw last year.
Andrew Liesch
Got it. Okay. Thanks for taking the questions.
Dan Beck
Yes.
Operator
Your next question comes from the line of Jennifer Demba with Truist Securities. Your line is open.
Jennifer Demba
Thank you. Good evening. Two questions. I’m just curious as to how you feel the Boston Private acquisition has gone versus your internal plan thus far? And my second question is how much more hiring do you need to do in the investment bank? Thanks.
Greg Becker
Yes, Jennifer, let me start with the question on the private bank. First off, I feel very good about the platform we now have in SVB Private. When you look at the team of people we brought on board, when you look at the new hires we’re bringing on board the quality, when you look on the breadth of capabilities. So from my standpoint, the opportunity is at least as good, if not stronger than I originally thought.
One of the things I would say, where probably underestimated on, I’ll say my part is capacity. And so when you think of when we brought Boston Private on board, right, their advisers, their teams are already fully leveraged. And so we — I would say we probably hoped for more capacity. But look, with market volatility and everything else, people are spending a lot of time with clients, which is exactly what you’d want. So our focus is on attracting talent. And that’s where I am feeling really good. We’ve got a great team already. And when you look at the people we brought on board in the fourth quarter, when you look on the people that are in the pipeline to come on board and that we’re in the middle of negotiating with I feel incredibly positive about that.
And then the last part is, what feedback we’re getting from our clients and the market about having this capability, and that’s also very positive. So, I would say underestimation on my part about capacity, but the feeling about the potential and the opportunity is stronger than originally thought.
Second question on SUV securities. Yes, we have some additional hiring to do, but I just want to first pause on the fact that I feel incredibly positive about the people that we’ve added. Well, the original platform that we acquired with Leerink Partners, let’s just start with that. And then the team of people we brought on board, and that is in both health care services, the technology and the team that we brought on, on leveraged finance, feedback from market, the pipeline, deal wins, et cetera have been extraordinary.
Now, your follow-up question may be, well, if you feel so good about it, why was first quarter soft? So let me answer it. I think anyone that has a capital market business right now would clearly agree that the softness in the IPO market, capital markets equity, capital markets has been exceptionally soft, 85% decline from the fourth quarter. So what’s positive? Positive, we’re still signing up deals. We’re signing up new opportunities for companies to go public and when the market starts to open up and M&A is strong. And so I feel very bullish about the team of people. They’re very bullish about our capabilities. And when you combine the strength of the commercial bank that we have under Mike’s leadership, the private bank and the investment bank, that’s really why this concept of one SVB all working together is, again, while you probably hear in our voices, very, very positive as we think about the balance of ’22 and into ’23, ’24, et cetera.
Operator
Your next question comes from the line of John Pancari with Evercore ISI. Your line is open.
John Pancari
Good afternoon.
Greg Becker
Hey John.
John Pancari
I just want to ask around the farm flows question in a little bit different way. I guess I hear you in terms of where you’re seeing a little softening and where the risk could be, but also the benefit of dry powder and how that’s buffering flows. I mean how — what incremental slowing in flows is included in your guidance right now as you look at the full year expectation?
Greg Becker
Yes, I’ll start, and Dan will then give you more color around it. This is how I think about it. I think about the — what we saw in the first quarter, we kind of look at softness for another several months that’s going to continue. And then just start to see some uptick in kind of the market and money flowing back in at the pace that we talked about, capital markets opening up clearly more than they are right now, which you could argue it’s closed. So, that’s not a long leap from where we are right now.
So, that’s what we have in the forecast. And where we are when you think about that range or the lower end of that range of deposits that we have in that forecast. So, that’s taking the forecast — the lower end of that range and combining it with what I said about what we’re — kind of how we think the crystal ball is, right?
So, if it plays out differently, obviously, more positive, more than likely, we probably wouldn’t go — I have a hard time seeing how we’d go above the range and go to another range. That’s a pretty big step up. You’d have to see a pretty big pickup from where we are right now.
Conversely, on the other side, if the numbers that I talked about, you saw from first quarter of the funds flow in venture capital, public, international private equity were worse, you could see us go below that range and tick down into the next range below that. So, just to give you a little more color of the outlook, what’s built into the outlook? And what could cause it to kind of go above or below that range?
Dan Beck
The only thing I would add to that, Greg, is, again, the off balance sheet, the ability to be able to serve clients’ needs and we enter the short-term rate environment where it stands to be able to drive some of that money on the balance sheet to support liquidity management is another thing that we consider as a part of the scenario that Greg just laid out. So, we do have more flexibility. We do have more options as well.
John Pancari
Got it. Okay. Thanks for that. And then separately, I know in your CEO letter indicate that warrant gains could moderate from here, even though you typically don’t guide on warrants. I don’t know if can you help us maybe frame out that potential moderation? How we could think about that?
And then I get a ton of questions in times like this for you guys that could these warrant gains turn negative? And could your investment gains turn negative. So, could you talk about that? Thanks.
Greg Becker
Yes. So, we don’t guide. We don’t give ranges. We don’t give details around it because, quite honestly, it’s too hard to predict and we could be off in a meaningful way just based on market. So, that’s obviously the reason that we don’t guide.
