SIVB (2021 - Q4)

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group Q4 2021 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. Thank you. It is now my pleasure to turn the call over to Meghan O’Leary, Head of Investor Relations. Ma'am, please go ahead. Meghan O

Thank you, Brent. And thank you, everyone for joining us today. Our President and CEO Greg Becker, and our CFO, Dan Beck, are here and will be joined by other members of our management team for Q&A, regarding our fourth-quarter and full-year 2021 financial results. 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, maybe found in our SEC filings, specifically our financial release and slide deck. And now, I will turn the call over to our President and CEO, Greg Becker.

Thanks, Meghan and thank all of you for joining us today. We're pleased to be reporting another quarter of strong growth and profitability. Our core business continues to fire in all cylinders with a growing balance sheet, healthy net interest income in spite of NIM pressure, robust fee income, and excellent credit quality. While warrants and investment gains moderated from record levels in Q3, we see continued strength across our entire business. We are reiterating our strong 2022 outlook, and raising our expectations for loan growth and net interest income. In addition, our outlook does not include the significant positive impact of future short-term rate increases, which seems increasingly likely. We filed our earnings materials earlier this afternoon, and they're available on the Investor Relations section of our website. And with that, I will ask the Operator to open up the lines, and turn it over for questions. Thank you.

At this time, I would like to remind everyone in order to ask a question, If you'd like to withdraw your question again, . Your first question comes from Ebrahim Poonawala with Bank of America. Your line is open.

Good afternoon.

Hey, Ebrahim.

I guess -- hey, Greg. Maybe just in your letter, you mentioned public market volatility a couple of times. When I look at your results, extremely strong, the outlook is strong, but when you look at the stock performance since October, it's exact what we're seeing in with tech stocks in the IPO market. Remind us in terms of if we do have a sustained sell-off and technology higher-growth stocks, where will that manifests itself in terms of your growth outlook be it credit, be it in terms of fee or balance sheet growth?

I'll try to answer it a couple of different ways. Ebrahim and then Mark Kadjar are going to talk about credit or Mike want to talk about the commercial bank. Well you see the volatility that we've seen in public markets. There's a few places that you could see that. Obviously in any ECM business we have in the investment bank that could be one area, but I will counter that with the upside of we have a lot of M&A capabilities. And so I think M&A will pick up. So I actually think it will offset and there's more upside there and we can get into investment banking a little bit later. So that's one place. Second place is in the volatility we would see in moderating warrants and investment gains, which we talked about in the letter. And so clearly, if we stay in this place for a material period of time where tech stocks are down, you could see some compression there. But still we expect even with some compression, we still believe it will be healthy in 2020. Credit quality wise, I'll give my perspective and then Marc may want to add. You really have to see the ripple effect in a pretty material way. Valuations are not what repays loans. You have cash flow and cash that repays loans and companies, public and private are incredibly strong from a balance sheet perspective. And their ability to raise money is also very strong. So we don't see -- and the outlook obviously is very healthy. We think it's going to be healthy even if there is some volatility in the market. So those are a few places that you could see it and maybe new client growth. But again, we've seen for the last 3 years a really nice tick-up in our new client’s additions, and we still obviously are very bullish on the innovation economy. And so I don't see that slowing down. So a temporary volatility in the public markets, net-net isn't going to have that material of an impact.

Got it. I guess, just a separate question. Maybe I don't need sensitivity for you, Dan. So you've laid out the impact from in our investment field. Talk to us about one -- cash came down a fair bit this quarter, how are you thinking about the bond book in terms of, what are we adding duration and credit wise? And is there any meaningful credit risk in that corporate bond portfolio that you've added over the last few year? Just give us some coloring into that if you could.

Ebrahim, so on the first question specifically, if you look at cash balances, as we've talked about in previous years, there's a pretty substantial amount of distributions that happen around private equity and venture capital. We saw that plus the -- effectively putting over $20 billion to work in the investment securities portfolio in the quarter. So we're still bullish on liquidity as you see in the guidance for 2022. Now, when we look at the investment securities portfolio and where we're putting money to work based on the current environment we'd probably be putting money to work in the 165, 175 range. The vast majority of that still being agency mortgage-backs, mortgage, collateral, things along those lines. The corporate growth is still quite small and that's all high credit quality. So don't expect to see any issues there from a credit perspective. So the good news is at least we are putting money to work, is that that is above effectively the yield of the portfolio to the margin compression that we've been seeing by putting money to work underneath the securities yield seems to be abating in this better rate environment.

