SIVB (2019 - Q4)

Welcome to the SVB Financial Group Q4 2019 Earnings Call. My name is Adriane, and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note this conference is being recorded. I’ll now turn the call over to Meghan O'Leary, Head of Investor Relations. Meghan O'Leary, you may begin. Meghan O

Thank you, Adriane. And thank you everyone for joining us today. Our President and CEO, Greg Becker; and our CFO, Dan Beck are here to talk about our fourth quarter 2019 financial results and they will be joined by other members of the management for the Q&A. Our current earnings release and summary CEO letter and slides are available on the Investor Relations section of our Web site at svb.com. 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 may be found in our SEC filings and in our earnings release. And now, I will turn the call over to President and CEO, Greg Becker.

Great. Thanks Meg and thanks for joining us today as we review our Q4 2019 and full year 2019 results as well as review the outlook for 2020. We are pleased to report, we had an excellent fourth quarter earnings per share of $5.06 and net income of $263 million, healthy ROE of 17%. Our presentation in stakeholder letter details these results and as we have started to do at the end of 2019 are going to not go through scripted remarks but just open by the call to questions. So with that, I will turn it back to the operator to start the Q&A.

Thank you. We will now begin the Q&A session. And our first question comes from Ken Zerbe from Morgan Stanley. Your line is open.

Great. Thanks. Good evening everyone. I wanted to start off with expenses, clearly a little bit higher than I think what most people were expecting this quarter. I guess, I'm just trying to figure out maybe a good place to start is, can you just break that up, I know there was number of sort of non-recurring charges, I think like 10 million of comp, some software impairments and other stuff. But then, there was such as like your investments in your global, like the digital banking and the infrastructure initiative that you have, can you just help us understand like how much of the expense growth is sort of to grow your business versus how much is sort of unusual one-time in nature type charges?

Ken, this is Dan. I will start and others might want to jump in. So, first as we look at expenses overall, just looking at 2020 in total, we haven't moved off of our preliminary expense guidance that we issued last quarter. So we’re still in the high single digits for 2020. And as we look at expenses for the first quarter, we are expecting those expenses to be in the $430 million to $450 million range. So, just wanted to baseline there and as we then start to talk about Q4 expenses, you are right, close that $30 million of that increase that we saw in the first quarter was all revenue driven mostly from our Leerink very strong performance.

Okay. That does help a little bit. And just to be clear though, the high single digit guidance because it was the same last quarter and this quarter, but this quarter includes, I don’t know $50 million, $60 million higher than what we were expecting. Are you implying or trying to imply that your expense that the total expense base next year is now higher than, not that I shouldn’t say base but the total expenses next year higher than what it was the way you expected last quarter because the base is higher?

So if you think about it, the expense range we give there's room within it. So to say that it's materially increased. I don't think that's true. But it has slightly increased on a year -- on from last guidance to this guidance.

Got you. Okay. And then just last question if I may, sorry, go ahead.

I was going to say, but still within that high single digits range.

Understood. Okay. And then just the last question in terms of Leerink, obviously they had a very good quarter. I saw -- I'm going to say they maybe be us by less than 20 million, but I thought you're the compensation expense for Leerink. I think as part of the incentive plan goal by more than 20 million, around 20 million. Like, it seems like there's, please help us understand that because it seems like there's a bit of a disconnect between what they're earning versus what you're paying them. And I'm just trying to make sure I fully understand the dynamics of the big jump in their compensation.

Yes. So, if you look at them from a gross or an operating margin or operating profit perspective they delivered 2019 and let's call it an 18% operating margin. We look at the earned comp ratio that is more consistent with what you'd see at other investment banks. What you're seeing come through the expenses in this quarter is that there was an expectation at the end of the third quarter that financial performance would be lower than what was delivered. So the incentive compensation increased in the fourth quarter because of those improved expectations and actual delivery in the fourth quarter.

Okay. Great. Thank you very much.

And our next question comes from Ebrahim Poonawala from Bank of America. Your line is open.

Hey guys, just one quick follow-up Dan, first on the expenses. So if you take the midpoint of the range, you gave 430 to 450 for the first quarter and annualize that or the 1.6 billion for 2019 gets you to a 9.9% expense growth. So is it safe to assume that we are going to be in that range or lower sequentially for most of 20 -- or all of 2020?

