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SVB Financial Group (SIVB) Q1 2021 Earnings Call Transcript | The Motley Fool

SVB Financial Group (NASDAQ:SIVB)
Q1 2021 Earnings Call
Apr 22, 2021, 6:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the SVB Financial Group Q1 2021 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Meghan O’Leary, the Head of Investor Relations. Please go ahead.

Meghan O’LearyHead of IR

Thank you, May, 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 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 have been filed with the SEC and are available on the Investor Relations section of our website. We’ll be making forward-looking statements during this call, and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information, which applies equally to statements made in this call.

In addition, some of our discussion may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release. And now I will turn the call over to our President and CEO, Greg Becker.

Gregory W. BeckerPresident, Chief Executive Officer & Director

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, SVB had a great quarter of exceptional growth and profitability, and it was our best quarter in history and we’re notably increasing our outlook for 2021. Our Q1 performance was marked by continued outstanding balance sheet growth, strong net interest income, incredible warrant and investment gains, outstanding SVB 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.

Questions and Answers:

Operator

[Operator Instructions] We have our first question from the line of Ken Zerbe from Morgan Stanley. Your line is now open.

Ken ZerbeMorgan Stanley — Analyst

Right, great thanks. Good afternoon, everyone. Hi, Ken. Greg, I would agree with you. It was a fantastic quarter, it seems. I was — one of the things that stood out to me actually looking through the materials was the very large increase in the held-to-maturity securities portfolio. It looks like on an end of period basis, this is up about $25 billion. No, I guess I’m not overly surprised that you’re investing in — some of this excess cash into securities. But can you just talk about why held to maturity versus available for sale? And what exactly are you investing in? Thanks.

Daniel J. BeckChief Financial Officer

Hi Ken, it’s Dan. I’ll take this one. So obviously, we’ve seen just incredible liquidity growth coming through the end of last year and continuing through the quarter. Based on review of that liquidity and the 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 in longer duration in the held-to-maturity category, so think 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 a 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 and the stability of the liquidity in the market, we’re comfortable putting that type of money to work.

Now what are we investing in? We continue to invest in agency securities. This is also a mix of agency mortgage backs as well as agency CMOs in that three- to five-year maturity range.

Ken ZerbeMorgan Stanley — Analyst

Got it. Okay. That helps. And then I know this is going to be a tough question that you may not want to answer. But just in terms of the investment security and warrant gains, like, again, fantastic growth, certainly surprised even everyone despite your pre-announcement a little while ago. But when you look at the portfolio, is there any reason not to assume that this continues? Because I think both ourselves and probably the rest of the Street has been sort of caught a little bit flat flipped 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.

Gregory W. BeckerPresident, Chief Executive Officer & Director

This is Greg. I’ll start, then Dan may want to add. We’ve had — I mean, this quarter was extraordinary. Last quarter was incredibly strong and the quarter before that as well, 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. What drives the warrant and securities gains are, obviously, IPOs, public offerings, and it’s also driven by M&A. And right now, it’s — the market is being driven by IPOs.

Clearly, we have warrants and securities gains that are benefiting from that, but to say that would continue at this pace is just unlikely. Do we expect that we’re still going to have some gains back for the balance of the year? Absolutely, but not to the extent we just had. It’s just been extraordinary in many, many, many ways.

Ken ZerbeMorgan Stanley — Analyst

Understood. And if I can just fit one last question in. Greg, in your written remarks, you mentioned that you were interested in growing the business through targeted acquisitions and hiring teams with special skills. Can you just elaborate in terms of what kind of skill set you are looking for either through team hires or through acquisitions?

Gregory W. BeckerPresident, Chief Executive Officer & Director

Yes. That point was mainly related to two specific areas. One — and this is realistically post-Boston Private integration and the deal closing, assuming everything goes as we expect it will go. So looking at wealth management teams that fit into our strategy either from both cultural fit and a targeted market perspective. So that’s one area that we’d be looking at.

And the second area, we’ve talked about this for quite a while, is in technology investment banking. So we executed this past quarter on bringing in a healthcare services, med — digital health team with Barry Blake leading that, and you’ve seen the announcements that we made about those hires. So that would be an example.