And do you expect any difference in deposit behavior than this cycle versus what we saw in '16, '17, just given the Fed might be hiking at a much faster pace, you have larger customers. Do either of those dynamics change how deposit betas, the mix shift could behave this cycle versus last?

Yeah. Ebrahim, we're watching that and modeling sensitivities to that. All and our rate sensitivity, we've got a 60% deposit beta, and that's on the interest-bearing balances that we have in the portfolio, which is consistent with the last cycle. And we've effectively for conservatism, modeled a faster beta and some of these net interest income assumptions, meaning that they would take place sooner in the rate cycle than we experienced during the last hike. So we feel like we've got some measure of conservatism in there. Just to take into consideration the fact that Fed could move faster and client behavior could be different this time. That's how we're getting comfortable with that all lien $102 to $130 million annualized pretax net interest income number.

Got it. Thank you.

Your next question comes from the line of Steve Alexopoulos with Bank of America. Your line is open.

Hi everybody. I'm still a JPMorgan.

Thought you changed jobs dude.

No, Ebrahim, I think is still at BMA. Greg, I wanted to start with the environment. So we're obviously paying a lot of attention to the equity market, but are VCs getting more cautious given the correction in tech stocks now playing out. Now with, spec stocks seeing even more bit of a beating, are private companies starting to see down rounds?

It's very early when such a correction in the tech market is played out. I would say the engagement we have in our discussions, we're paying attention, very close attention to it. But we really haven't seen it. So our channel checks in talking with their clients, in talking with venture capital, it's still very active. And I think you have to -- could there be a little bit of a slowdown, it's possible. Again, we haven't seen it yet. But you have to remember, there's so much money that was raised last year. There was so much dry powder, and they need to put it to work. And so, could there be some valuation corrections in the later stage? Yeah, there could be as companies look to raise money. But if they do, there is still at healthy valuations. And so I think companies need to raise money. There is ample money out there for them to raise money. Could they hold out, wait for high evaluation? Possibly. But again, we're just not seeing yet. And it's good to wait at least a quarter or two to really see if there's any -- a trend that start -- anything that starts a meta trend beyond that.

Okay. I want to follow-up on that. So VCs and P firms are sitting on a record dry powder. But if the HM markets were to get disrupted, do you think we would see the pace of investments slow the way we've seen in other cycles, or because of all this dry powder, do you think that firms will just invest right through a market disruption?

Well, when you go back and talk about cycles, right, the last time we had a -- I'll call it a dip, was back in 2016. And if you remember, that was because of Asia and concerns around Asia market. It literally slowed down for about 90 days or a 120 days, and we were very worried it was going to continue to be a very slow decline or a pause, it quickly came back. You can look at the beginning of the pandemic. We thought with everyone going to zoom, that people wouldn't be making investments because it's a different way to do it. That was about a 90 days’ cycle. You really have to go back and look at 2010 to say when there was really a pause or slowdown. And when I talk to limited partners, when I talk to investors, the one mistake I think most of them would say is they didn't put money to work more quickly, they waited too long to jump back in. If you combine those things with just the innovation market growing very fast domestically and globally, could there be a prolonged slowdown? It's possible. I just think the likelihood is a lot less than it has been in prior significant cycles.

And it's because of the dry powder on the sidelines that's why I think it will be narrower?

It's because -- well, it's 2 things. It's the dry powder, Number 1. Number 2, it's the innovation economy still growing on a global basis. And number 3, if you do see valuations even do a minor correction, I think people are going to look at it and say, that's an opportunity to get back in and this is going to be temporary. So those are the 3 reasons I would point to say that it could be short-lived if there is a short-term slowdown.

Okay. And then final question for Dan. Assuming we do see rate hikes, another guidance is x-rate hikes. You talked about reinvesting a portion of it. How should we think about how much of that potential benefit you guys will reinvest back into the company?

I think Steve, to the extent that we see rate increases, it's clear we're going to reinvest a portion of those increases across the said objectives. The question is really about the timing of those rate increases when that occurs. But imagine we see rate increases March, June time frame, that could potentially move us into the next expense guidance range, of the mid-twenties. So that's the way to think about it. If we see a March, June increase that we could move into that next range as we reinvest a portion of that spend. And at that point, we would talk about the impacts into 2023. How much of that is one-time, how much of that is recurring.

Okay. That's helpful. Thanks for taking my questions.

Yup, thanks.

Your next question comes from the line of Casey Haire from Jefferies. Your line is open.

Thanks. Good afternoon, guys.

Hi, Casey.