So we communicated this in the earnings presentation. So in the first quarter, we also have higher seasonal compensation related costs. So the expectation is that that comes off in the second quarter and the cost is decreased in the second quarter. So that's the right way to think about it.

Okay. Got it. And I guess we shouldn't anticipate as much of a ratcheting up in expenses as we saw in 2019 just based on guidance I guess understood.

That's right. That's our guidance.

This is Greg. The only exception is that, just a caveat is performance-based as we've talked about in prior years. So to the extent either the bank's overall performance, SVB Leerink's performance actually exceeds forecast in a meaningful way. You could see some incentive compensation, take it over there. And at some point in the year, we may, again from an investment perspective, we may take up investments in digital platform, et cetera. But I'd say right now, again, with the outlook we've given you, we're right in the range that we talked about.

Got it. In terms of your loan growth guidance it implies a meaningful deceleration just when you look at the dollar amounts of loan growth that you had in 2018, 2019, is that you just being conservative in terms of your outlook on loan growth or do you expect some seasonality payoffs early part of the year?

This is Greg. I'll start and Dan and Marc may want to add to it. So we did have a really strong fourth quarter and especially a period end, in most of that's from capital call lending. Right? So when you look at that, there is the possibility that will decline in the first quarter. So you get back to that level. If it sticks, if it stays in the first quarter plays out in a way higher than expectations again where it stays, we're going to be in the next range category. But again, we kept it the same because it's mostly capital call lending and it may not be as sticky. So, just I guess watch and see how the first quarter plays out.

Got it. And just Greg to your point on investments, would love to get a little bit of a sense of like, you made tremendous investments in people, global expansion technology. Like how does this translate into faster, stronger revenue growth, balance sheet growth? If you could give us a sense of what we should expect beyond just your 2020 guidance as we think about a 2 to 3 year timeframe as a function of all the investments.

Yes. So I will start, I'm sure Mike is going to want to add a few things. And I'm going to piggyback on some of the things that Dan has said. So when I think about where we are as an institution, I think I would give us incredibly high marks for our people, our service. And broadly speaking our products where we need to continue to improve and get better isn't the digital platform. We have an okay digital platform. We need to actually have a much better digital platform. So we're investing in that business heavily and you'll expect us to see, or you should expect to see more investment in that. We expect to be releasing an early stage digital -- enhanced digital platform in the second quarter. And so there's a lot of investment in there. In addition, on the product side, almost every category of product we're paying attention to and investing in, whether it's FX or the card platform, part of that is to expand the opportunities that we have both domestically and globally. But if you look at that as well, we're also using that as a way to push back on the competition that we're seeing in the market as well. So we're looking at it both from a defensive perspective and also an offense perspective. And we want to continue to grow our core fee income at a healthy pace. On the people side we continue to invest globally. And that's a business where you put more money into it and it grows at a higher pace, but your margin isn't as high. You're really investing for the long-term growth. So it's both product and it's the global business. And so that's kind of a one way to think about it, but I'll let Mike add more.

Sure. Yes, I think the way to think about it is a lot of our efforts are going around the client experience. So when you think about user interfaces, whether it's what Greg was talking about the early stage banking applications, whether it's with our credit card or onboarding clients, whether it's for loan onboarding or just deposit products, it's all about eliminating friction and making sure that the clients have a really good experience.

Thanks for taking my questions.

And your next question comes from Steven Alexopoulos from JPMorgan. Your line is open.

Hi, everybody. I want to start with first with a big picture question. So if I look at the IPO market in 2019, there was a pretty wide divergence in the performance of what I think of as pure tech companies and then other companies that were trying to get a tech multiple. But, we're really in an old economy type industry, right? I'm thinking about Uber or Lyft. When you look at your startup clients, companies that are not in pure tech now struggling today to raise funds and maybe seeing like down rounds or anything like that?

So Steve, I'll start and Mike and Mark, they want to add. Yes, at least from my standpoint, I have not seen anything significant that would say there would be a trend, whether it's hardcore tech versus what I'll call business model innovation. I try to distinguish the two that way. Do I think that the valuation of some of the business model companies that had rapid growth that maybe didn't have something as differentiated, the valuations are coming down or it's a little bit more difficult to get these high valuations? I think that's true. But I think also those companies are the ones that didn't have as clear path to profitability. And I think one of the questions we get on a regular basis is regarding we work and what was the impact. I actually think the impact is positive for our market for the following reason.