But two other things that could happen are, one, in the wealth space, and the second one in technology investment banking. Outside of that, it’s mostly targeted hires in many areas across the platform, but it really isn’t what I would call a team-based approach.

Ken ZerbeMorgan Stanley — Analyst

All right. Thank you very much.

Gregory W. BeckerPresident, Chief Executive Officer & Director

Yes.

Operator

Next is Ebrahim Poonawala from Bank of America. Your line is now open.

Ebrahim PoonawalaBank of America — Analyst

Good afternoon. I guess just, Dan, if you wanted to follow up on the, I guess, repositioning of the securities book. Is that complete, like given the move? I understand the big swing in the AOCI this quarter. Going forward, if we get another 50 basis points move into 10-year, is the book protected where you don’t have as large an AOCI hit? Can you just talk about that? And in terms of how protecting against higher rates in funds, just how you’re managing the liquidity and balance sheet?

Daniel J. BeckChief Financial Officer

Ebrahim — sorry about that. So yes, Ebrahim, we’re certainly positioning at this point for the potential for higher rates. 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 movement.

So if you take a look at our target duration in that book, we’re going to cut that in half here pretty quickly, while at the same time, as I mentioned to Ken, taking the rest of our investment dollars in held to maturity where we’re more protected, being 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, 135 and 145 while protecting against that OCI risk. So we’re not going to be able to isolate for all of it, but it will be in that two-year duration much more protected than it was in the early first quarter.

Ebrahim PoonawalaBank of America — Analyst

And just tied to that, Dan, the $18 billion in cash liquidity, which was earning seven bps, does that continue to grow until we get to higher rates? Because it doesn’t look like the liquidity inflow is going to slow anytime soon. And is that kind of something that you’re comfortable with?

Daniel J. BeckChief Financial Officer

Now Ebrahim, we put a lot of money to work in the quarter. So if you can see just in the held-to-maturity purchases, that’s up close to $20 billion in the quarter. So we’re certainly putting money to work. But with the continued deposit growth in the quarter, there’s still certainly a lot of liquidity 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 we’ll be strategically positioning part of it into that held to maturity as well as continuing to invest shorter in the available-for-sale category to protect against that OCI risk. Again, net-net, investing at about 135 to 145.

Ebrahim PoonawalaBank of America — Analyst

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 that opportunity 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 a sense of the timing and the magnitude of how we should sort of look for Boston Private adding to the private banking strategy?

Gregory W. BeckerPresident, Chief Executive Officer & Director

Yes. A couple of things. One is that, look, we’re still early. We are very, very focused on integration and getting things closed and getting all the approvals across the board. So that’s the number one thing. But obviously, as part of our discussions, we’re talking about what’s going to be — what’s the — when we close 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 let’s just assume for a second that the deal close as we expect it to. We’re looking at making sure we’ve got the right teams focused on the right opportunities and making sure that those referrals are going to come from the commercial bank. You’ll see that in 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 in the innovation economy.

And then there’s obviously the wealth opportunity, and that’s one of the key reasons is fee income around wealth. How fast that will come, Ebrahim, we’re not ready yet to kind of share that plan. But clearly, at the next earnings call, we’ll take a more focused approach and rolling that out as we get closer to the announcement date and the final close, again, assuming everything goes well.

Ebrahim PoonawalaBank of America — Analyst

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

Gregory W. BeckerPresident, Chief Executive Officer & Director

Thank you. Thanks, Ebrahim.

Operator

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

Steven AlexopoulosJP Morgan Chase & Co. — Analyst

Hi, everybody.

Gregory W. BeckerPresident, Chief Executive Officer & Director

Hi, Steve.

Steven AlexopoulosJP Morgan Chase & Co. — Analyst

And Greg, I’ll echo Ebrahim’s comments. Congrats on 10 years in the CEO seat.

Gregory W. BeckerPresident, Chief Executive Officer & Director

Thank you.