So on the loan growth guidance, just curious about the mix. Obviously, fund banking, capital call drove about 60% of it in '21. Are you expecting the same kind of strength where it's striving in the majority of the loan growth or do you see the mix changing? And if so, how?

Hey Casey, it's Dan. I'll start, Mike might want to add, but -- if we look at 2022, I think will still be predominantly capital call lending from a growth perspective. But as we continue to develop, and we continue to be excited about the integration with Boston Private, private bank wealth management and see the opportunity for mortgage lending, which is already strong to continue to see that growth. So still predominantly capital call lending, but starting to see mortgage as well as other elements of private bank lending pick up in the New Year. Now, at the same time, don't count out what's happening in technology, healthcare, life science lending. And even with all of the liquidity that's been in the markets we've seen good growth there. So still predominantly capital call, but a private bank as well as what we do and core technology, healthcare, life sciences will also contribute.

Very good. Thank you. And then just -- Dan, you mentioned that the new securities yields 165, 175. I know you guys update that at year-end. The 10-year obviously, 30 bps higher than where we were at the beginning of the year. Is that 165, 175 accurate relative to where we are today, rate-wise.

Yeah, I think based on where the 10-year sitting and the sell-off we've seen over at least the last couple of weeks. You could -- and it's hard to count on this for a longer period of time, look to add another 10 -- 15 basis points to that yield. If we stay effectively at the same rates today throughout the rest of the quarter. But a lot of that depends on market opportunities, a lot of that depends on liquidity flow. So we're comfortable with the 165 to 175, and to the extent that longer-term rigs in the sell-off, that sure today it sticks. There could be some small opportunity there.

Okay. And just last one for me on the credit front. The charge-off guidance is down a little bit. Is that -- the slide deck makes it seem like it's more environment-driven, but is that finally just a reflection that the low-risk capital call is just a much is over half the book. And then also the ACL ratio plateau in here at 65 bps is that also a good level going forward?

Yes. So starting its Marc Cadieux, and starting on the charge-offs question. Yeah. I think it is reflective of the continued evolution of the portfolio towards the lower risk forms of lending like capital call lending, mortgage lending, and by extension well, early-stage lending where we've historically taken the majority of our losses, continues to grow in dollar terms, but continues to shrink as a percentage of total loans. And so those things are certainly conspiring to bring the guidance down and then to your question about reserve, I think adjusted for the change in composition of the portfolio from the beginning of COVID to now. I think what you see basically is that adjusted for that change in composition, we have finally, I think, found, if not the bottom, probably pretty close to it. It's hard to imagine where more reserve release would come from, we'll certainly have some growth in capital call lending as we've mentioned before, is certainly figures prominently in the outlook, and if that continues you could see some continued modest downward pressure on the reserve, but I think at this point most of what was built during COVID is now out of it, and we're back to normal. And I think the more normal provision in the fourth quarter, reflective as the growth would suggest.

Great. Thank you.

Your next question comes from the line of John Pancari with Evercore ISI. Your line is open.

Good afternoon.

Hey, John.

On the -- your back to the loan growth, just kind of digging a little bit more in terms of if we do get the -- I mean, there's some expectations for practically 8 hikes by the end of ' 23. If we do get that and we get that piece starting relatively soon in 2022, does that -- can you talk about how nicely should that may impact your loan growth expectations at all? Just curious if in that dynamic, if you've seen much of an impact or does again, does the dry powder factor that we've talked about really choke that? Thanks.

Meghan.

No, we're just trying to figure out how to un -mute and either is the best. John, this is A - Mike Descheneaux, there, here. In general, I mean, as far as you've known, you've been following us for a number of years, the first few basis points heights, really is not going to have much impact on the loan books as well. Clearly, you're looking at some leverage loans and that particularly are some buyout, they might consider, but still nonetheless, that is still so much cheaper than equity. So you are still going to have people that we are going to use here. So we're not really anticipating that we'll have that strong of an impact here, but it's actually something to keep an eye on.

Got it, Mike, that's helpful. Thanks. And then in terms of the warrant and investment gains, I know you reasonably expect them to moderate off of the very strong 2021 levels. I know this is probably a tough question but any way to help us gauge the magnitude of moderation that we can expect any way to frame it, as you are looking at the market now and the backdrop to turn to see if there's how we should think about it.

John, this is Dan. It's really hard. And that's obviously why we don't guide to it. To put a range around what that could look like coming out of the year with close to $1.1 billion worth of and investment gains. But I think it's clear that that's exceptional and likely not to repeat. But at the same time as we've been talking about, we are still bullish on the environment and so hard to put a percentage around it, we just know that with this market volatility, it could be slower, at least for the next quarter or so, especially relative to what we saw in 2021. Still again, expecting 2022 to be a good year.