Yes. I haven't been seeing any heavy amounts and down rounds either out there as well. And quite the opposite. I think, we saw that probably about a year, year and a half ago, a lot of down round talk. But around this current time, I'm not really hearing much about down rounds.

Okay. That's helpful. And then on -- thanks for that. On the buybacks, you didn't buy back stock in the quarter and you have 350 million authorization left for 2020. How much do you think you'll buy back of that?

It's hard to say in total, but the -- this whereas the issuance of the preferred is helpful. We now have the ability to really optimize the capital stock and exchange some more expensive common equity tier one as a result. So hard to say exactly what we would do in terms of the amount, but there's an expectation that we will use some of the authorization.

Okay. Thanks. And then finally, if I look at the deposit mix, the interest bearing deposits are now about 34% of total looking at average. Dan where do you see that mix trending in 2020?

Yes. I think on a full year average basis, we'll be in the low to mid sixties full year average. I think the trend is continuing to mix more towards interest bearing is going to continue. And you could see us leave 2020 in the -- let's call it the lower sixties from a non-interest bearing deposit perspectives that generally in this rate environment, how I think it's going to continue to trend.

In terms of the strong growth this quarter and interest bearing. Are you just offering more attractive rates than what clients can get in the off balance sheet product? Is that what's driving that?

No. If you've taken a look at our overall client liquidity over the last couple of years, especially with the increase in rates, you saw a material movement towards off balance sheet. Now what we're doing is positioning more on balance sheet products at a competitive rate. And you're seeing that plus some of the features that Mike talked about from a product perspective attract folks to who want to be on the balance sheet and a deposit product. So it's not just about the rates. It's about the product, the product positioning and how we're moving forward with it.

I would say that essentially Steve going in to the market, making sure that we're keeping in line with the market because if you're out of a market right now, obviously it makes it a lot harder. So again, being the market range is certainly really, really helpful. If you know there's just a significant amount of liquidity going on there and that people are fighting for it. So we're no doubt getting more than our fair share.

Okay, great. Thanks for taking my questions.

And the next question comes from Jennifer Demba from SunTrust. Your line is open.

Thank you. Good evening. Hi, a question on Leerink. Can you just expand on the outperformance in '19 and fourth quarter of what's gone really well? What do you feel like the opportunities are still in '20 in the next couple of years?

Yes. This is Greg. I look at 2019. So our first year of SVB Leerink being part of the organization. And I would characterize it as being a very strong year. And I would look at it from a standpoint it slightly exceeded, but it's always good to exceed our expectations for the year from a revenue and a contribution perspective, number one. But actually more importantly, I would say how the team has come together, the cultural fit that we hoped would exist was as advertised and maybe even a little better than expected there. So I feel really, really good about that. Then the last part is a collaboration with the life science and healthcare commercial banking team. And again, because of that cultural connection and the cultural fit it is really a seamless partnership between our commercial bankers and the health care investment bankers at SVB Leerink. And I look at that and look at the deals that are being introduced to the commercial bankers. I look at the deals that are being introduced from the commercial bankers to SVB Leerink as a very, very positive sign. Now, was it working perfectly in 2019? No. But that gives me an optimistic outlook for what I see going forward in 2020. So part of the revenue when you think about capital markets, it is mostly a function of what happens in the market and the market share they have, the market share we think is going to hold steady, maybe increase a little bit, but it's a solid market share in the target market they go after. So if anything my hope, my anticipation is that the collaboration will be even better. And so the commercial bank on the life science side will see an even stronger 2020 over 2019. So I would characterize it as a very, very good year. And just I really want to say thanks to the team at SVB Leerink for just being such great partners.

And maybe, well add on to that Greg is, Jennifer, when we look back about the insight and knowledge that the Leerink team brings to the table, when you're having those discussions with our clients, their insight and knowledge is best in class. It just makes -- it brings that level of discussion to a completely different level and really adding value for our clients. So I think there's been a lot of great receptivity from our clients as well as -- even inside here at SVB, just been quite surprised with their depth of knowledge.

At what point do you fan into the technology sectors and investment banking?