Steven AlexopoulosJP Morgan Chase & Co. — Analyst

Hard to believe you guys had $30 billion of client funds when you took over, and now you’re $300 billion. It’s pretty good. But along those lines, this might seem like a crazy question, but when we think about the client funds where they’ve moved to, how large could that go given the infrastructure of the company today? Could you go to $500 billion, for example, with your current infrastructure?

Gregory W. BeckerPresident, Chief Executive Officer & Director

Well, so I’ll start. Dan may want to add. It’s not as if the infrastructure has been static. We continue to add capabilities, and we do kind of every quarter look to reinforce and add to it. The growth that we’ve seen over the last 12 months, once we started seeing it, we started to really, I’ll call it, start to double down on more infrastructure, thinking about getting ready for LFI, large financial institution, improving our risk management infrastructure across the board from a technology perspective.

So 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 — if you were to say, could we get to $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 the areas that we’re investing in, and those are important.

But there’s 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, has never been this high. And while it may be volatile, I’m certainly betting — we’re betting on it continuing to go up and to 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.

Steven AlexopoulosJP Morgan Chase & Co. — Analyst

Okay. That’s helpful. I actually saw that language in your statement on the large financial institution compliance in the U.K. business. Is that essentially you guys now thinking you’re going to cross a new regulatory threshold given the overseas deposits? Is that now coming?

Gregory W. BeckerPresident, Chief Executive Officer & Director

Well, there’s — yes, there’s two pieces to it, Steve. So one is domestically, obviously, when you cross $100 billion, you move into LFI. And so we’ve obviously done that. We’ve done it faster than we thought we were going to. And we saw that coming and we started preparing for it last year, and that will be things that we’re doing that Dan can give you more perspective on or a better perspective on over the next quarters and years to make sure that we’re compliant with all the LFI requirements.

But then globally, there’s also different requirements when you hit certain thresholds. In the U.K., one of those thresholds is the amount of deposits you have to smaller companies, and that definition is — there’s 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 you crossing that threshold.

So as we head down a path to create a subsidiarization in the U.K., that is also building our capabilities. And so we have LFI domestically, and we have the subsidiarization in the U.K., all of which is building infrastructure to support our longer-term growth.

Steven AlexopoulosJP Morgan Chase & Co. — Analyst

Okay. That’s helpful. And then, Greg, what about — I know the exit markets have clearly supported your business results across the board. But the IPO market’s been a little bit weaker recently, right? It’s back to have had a bit of a challenge. Is this having any immediate impact on client flows?

Gregory W. BeckerPresident, Chief Executive Officer & Director

Client flows, obviously, have been incredibly strong. And I think as we’ve said in prior quarters, when the market gets very strong, it doesn’t usually stay that way. Well, it doesn’t stay that way indefinitely. And so I think all of us would have expected some — a little bit of slowdown in the market. We’re 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, to 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 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 greater 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 and large private rounds as we are anything else. And so a slowdown in that would expectedly show some pickup in loan outstanding. So we feel whichever way it goes, we’re positioned well to take advantage of those opportunities.

Steven AlexopoulosJP Morgan Chase & Co. — Analyst

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?

Gregory W. BeckerPresident, Chief Executive Officer & Director

Well, the early stage — so thinking about the whole portfolio, right? 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. In fact, our win rates are incredibly strong. The pipeline is incredibly strong. They’re doing truly an amazing job. Is it being credit after liquidity? The answer is absolutely.

So there is no slowdown in our desire to drive more loan growth 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’s 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.

Steven AlexopoulosJP Morgan Chase & Co. — Analyst

Okay, that helps. Thanks for taking my question.

Gregory W. BeckerPresident, Chief Executive Officer & Director

Absolutely. Thanks, Steve.

Operator

We have our next question from Bill Carcache from Wolfe Research. Your line is now open.

Bill CarcacheWolfe Research — Analyst

Thank you, good afternoon. There has been 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 assets to higher-yielding loans either in the U.S. or internationally on the back of this accelerating economic growth? I mean your results are exceptional today, but just curious to hear your thoughts against that backdrop, how that changes?