Got it. Okay.

Maybe John, I'll just add on top of what Dan is saying. It is no doubt a very difficult thing to predict, but just some of the factors to consider. I mean, we talked -- we keep talking about dry powder. There is a lot of lot of dollars out there, but there's a lot of companies that have been formed over the last couple of years that are prime and really great candidates to go public as well. I mean, we had something like close to 300 public listings in 2021, but there's -- if you look at some of the fact sheet, the number of companies that are valued greater than the medium value of what went public last year, is significantly greater than what went public. So there is a lot of good companies that can be tenants for exit there. So the fundamentals are still really, really strong and a lot of good companies out there.

Got it. Thanks, Mike. And then I know Greg you referenced that earlier on. But just curious around the investment banking trends. If you could maybe give us a little bit of color on the outlook there and pipeline and everything and then also in terms of impacts that you expect from what we're seeing right now, if we are looking at a certainly a rising rate environment in this backdrop, or how does that impact that outlook? Thanks.

So we got a couple of slides in it. In the deck, we talked about both get the revenue side of what we've seen in the quarter-to-quarter basis. But really, when I think of '22, we have a pretty nice growth built in their relative to what the record quarter -- or record year was in '21. And the question really is, how volatile is that? How do we think about that? And to answer that question, I would break them to business into few categories. First is the historical SVB Leerink business. So it was mainly Biopharma. It was ECM. It was trading, research, and they just continue to do an exceptional job in that area. Exceptional moving up the lead tables had a great year last year. But what we are building up capability wise, is Healthcare services, technology and M&A and ECM, and then M&A for biotech, and now, with research with technology as well. So while you're hearing from some other larger investment banks softness as they go into '22, for us, especially in technology and healthcare services, and then of course M&A, we're going from either a 0 base or a very little base. And so, when you speak about the team that we've assembled, we certainly believe that the upside from where we are still significant, even if it's a softer market in '22. I also believe that the equity capital markets are slow. Again, what we pushed towards is having a balance of both ECM and M&A. And in fact, in technology and in Healthcare services, the main teams were more M&A led. We feel good about the outlook, and we feel good, not just about the outlook for '22, but the trajectory in '23 and '24, based on the people that we brought onto the platform who really are exceptional.

Great. Thanks, Greg. Appreciate it.

Your next question comes from the line of Bill Carcache with Wolfe Research. Your line is open.

Thank you. Good afternoon. Greg, I wanted to ask a question on Wolfe management. It would seem that Wolfe management teams would find opportunity to join SIVB as quite compelling given your client base. Can you speak to the pace at which you would expect on-board new teams as you grow that business? And is there may be a certain number of per year that you're targeting or are there any parameters you can share on the characteristics of the teams you'd be looking to on-board, including maybe a minimum level of assets under management, any color?

Yeah. When we add wealth advisors, it's a little bit different. And so again, I will break this down into a couple of different parts. When is the interest level. The interest level is very high. Lots of inbound, and when we do approach targeted individuals that are in the innovation economy, we're getting a very, very positive reception. And so we added 14 wealth advisor hires in '21. And really, if you think about it, that was mainly at the last three or four months of the year. And then we expect, as we grow into this coming year, that we're going to have anywhere from 14 to 20, maybe 25 add in 22. I've been on some of those calls to recruiting calls and discussions, and it's very positive. And in talking to some of our team members who have joined, they've been on the platform for 30 days, 60 days, kind of getting their feedback. And again, very positive for a couple of different reasons. One is the opportunity because we always said it is incredible here, given our connections to the innovation space for wealth is created at our incredibly rapid pace. That's number 1 and number 2, the collaborative environment that exists on the platform. Those 2 things are very compelling. And so it's still early. So we certainly can't claim victory. But so far I feel really good about our ability to recruit. But it's not just about recruiting. It's about who is the team that you have already here. And I feel really, really good about that as well. So I think the outlook is positive. We want to kind of have a -- I'll call it tempered outlook because we want to see the evidence of it happening, and so more to come over the coming quarters, but the foundation is very strong.

That's very helpful. Thank you. A follow-up on your earlier comments, where would you say the Technology Investment Banking business is in its ramp from last September's launch, I'm guessing it hasn't hit full stride yet, but it'd be helpful if you could frame for us. I guess, just give us a sense of what you've assumed in .