Yes. It's a great question. I think for the most part there are two different markets. What I mean by that is, you to look at the technology space. What's interesting in life sciences, I'll start with that. You have some small players, you really have SVB Leerink as being right in the middle and incredibly solid when you look at economics and everything else. They do a really, really good job. And the economic differentiation for capital markets is very, very close to the bullish bracket firms. And then, you have the bullish bracket firms. In the technology side is, we've looked at that market where you really end up with is the bullish brackets and then everyone else. And so from my standpoint, it's hard for me to see us jumping in to capital markets in technology. Well, what that leaves is advisory. And I know, I'm sure you know that the number of firms that have gotten into the M&A advisory business and technology has increased dramatically. So that's a very competitive space. So before we would do that, we would have to be confident that we had synergies on the commercial banking side in technology for buyouts or something in sponsor finance that we could capitalize on in an advisory business and technology. So that's what we're looking at. We're making sure that before we make any movement in that area that we can really make it work across the platform. So nothing to share right now, but it is something we're looking at, but it'll probably be, if we do something it will be on the advisory side.

Great. Thanks for the color.

And our next question comes from Chris McGratty from KBW. Your line is open.

Great, thanks. Greg, maybe a question on just overall credit quality. It's performing very well. Maybe interested in kind of some thoughts of portfolios or sectors that you might be keeping an eye on.

Yes. Chris, I'm going to turn over to Marc as he is the expert in that area and he's dying to answer a question.

Thanks for asking the question. So yes, it's Marc and the answer to your question is there's no particular sector credit, quality as you notice than very strong for quite a while now and reflective in that is no adverse emerging trends that we can see. Having said that, the segments of our portfolio that always bear the closest watching is the investor dependent and particularly the early stage segment of the portfolio. Given that that can change quickly depending on market factors, investor sentiment, et cetera.

Okay, great. And maybe one more, Greg, kind of a longer term question. You've had a lot of success with the capital call business. The growth there is tremendous. Maybe can you speak to diversification efforts that might be in their way over the next couple of years? I think you've talked in the past about private banking. Thanks.

Yes. And Chris, I guess I think about your question is more broadly speaking about growth overall. And I want to characterize one thing for us, but just the capital call business. When you think about it from a lending perspective, that clearly has been the biggest driver of loan growth. And that gets a lot of headlines because obviously banks focus on lending, but I really would ask everyone to focus on the overall business, the overall platform, core fee income, deposits or client liquidity and then lending. When you think about it from those three avenues, the tech and life science part of the portfolio, even though the lending side has headwinds from the standpoint, the amount of liquidity that exists in the market, the success that group is having about adding new clients, bringing loan commitments, bringing client liquidity, the majority of the client liquidity came from technology and life sciences was exceptional and core fee income, FX, cards, they have seen exceptional growth. So I would argue that we actually do have a more diversified growth story than what is the headline in lending regarding private equity services. You've got global, which is part of that. And then you brought up private bank. I am very bullish on private bank. And as far as I think about objectives for 2020, we need to make a bigger, bolder move in the wealth side. That is both organic and building it out. But we're also looking at inorganic opportunities as well. And so that may come up during the course of 2020. So when I think about the growth trajectory, it is the whole business tech, life sciences, private equity services, private banking all those combined that gives me optimism for the kind of future.

Great. Thank you.

And your next question comes from Gary Tenner from DA Davidson. Your line is open.

Thanks. Good afternoon. Want to ask about what looks like a modest change to your guide on core fee income versus the preliminary guideline last quarter. It looks to be a little bit lower now. I'm just wondering if it's the dynamic of bringing some more client funds on balance sheet, maybe a little bit of a negative impact on the growth in client investment fees in 2020.

Yes. This is Dan. I'll start Mike might have something to add. But if we take a look at the change in the guide, the majority of that change is related to the fact that our 2019 performance was even stronger than we had anticipated. That just changed the dynamic of the growth rate between 2019 and 2020. Overall, we continue to expect solid liquidity from a client funds perspective, because of the environment that Greg and Mike mentioned earlier. So we're still bullish on the environment. And the change in the guide is just more related to how we exited 2019.

Thanks. And then one additional question, in terms of the margin, the guide for next year just modestly below where the fourth quarter ended up. I'm wondering, is this a question of kind of a first quarter step down from some additional repricing from the fourth quarter rate changes and then a stabilization or is it more of a kind of bleed over the course of 2020 as earning asset mix maybe ships more towards lower yielding assets?

Yes. I think if you look at how 2020 is going to continue to progress you're going to obviously see stabilization from a rate perspective. But you are going to continue to see a remixing of the deposit side of the portfolio and to more interest bearing deposits to that. That's going to be of a source of growth, but at the same time some continued pressure on the margin. We also continue to expect some competitive pressure on the lending side of the equation. And I think those are the two factors that will continue to push margins lower through 2020. But overall all of those factors have already been included in our guide for the year.