But we wanted to give additional color to say, look, there’s clearly a possibility that there could be more softness in there, and we talked about this a little bit earlier on the call. There’s a little bit of a lag in some of the investments, right? So, that could go through and you could see a decline there. And to your specific question was, could you see warrants decline and actually be a negative number? The answer is yes, you could. It’s possible. And so again, we expect some softness. Do we expect it to go negative? The answer is no. But, what we like to do with our confidence levels when you look at our guidance, we’d like to clearly have a pretty strong confidence, 70%, 80%. And that’s why we don’t give guidance on warrants and securities because the confidence level, quite honestly, if I said this is the direction, if I said this is where it would be. The confidence level would be below our comfort zone.
Mike Descheneaux
But clearly, John, I mean, as you know, how does the IPO market? How does the exit markets, it’s really going to drive or determine what those numbers are going to be. So you to take a view on where do you think the IPO and exit markets are going to go.
Dan Beck
John, the last thing I’ll say, this is Dan. Again, the granularity here really matters, and the fact that the vast majority of what we’ve got in the warrant investment portfolio are in the private market. If you think about it, you’ve got 500 funds. You have close to 5,000 companies and thousands of individual investments that are made over time.
So, there’s a lot of diversification in the timing of those investments and the number of companies. So, you have to have a prolonged and quite sustained reduction in value to start that — to see that really come through all of those private investments. So hopefully, that gives you a little bit of extra color.
John Pancari
No, that does. Thanks, Dan. And lastly, also in your CEO letter, Greg, you indicated the increased expense outlook is partly influenced by the investments that you’re making still in the business. Can you just talk about like what are the largest areas of investment that you’re putting new money into right now?
Greg Becker
Yeah. It’s really — it is across the board. It’s digital. It is headcount in a lot of different areas to increase capacity. And clearly, it’s in risk management as well. When you think about the growth that we’ve had and going to a Category 3 bank, there’s a lot of investment around there. And so, we look at all those areas as opportunity investment to really — and again, it’s not just building for today, it’s building for the future.
And we’ve talked about that over the years that, we look at these as opportunities with this additional revenue that we have to really just keep pressing on our ability to deliver for our clients. And that is across every one of our four businesses, plus the support functions. So what are the highest, it really is. It’s in almost every area in the sheet and the deck that goes through and talks about our investments. It’s significant across the board.
Dan Beck
John, the only thing I’d add to what Greg said is, it’s all about people as well, and we are strategically continuing to make investments in bringing new people onto the platform as well as making sure that we retain the incredible talent that we have across the franchise today. So, all of those investments, really, the core of it also continues to be the great people that we’ve got as part of the franchise.
John Pancari
Got it. All right. Thanks Dan.
Operator
Your next question comes from the line of Chris Kotowski with Oppenheimer. Your line is open.
Chris Kotowski
Good evening. Thank you. I just wanted to make sure I understood the dynamic in the NIM in the first quarter properly, because like on January 20, if you guided to $192 million, and it came in at 213%. And was the delta in those 70 days, just the premium amortization? Is it just as simple as that the long end of the curve, let go and therefore premium amortization went to a de minimis level?
Dan Beck
This is Dan. It’s a combination of, like you said, the substantial slowdown in premium amortization from what happened with 10-year rates. We were highly sensitive to that premium amortization below 10-year rates of 2% and now looking at the 10-year starting to get close to 3%, that’s materially slowed down. You saw a big improvement there in the quarter on that? Secondly, just reinvestment in the quarter from this incredible investment securities portfolio, being able to reinvest with short-term rates so much higher also helped from a NIM perspective. So, kind of add all of those things together in the quarter plus some of the benefits on the short-term cash, you get to a better yield.
Chris Kotowski
Okay. It’s quite a dramatic change in 70 days. The other thing I was wondering about is in your press release, you show that the duration of the held-to-maturity portfolio extended about a year, 1.1 years to 5.2 years. Was that mainly a function of the movement in rates extending the maturities of the portfolio, or was it a function of the new securities that you added?
Dan Beck
No, you’ve got it really a function of the duration extension, especially of mortgage securities in which there was a good proportion sitting in the held-to-maturity book. So that reduction in premium amortization also comes as a part of all of that. So yes, mortgage securities and held to maturity versus net new purchases.
Chris Kotowski
And knowing that there’s like a huge difference between duration and contractual maturities, looking at your 10-K, it’s roughly two-thirds of your held-to-maturity book has maturities of over 10 years. I mean what is the extension risk on that portfolio if we get into like another 200 or 300 basis points on the long end of the curve or something like that?
Greg Becker
Yes, it’s a good question. I think with the rates where they are, you’re seeing extension risk, you’re seeing the extension of the book already playing out from a duration perspective. Going much higher from here will have some impact to the overall duration and extension risk, but not as material as the move that we’ve seen here effectively in the 10-year, getting close to 3% by the end of the quarter. That’s where we had the most sensitivity. That’s why we had those bonds sitting in held to maturity to begin with. You will see some extension risk from here, but not as significant because we played through a lot of that already.