Gregory W. BeckerPresident, Chief Executive Officer & Director

Yes. Bill, this is Greg. I’ll start and Mike Descheneaux, our Silicon Valley Bank President, and Marc Cadieux may want to add some commentary. We clearly believe that there is 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 economy, that’s going to create a very, very strong second half of the year with very strong GDP growth.

How does that impact us? Clearly, some of our clients that are seeing — that are in e-commerce, in consumer-facing industries are 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 we’re headed in right now. I just don’t — I don’t see a big change there. Do I think it’s going to be healthy for the market overall? Yes, I think it will be healthy. I don’t think it’s going to have much of an impact on the loan portfolio. I’ll see if Marc or Mike have a different point of view than that. And Mike, you are on mute.

Michael R. DescheneauxPresident of Silicon Valley Bank

Okay. Can you hear me now, Greg?

Gregory W. BeckerPresident, Chief Executive Officer & Director

Yes.

Michael R. DescheneauxPresident of Silicon Valley Bank

I’ll go ahead. I’ll start, and Marc will jump on here. Clearly, the pent-up demand, I think, is the 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 industries, when you think of hospitality and travel and the innovative companies that we had that center and serve those areas, again, I think you could certainly see some pickup.

Obviously, it’s not necessarily a huge piece of the loan portfolio. But certainly, it will lift the boats there. Moving on to kind of the fee income. When we start to see more pent-up demand, more opening of the economy, you’re going to start to see credit card fees, 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 deal activity as well. As people start to move around, there are certain groups of people that maybe been holding back in terms of deal activity. Maybe they’ll start to do more deals — cross-border deals as well, too, so again, since there’s 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 of the economy, the pent-up demand is a net-net positive to us overall.

Marc C. CadieuxChief Credit Officer

This is Marc. I think Mike and Greg covered the waterfront there. Nothing further to add here.

Bill CarcacheWolfe Research — Analyst

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 of greater risk today?

Gregory W. BeckerPresident, Chief Executive Officer & Director

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 in Chart eight 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 year where client funds dropped a little bit, and that was a minor drop from 2008 to 2009.

But other than that, through cycles, we’ve been up and to the right. It’s more of a question of what pace of growth that we have seen. So could there be some softness in deposits on a quarterly basis or maybe in 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 just about the innovation economy and how you really do look at this innovation market domestically and globally.

And my view is this market is the place to be. It is going to continue to be — to outpace most, if not all, other markets. And that, in turn, will drive liquidity and deposits, balance sheet funds. And so from that standpoint, we’re still very optimistic about the upward trajectory.

Bill CarcacheWolfe Research — Analyst

Understood. If I could squeeze one last one in for Dan. Dan, as you look to deploy more of your liquidity into securities as you’ve described, is there any constraint on how high you guys are willing to take that mix relative to your average earning assets? We saw the investment securities portfolio reached a peak of 74% of average earning assets back in 2014 versus the 58% where you guys finished this quarter.

So first is how high can that go? And then is 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 a municipal bond portfolio that we do see higher tax rate?

Daniel J. BeckChief Financial Officer

Yes. Thanks for the question. I think as we take a look at the deployment of liquidity, our past practice and our continued objective is to continue to progressively put that excess liquidity to work. And you continue to see us put it to work and 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 a hard limit of how we’d go, we don’t have one. And I think what we would continue to do is 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 in that AFS, available for sale, portfolio. That’s 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 we’re certainly investing both in the longer 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 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 we’re going to continue to deploy. We’ve got the room to do it, and that benefit of liquidity coming back to us every quarter gives us a lot of flexibility to be able to do it.

Bill CarcacheWolfe Research — Analyst

That’s very helpful. Thank you all for taking my questions, it’s a great help.

Operator

We have our next question from John Pancari from Evercore ISI. Your line is now open.

John PancariEvercore ISI — Analyst

On the securities investments again, sorry for another question around that, but can you just talk about the pace of incremental additions from here? I know you just mentioned the $3 billion to $3.5 billion in cash flow, but you’re 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? Thanks.