Thank you.

And the next question comes from David Chiaverini from Wedbush. Your line is open.

Hi, thanks. My questions were answered.

Thank you. And our next question comes from Jared Shaw from Wells Fargo.

Hi, good evening. It's just circling back on Leerink. With the separation of the core fee income guide. So, we shouldn't expect that the growth rate at Leerink slows in 2020. Is that the right way to think about it given what we see here?

So the growth rate in Leerink on a year-over-year basis there is growth on the revenue side of the equation. And that's what's been factored into the guide. There's the growth rates since that was the first year for us with them that we see is consistent with what we had expected when we looked at the transaction.

Jared, the only thing I would add to what Dan said is, it's not entirely comparable, but it's more, at least for me, it's more analogous to what you see in warrant and security gains. It's more market driven. So if they keep their market share the same, its part of a function of what are the M&A and what is the capital markets for a healthcare. And so, yes, we've got some growth built in, but if next year or this year is a very, very, very strong year they're going to have more upside, if they're softening and that market, you're going to see a lower revenue. And so when we first announced the acquisition of Leerink at the beginning of last year or at the end of the '18, we said it is going to be more of a market tied business. And so when you factor that in, that's what you should not expect.

Okay. And then, when we look at Leerink, I guess, what's a typical expense relationship to revenues or excluding the incentive comp? What's the efficiency ratio, I guess? For Leerink as we look at growth there.

Yes. So we look at their overall operating margin, they're generally targeting 18% to 20% operating margins. So that's effectively the way to think about it.

Okay, great. Thanks. And then Greg, maybe just a talk a little bit about the international view and how any potential trade settlement could impact your business and how you are sort of viewing the international side of the business overall.

Yes. So the international business, and again you can break it down into the U.K., EMEA, then you look at Asia and then we have we have Canada as well. The business has all three of them had nice growth in 2019. There really wasn't a lot of impact from -- in the U.K., we didn't see a lot of impact or maybe any impact from the Brexit discussions in China. We didn't see a lot of change there. And you may hear in the news about the venture capital activity in China where it actually dropped very significantly in 2019. But I think it's really important to distinguish what that drop or where that drop came from. It was kind of what I'll call two buckets of venture capital in China. One is government supported RMB funds where the government is putting money into venture capital funds. And the other one is, what I'll call more our type of venture firms, which are either U.S. funds that are gone there and setting up shop or almost like a Western style of venture capital model there. Those were more familiar with, that's where our concentration is. And so we really didn't see much change. We saw a little bit of change, but not much change in 2019. And so we have healthy growth expectations across all those businesses. And, I think the only -- I only expect positives from the fact that we had a phase one trade deal in China, number one, number two Brexit is clarified, which I think is a really good thing. So I look at it as just being more helpful. But 2019 was a very good year.

Thanks for the color.

And the next question comes from Tyler Stafford from Stephens. Your line is open.

Hey, good evening guys. Thanks for taking the question. Greg or Dan, earlier you mentioned just around the competition impacting the margin outlook and obviously within the capital call business, we've seen some newer market entrance in the fourth quarter and continued competition there. Can Greg, I guess you just share your position, how you feel about how this is positioned within that business? How insulated or comfortable you feel about protecting and growing your market share within the capital call segment?

Yes. I will start and Mike may want to add as he's even closer to it than I am. We've had great growth in that business. There's been some margin compression but I still believe, I know we have a premium for what we do. And so the question is like, why do, would we get a premium or why would you expect to be in the position that we're in, which we believe, or we know where the leaders in that space. It's really several factors. So one is the fact that we're the really the only global platform that covers private equity and venture capital across kind of all the global geography. So whether it's Asia, which is a big, big market, whether it's the U.S. and then you can look at Europe, but specifically taking that out of the U.K. So we have more people covering this market than any other institution, number one. Number two, all our products and services are tailored specifically to that market. And number three, the third thing is the client service. And so it's not one thing. It is kind of all those things. And if I were to say, what's the outlook for us, I know my objectives and I know Mike feels the same way, that what we need to double down on is, what are the other things that we services that we can provide private equity firms and venture capital firms to be even more of a one-stop show. So that's what we're looking to build out in 2020 and 2021. But I feel very good about our positioning in the market right now.