Chris Kotowski
Okay. Great. Thank you so much. That’s it for me.
Greg Becker
Great.
Operator
Your next question comes from the line of Brock Vandervliet with UBS. Your line is open.
Q – Unidentified Analyst
Hey, everyone. This is Yvette Abraham [ph] on for Brock. Thanks for taking the question. I just wanted to revisit the on-balance sheet, off-balance sheet flexibility conversation again. I think you mentioned $2 billion came on from off in Q1. How are you thinking about the deposit beta for those and decided that fit into your broader deposit beta assumptions?
Greg Becker
Yes. The deposit beta there will likely be higher than what we see from some of the rest of the deposits in the portfolio, but still, in total, fits into – and I think this is what’s important. The overall, as we said, through the cycle, 60% deposit beta. So these might be a bit higher. And if you look at portfolio segmentation, for larger corporate clients, I think you end up with seeing that. But again, in total, from a guidance perspective, fitting quite well inside of that through the cycle, 60% deposit beta.
Unidentified Analyst
Okay. Great. That’s helpful. And are you able to talk about what percentage of deposits you guys hold are from later-stage companies and just how you think about the deposit behavior of those relative to other segments? Thanks.
Dan Beck
So in total percentages, I don’t have them sitting off hand. But as we look at the overall — I gave some metrics earlier of the migration, we expect interest-bearing to non-interest-bearing. We think that with the forward curve that could move into the – from the 30% to the 40% range, that considers also those later-stage clients. And at the same time, the deposit beta that we mentioned that 60% deposit beta also takes into consideration those later-stage clients. And we think through the last tightening cycle that we’ve got that incorporated in there.
Unidentified Analyst
Very helpful. Thanks, everyone.
Greg Becker
Yes.
Operator
Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open.
Jon Arfstrom
Hi. Thanks for squeezing me in.
Greg Becker
Yeah.
Jon Arfstrom
Just have a longer-term philosophical margin question for you. If Fed funds go back to the levels of what we saw in 2018 and 2019, so around 2.5%, any reason your margin can’t go back to 2018 levels? Anything different that would prevent that from happening?
Dan Beck
Yeah, John, this is Dan. I think the structure of the portfolio is really different from 2018. The investment securities portfolio obviously larger, you take a look, add the level that we have from a cash balance perspective, that’s different. And the mix of capital call lending to still much higher than where we were back in 2018. So when you look at those factors, the terminal margin that you end up getting to even if you had a comparable rate environment is lower.
Now at the same time, with the size of the balance sheet, obviously, you can start to do the math on what that means from a net interest income perspective. So while the margin is clearly lower, the opportunity to be able to drive sustainable core net interest income growth is much stronger than what we had during that last tightening cycle.
Jon Arfstrom
Okay. Thank you very much.
Greg Becker
Yes.
Operator
That is all the time we have for questions. I’ll turn the call back to CEO, Greg Becker, for closing comments.
Greg Becker
Great. Thank you. I just want to thank everyone for joining us today. I know, it’s late in the day for the people on the East Coast and you guys have any analysts have had a lot of different things to digest. So thank you for joining us. We are obviously very positive about the year ahead, even with the prospects of market volatility, and we’ve talked a lot about on the call today. We do have strong momentum from all the growth that we’ve experienced the last couple of years, and a strong and meaningful pipeline and additional upside, if there are future rate hikes that we talked a lot about again on the call.
And as we said, we’re continuing to invest in our strategic priorities, all about delivering on this, kind of, four pillar platform for business units, all-in service to our clients. So to me, again, continue to be extremely excited about that with the market, even with the market volatility.
As always, I want to thank our employees for all the incredible work that they do every single day. For me, it’s been a great quarter getting out and spending more time in the market as more offices open up and spending more time I was in Israel, I’ve been spending time in New York and other markets and just spending time with our teams of people has been so rewarding. Our offices are opened up now and the energy and excitement. So we gather people together for events as we gather people together for just team meetings and the excitement and energy that people have about being together is just great to see.
Obviously, I want to thank our clients as well because that energy and that excitement is translating into spending time with our clients and all the incredible things that they’re doing in every aspect of innovation is also incredibly exciting, and we certainly thank them for their business and working with us.
The final thanks that I want to do is an important one. And I want to give a really huge shout out to our retiring Chairman, Roger Dunbar. Roger Dunbar has been with SVB as a Board member — as an adviser since 2000, as a Board member since 2004. And you think about that time period, 2004 to 2022 and the last decade as Chairman, it’s hard to think about other institutions, banks that have performed better over that period of time. And having Roger at the helm as Chair for the last decade, really appreciate his leadership. I know for me personally, he’s mentorship and friendship and just wish him the best in the next chapter of his life.
And again, just so I appreciate what he’s done for us. And also welcome our new Chair, Kay Matthews, who’s stepping into the role later today. So I really want to thank Roger for his service and welcome, Kay, to the new Chair role.
And with that, I want to thank everyone again, and everyone, have a wonderful day. Thank you.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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