Daniel J. BeckChief Financial Officer

Yes, John, this is Dan. I think the way to look at it, we certainly came out of the quarter in 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, to the $7 billion to $9 billion range by the time we get to the end of the year. So we’re going to opportunistically deploy that.

There was certainly a substantial amount of deployment in the first quarter, and that was occurring on the back of a very strong deposit growth quarter. And obviously, you’ve seen 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 progressively put that money to work over the coming quarters. So that — there’s 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.

John PancariEvercore ISI — Analyst

Got it. Thanks, Dan. And then in terms of the progression of the duration toward that less than two years versus the current 4.3-year duration, is that a similar time frame that you’re trying to get to that point? Or would that take longer?

Daniel J. BeckChief Financial Officer

No. We’re going to do that pretty quickly, I would say, here over the next month or so. That’s easier to do because we’ll be able to use derivative instruments to do that than 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 shore up the duration there and at least move it to be shorter. So you’ll see that happen here pretty quickly.

John PancariEvercore ISI — Analyst

Got it. Okay. And then on the loan book, just want to see if you can give us the updated new money loan yields that you’re getting in the capital call portfolio.

Marc C. CadieuxChief Credit Officer

Hi, it’s Marc Cadieux. I’ll take that question. And regrettably, I’m compelled to decline to answer the question just given competitive forces in the marketplace and not wanting to disclose too much on this call about where our current pricing sits. Apologies for that.

John PancariEvercore ISI — Analyst

Okay. Understood.

Daniel J. BeckChief Financial Officer

John, I think what we can say is just overall, when we take a look at pricing, all of the new money yield on capital call lending, the mortgage book as well as healthcare and tech are included within our guidance of margin and net interest income for the remainder of the year. So we can’t give you the specifics, but where we are and how we expect that to progress is included in the guidance for the remainder of the year.

John PancariEvercore ISI — Analyst

Got it. Okay. Good. And then just two other quick ones, sorry for the multiple questions. But the — on the credit front, just on the heels of the fraud, can you just update us what changes have you implemented as a result of it just given that the fraud surfaced pretty quickly after origination of the loan? Now that you’ve had a little bit of time to implement, what type of changes to your approach have you implemented? Or was nothing material needed to be done since it was more isolated? Thanks.

Marc C. CadieuxChief Credit Officer

Yes. It’s Marc. I’ll start. Others may wish to chime in. I think you nailed it with the end of the question. As we’ve noted before, we did a review of the loan in 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 and have done it, I think, very well over that period of time. And during that period of time, this is — this potential fraud incident is the one and only incident that we’ve encountered.

And so while we have, of course, in the wake of something like this, taken a look at everything we do, the conclusion we’ve ultimately come to is it’s a good opportunity to reinforce through training and awareness that we need to be on guard against this kind of thing. And that really is the extent of it. I’ll stop there and invite anybody else to chime in if they wish.

John PancariEvercore ISI — Analyst

Okay. All right. Well thanks, Marc. And I promise my last one is just on the operating efficiency ratio. I know it’s at 58.5% here for the first quarter. Can you give us maybe your expectation on how we should think about the full year and maybe long term for that ratio, what your expectations are? Thanks.

Daniel J. BeckChief Financial Officer

Yes. John, I think the best way to look at it is we are clearly going to continue to invest in the franchise. We’re a growth company, and it absolutely makes sense for us to 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 the banking activity as well as the excellent performance of SVB Leerink. You see us investing in our initiatives, and that’s certainly driving a higher operating efficiency ratio.

So I think as we look for the rest of the year, we’ll certainly see continued the higher operating efficiency just because we’re going to continue to invest because we see this growth opportunity ahead. Exactly where that’s going to end up is so dependent upon what happens with more investment gains as well as what happens within the Leerink business. It’s hard to say exactly what that long run operating efficiency ratio should look like. But again, the focus here is on investment. We’re a growth company, and it makes sense for us to put that money to work.

John PancariEvercore ISI — Analyst

Got it. Thanks for taking on the question.

Marc C. CadieuxChief Credit Officer

Yes.