Okay, thanks. And I guess along the same vein, can you share, maybe Dan, what the current on balance sheet yield of the capital call portfolio is and any commentary about new origination yields out of that book would be helpful. Thanks.

All right. So it's Marc, I'll take that one. So the interest only yield in that portfolio is bleeding high 3% and low 4% is where it falls on average and haven't really in terms of recent originations are pretty consistent with the averages I just gave you.

And then Marc maybe just to follow up. So within your margin expectation would be no material change in that pricing of that as originations?

Well, I think as we already mentioned, competition will take some margin. All right. We'll see some margin pressure from that. But yes, at the range I'm talking about, there's not a whole lot of room left to go.

And Tyler, its Dan. Based on what we've seen over the last six quarters now, we've continued to factor in those margin declines into our forecast. So that that is already, those expectations are already baked into our guidance.

Thanks for clarifying, Dan. Appreciate it.

And our next question comes from John Pancari from Evercore. Your line is open.

Good afternoon. On the competitive line of questioning, are other portfolios outside of the capital call lines where you're seeing pricing pressure, is the capital call business is the primary area that's weighing on your margin from that perspective? Thanks.

Yes. This is Greg. It is the competitive market out there and it's not just in capital call lending. It is literally across the business. Our win rate is still exceptionally high; our market share is exceptionally strong. But yes, we have to -- we definitely have to compete every single day. And you're seeing it from banks, non-banks; you're seeing it really across the board. And I guess we really shouldn't be surprised by that. I know I'm not surprised by it, because number one, the target market that we has been exceptional market. Other institutions want to see growth. You've got low rates, and so people are looking for yield. And maybe finally and this is where I think it'll be interesting to see when we do have a little bit of a downturn. There hasn't been a downturn from a credit perspective for a decade. And you see people coming in that are doing one covenant deals, no covenant deals with low pricing. And as Mike has talked about on this call over the years, we want to focus on smart growth. So we're being aggressive, we're being competitive, but there's situations where places that we just won't go because we just don't think it's going to end well if there was a kind of a bump in the road. So yes, it's competitive. We're sharpening our pencil. And it's kind of hand to hand combat every day.

But, at the same time though in terms of the margin compression we are -- I would characterize this making it up from other products as well too, right? Those that have really good margins, we're improving on how we deliver our client experience as well too. So I'm quite okay with some margin declines, particularly as long as we continue to add the solutions and provide the solutions to our clients where you make up for it in fees.

And on that, Mike, as you look at the different products or the ways to deepen your relationship and enhance profitability with private equity firms and VCs, what are examples of those types of products and who you poised to steal that business from? Like who's doing that business now? Would you need to move upstream to larger PE firms in order to get greater access to different products that you could be offering? Thanks.

As you know, the market is massive in the private equity world, even though we are the largest global player, largest player and by and large in the United States, there's still a large market share for us to continue to go after. So I'm not worried about in terms of market opportunity at all. But yes, so you've got mid sized firms, you've got large sized firms, so we can go after all of them. In terms of a specific product, what we really have seen is FX foreign exchange as well as client investment piece. So some of our off-balance-sheet funds. And I'll give you an example, like for an FX, for private equity, we've been growing that business over the last five years, about 30% per year in the FX world. Right? Continue to educate our clients. We provide great insight, great solutions, great service to our clients. And so we continue to win a large mandate in that area. Similarly on the client investment piece as well too, the off sheet funds. Again, a lot of deposits around that on and both off. So that's why I would say is that where we are picking up on the margin and then it's a very scalable business as you can imagine.

The only thing I would add on to that is, there's market share growth and there's market growth. What I mean by that is, there's a fair number of private equity firms that historically actually haven't used capital call lending. And now as it's becoming more common to do that, you're actually seeing the market growth. So you're not taking share away from anyone. It's just they're just realizing this is actually a really good solution for them and for their LPs. So you're seeing growth both in us having market share, you're having growth in product market share and you're also having growth in the market overall. And so from that standpoint, that's really been the drivers of the growth.

Okay. Got it. Got it. That's helpful. Then one last thing also on the same theme. In terms of the competitive intensity, particularly around the capital calls space as it is. I mean, what would you say really reverses it? I mean, just given this is as it is a growing space and more and more entrance or stepping in, do you really see that reversing in terms of the pricing impact on the lines itself?