Operator

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

Jared ShawWells Fargo Securities, LLC — Analyst

Hi, good afternoon. Thanks.

Daniel J. BeckChief Financial Officer

Hi, Jared.

Jared ShawWells Fargo Securities, LLC — Analyst

Hi. Maybe could you just update us on either the strategy or the 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’re able to raise capital to the extent you did this quarter, but you still have TCE sequentially down. So any thoughts, I guess, on what that strategy is and the success of being able to direct those flows?

Gregory W. BeckerPresident, Chief Executive Officer & Director

This is Greg. I’ll start, and then Mike and Dan may want to 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 year is that what we’ve done is built a much broader product set in allowing clients to choose options that make sense for them. If you look at last quarter, we’re kind of in that 50-50 on and off balance sheet. And we have said in the past that 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 client preferences and what they’re looking for. 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 in a very small way change a little bit of behavior by moving some spreads around. But that’s hard to do when rates are 0. And so it really does boil down to product set and client preference. So Dan or Mike, anything to add?

Daniel J. BeckChief Financial Officer

Yes, Greg, it’s Dan. I’ll just go on to the capital topic and Jared since brought it up. When we think about capital, we’re really thinking about two things. One is profitability, and two is 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 two quarters, and you obviously see that on the balance sheet. That exceptional deposit growth we saw in 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 see it because 50% of the client inflows for the quarter went off-balance sheet. So we’re certainly, where we can and 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 this quarter helps free up additional capacity to support our growth in the ways that we’ve done in the past.

So that includes preferred debt issuance to support the Tier one leverage ratio, and the markets have been open to us to do those transactions. And that provides very low-cost 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 our risk-based capital measures remain very strong. If you look at CET1 at the holding company, we closed the quarter at about 12.2%. So all in, that’s how we’re thinking about capital.

Jared ShawWells Fargo Securities, LLC — Analyst

Okay. Great. Then maybe just finally for me, a broader picture question. We saw the — heard the news today about the potential tax changes that were proposed. I guess when you look at the potential for higher 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?

Gregory W. BeckerPresident, Chief Executive Officer & Director

This is Greg. I’ll start, and Dan, you may want to add. I — 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 the next few weeks about is that going to soften the stock market, is it going to call back valuations to come down and what could the ripple effect be of that. I think it’s too early to tell. But I would just say on a direct basis, I don’t see a lot of impact to our business.

Jared ShawWells Fargo Securities, LLC — Analyst

Great, thanks.

Operator

Next is Chris McGratty from KBW. Your line is now open.

Chris McGrattyKeefe, Bruyette, & Woods, Inc. — Analyst

Great, thanks for taking my question. Dan, just wanted to kind of combine a few of the questions that we’ve heard on what you’re doing with the balance sheet. But you guys have obviously been one of the most asset-sensitive banks in the country. All the actions you’re taking with the held to maturity and the swaps and adding the duration, I mean, broadly speaking, how much are you changing the rate profile of the company?

Daniel J. BeckChief Financial Officer

Yes, Chris, we remain quite asset-sensitive. And in effect, the actions that we’re taking with held to maturity, you can almost think of bit as a barbell. What we’re doing is extending the duration in the held-to-maturity book in that three- to five-year range and shortening the duration on available for sale into that less than two years. But net-net, the overall position of the investment securities portfolio remains about the same. So you’re thinking in the three- to four-year range on an all-in basis.

Obviously, that’s going to fluctuate quarter-to-quarter based on what’s going on with the rates. But all-in, the intent is not to change the position of the total portfolio, but to protect against sudden rate movements in the available-for-sale portfolio. So if we look at the asset sensitivity we’ve got that included within our slide deck, we’re still in a good place from a sensitivity perspective. And to the extent that we see rate movements, we would still benefit in a strong way from it.

Chris McGrattyKeefe, Bruyette, & Woods, Inc. — Analyst

Okay. Great. And then on the reserve, how do we think about the reserve going forward given the outlook on credit compared to day one? We’ve heard a lot of banks this quarter talk about getting back to day one by the end of the year. And obviously, you guys have worked your reserve down a little bit given the actions you took last year. Thanks.

Marc C. CadieuxChief Credit Officer

So I’ll start. It’s Marc, and Dan may wish to add. So following this first quarter and recognizing that our loan portfolio composition has evolved a fair bit in the four or five quarters since COVID arrived, we are 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.

Chris McGrattyKeefe, Bruyette, & Woods, Inc. — Analyst

Great, thank you.

Operator

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

David SmithSanford C. Bernstein & Co., LLC. — Analyst

Our questions are answered. Thank you.

Operator

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

Brock VandervlietUBS Investment Bank — Analyst

Oh, thanks so much. So I think the team here is extremely adept in these calls and communicating with the Street, and I just kind of raised an eyebrow when I heard the comments on capital call and capital call pricing. Now some of the — some of your competitors that are in the space talk about it pretty regularly. I think we all know it’s extremely competitive and [Indecipherable] 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 competitive dynamic there that we should be aware of. Thanks.

Gregory W. BeckerPresident, Chief Executive Officer & Director

So this is Greg. No change. It’s an incredibly competitive market, and we’re sensitive. I’m sensitive to — when you’re the market leader and you start sharing information, I would say that 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’s 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.

Brock VandervlietUBS Investment Bank — Analyst

Okay. Good. And the client investment fees, and those have kind of wound down with lower rates, how quickly would those — could those kind of claw back in the other direction assuming we get some activity on the short end of the yield curve at some point?

Gregory W. BeckerPresident, Chief Executive Officer & Director

This is Greg. If you look at Slide 14, I think the team did a really good job of describing the rate sensitivity in the third — the box on the upper right. It talks about the balance sheet client funds and what could happen with a 25 basis point increase in fees. And the number is an expected increase of $90 million to $120 million of growth in fees based on a 25 — or the initial increase of 25 basis points in short-term rates. So it’s pretty clear there, and obviously, a very nice impact if that happens.

Brock VandervlietUBS Investment Bank — Analyst

Yes, got it. Okay, answered my questions.

Gregory W. BeckerPresident, Chief Executive Officer & Director

Yes.

Operator

[Operator Instructions] No further questions at this time. I turn the call back over to Greg Becker for some brief closing comments.

Gregory W. BeckerPresident, Chief Executive Officer & Director

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 in every call, we certainly believe the long-term opportunity in this market is exciting. And as we really refine our strategy to 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 SVB Capital, our intent is to support, to grow, to expand each one of those businesses.

At SVB, we’re 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 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 wouldn’t be possible without our great, talented and dedicated employees.

Last comment I would say is the following. You’ve heard a couple of people talk about and congratulating me on 10 years as CEO. And this is my tenth year of a quarterly call, so we just wrap this up. Obviously, incredibly proud of what the institution has built over the last 10 years. I’d say on a regular basis, both internally and externally, I’m confident I have the best CEO job in banking and believe I probably have one of the best CEO jobs in any 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. I get more energy and excitement from engaging with our clients and talking to our teams than almost anything. And so I feel incredibly fortunate.

So I really want to thank the exec team, thank the Board of Directors, thank the entire SVB team and our clients for allowing me to have such a great job, and I couldn’t be more excited about where we’re going. So thank you, everyone, for joining us, and we will talk next quarter. Take care.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Meghan O’LearyHead of IR

Gregory W. BeckerPresident, Chief Executive Officer & Director

Daniel J. BeckChief Financial Officer

Michael R. DescheneauxPresident of Silicon Valley Bank

Marc C. CadieuxChief Credit Officer

Ken ZerbeMorgan Stanley — Analyst

Ebrahim PoonawalaBank of America — Analyst

Steven AlexopoulosJP Morgan Chase & Co. — Analyst

Bill CarcacheWolfe Research — Analyst

John PancariEvercore ISI — Analyst

Jared ShawWells Fargo Securities, LLC — Analyst

Chris McGrattyKeefe, Bruyette, & Woods, Inc. — Analyst

David SmithSanford C. Bernstein & Co., LLC. — Analyst

Brock VandervlietUBS Investment Bank — Analyst

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