This is Greg. I don't see that market changing a whole lot from a competitiveness perspective. You see more non-banks competing with banks for lending. And what that does is people want growth. They're going to be forced to compete on the lower risk spectrum. And you're going to compete in lowers risk spectrum by usually lowering rate. What our focus is, and Marc said this earlier, which I just want to kind of follow up on the margins already low. So, whether it's an extra 25 basis points or 30 basis points or 40 basis points at some point and we see that companies say that's not the most important thing. The most important thing is, I want service, I want certainty, I want the product set, I want value add. And again, that's something our team and the platform we provide does exceptional job of. So we're competitive on pricing, but we're doing this as much as we can on the -- I'll call the wrapper value add that is really the key differentiator at the end of the day.

Got it. All right, thanks Greg.

And the next question comes from Brock Vandervliet from UBS.

Good evening. Thanks for the question. I'm going a little bit deeper into the footnotes here. I was just looking at the NII strength and I noticed there's mention of these the loan fees. Could you talk about, whether there's a seasonality to that, what types of lending that's coming from, whether it's a capital call or tied to the mid stage lending and kind of how we should think about loan fees going forward.

Yes. This is Dan, I'll start and Marc might want to add. The loan fees that we see are aren't seasonal. We do see them just based on a standard pay off activity, but it's really hard to predict on a quarter-to-quarter basis. We did happen to have stronger prepayment fees in this quarter. And that's why we noted them in the presentation. Traditionally, the largest prepayment fees are coming out of our healthcare and life science lending portfolios. And those generally generate the largest more episodic fee events.

Okay, great. And separately regarding Cecil, I saw that, saw that disclosure and more, this is more focused on kind of the day two impact and I was trying to do the math myself, but how should we look at this affecting your provisioning levels going forward?

So, it's Marc, I'll start. Dan may want to add. As we noted in the slides, we have the one time range of $40 million to $60 million. And from there on out, we're expecting in the reserve for the funded a range of 95 to 105 is the guidance. And what that reflects is the expectation that so long as the economy stays stable and that's an important caveat that we expect to be within that range.

Okay. And then provisioning, we'll just hold it there. Okay, great. Thank you.

And your next question comes from . Your line is open.

Great. Thanks. A quick follow up on NIM. Dan, the NIM guide, you guys did a very good job of working down the liquidity this quarter and but it's still around 10% of your earning asset base. What does the NIM guide presume, how does that trend in 2020?

It's a good question. The NIM guide assumes that we get back to our cash targets in, let's call it the $3 billion to $5 billion range. We've been consistently over the last couple quarters above that, which has been pressuring the NIM a bit. We've been putting money to work as quickly as we can, but at the same time, we have to balance kind of cash needs of the company. So the expectation is staying in that, let's call it $3 billion to $5 billion range hopefully closer to the middle of that. And to manage that down and that's what's embedded.

Okay. And would that be a gradual process from that? Well, actually you're what, 6.5 billion now?

Yes. I mean, we manage that every day and put that money back to work. The velocity of the fund flows is pretty strong. So every day we're looking to manage down to that level.

Understood. And just one quick one on the expense side, just to follow up. It sounds like the expenses are going to get some leverage in the second quarter from whatever the 430 to 450 in the first quarter. The season, the pattern looking back is that there's still expense growth in the second quarter. It's just as those seasonal payroll taxes roll off, the expense growth is more muted. So I'm just wondering where do you expect the expense leverage to come from in the second quarter.

Yes. Some of it is obviously related to the seasonal components and some of it's expected timing of spend from a professional services. So the largest aspect was the roll-off of those seasonal compensation expenses.

Got it. Thank you.

And that concludes our question-and-answer session. I'll now turn the call back over to Greg Becker for brief closing comments.

Great, thanks. I just want to thank everyone for joining us for our Q4 results and really is -- you can look at Q4 was a great quarter 2019. The year was incredibly strong year. And actually I like to even look back at the last decades since we're turning a new decade. And, it was really just an incredible period for us. As we look at the outlook, obviously 2020 we got positive guidance, which we feel good about and was probably most excited about is the team of people that we have what we're building out and so the overall long-term outlook. So that gives me optimism. I also want to thank our clients for supporting us and allowing us to support them. The team that I mentioned earlier, an incredible group of people that I believe are at the end of the day the biggest differentiator, both from a culture and values perspective and of course our investors who support us and support our long-term vision. So again, thanks all you guys for joining us and have an incredible 2020. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.