So actually, we expected that it would take really, 6,9 months for really to hit -- I wouldn't even say full stride. But I would say really starting to get a little bit of a flywheel. And I don't think you're really going to see what I'll call the full potential until later this year and into '23. And it just takes time to get everything in order, to get everyone communicated with. That being said, what has impressed me right out of the shoot is that we've had more than ten very significant mandates signed up, and a very, very strong pipeline in the technology side and healthcare services. And again, in the biotech side, it's already an incredibly robust team and outlook. I think we're in a really good trajectory. And again, most of those are M&A, but we certainly have already signed on a couple public offerings as well. So again, feeling really good about the foundation that's being built.

Okay, great. That's great to hear. Last one for me, for Dan, your reserve build was growth driven. Looking ahead, should we expect the reserve rate to hold such that the growth in your reserves will generally be commensurate with your loan growth? Is that a reasonable way to think about it?

Yeah. Though I think that Marc might want to add something to it, but I think, when we look at where the reserves are, we're effectively probably at the bottom from a reserve rate perspective. So I think to the extent that we continue to add on additional lending, that it's going to drive the additional formulaic provision that we saw this quarter. Obviously those loans are generating good solid net interest income and client relationships, so that we're certainly going to see more provision associated with loan growth.

Nothing to add here Dan. Thank you.

Thank you for taking my questions.

Your next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is open.

Hey, everybody, and good afternoon. Thanks.

Hey, Jared.

Circling back on the expense conversation and the expectation for additional investment if rates or want s rates to go higher. How should we be thinking about that? Is that really more when we look at Slide 14, it will just be an acceleration, a pull-forward of investments that may otherwise have taken a little bit longer or would there be new initiatives, other new opportunities that you would use that that opportunity from revenue to expand?

Yes, it's Jared,

Keep going.

Go ahead, Greg.

Jared, to start. I wouldn't call it necessarily a pull-forward. Here's what I would say, is we have an incredible amount of opportunities to invest in a very long list. And part of this is we're constrained by just how many things you can do at once. And there is some we want to make sure that we're investing at the right pace. If we do see revenue start to pick up with some rate increases, we're going to look at opportunistic opportunities to accelerate some of those investments. So is it a pull forward? I wouldn't describe it that way because a pull-forward means that you have a certain dollar amount you're moving it up and then it'll drop down to a lower level. It's more we're going to take advantage of those investment opportunities. So I would think about it as saying it's opportunistic. And we have a lot of opportunities ahead of us. So if we do get that rate increase, we'll put some of it to work for sure.

Okay. Alright. Thanks. And then looking at the AUM guide and in light of the prior question around the success you've had bringing people, relationship managers, onto the platform and the expectation with that to continue. The AUM guide seems a little conservative, I guess, given the growth we were used to expecting from Silicon Valley. What could cause AUM to grow faster with the broader expectation of the support you're putting behind the private bank?

Yes. I think we have to get, what I'll call the flywheel up and running. And we're just getting it started. To think about it, that's one thing, you're not -- let's just talk about the differences between wealth management and what I'll call commercial banking. In commercial banking, you have a Commercial client, they have a lending need. And it's usually within a reasonable period of time. You put that together, you put the loan in place and they borrow money. It's a relatively, I'll call it a short time period to bring on those types of new clients. When you're looking at in the private bank and wealth, you typically -- it takes a while to build that relationship, to reconnect with them, to convince them that you have the full product set, for them it's capable. That's even for wealth advisors that are coming over, because again, we're looking specifically at the innovation economy. So it's going to take a little bit of time, and once we see that, then I think they are going to see in outlook, that's going to be increasing at a much, much accelerated pace. But I think we're just saying until we see that flywheel effect, we're not going to set overly ambitious goals and wealth AUM at this point.

Okay, great. Thank you.

Yes.

Your next question comes from the line of Chris McGratty with KBW. Your line is open.

Great. Thanks. I'm interested in your thoughts on the geography of deposit growth in 2022 under a varying rate outlook on or off balance sheet, the next where do you see it going.

Hey, Chris, it's Dan. I think as we look at the first couple of rate increases, imagine 25 to 50 basis points, I think we're going to start to see behavior -- pretty similar to what we saw during the last rate rise cycle, where you're not really seeing a massive shift towards off balance sheet and not even seeing much of that money start to be motivated to move into the interest-bearing sectors. I think as we start to get into the 75, 100, 125 basis point of said funds, that's when the money market rates off the balance sheet really can start to be more attractive. And I think that's when you can start to see more movement. And that's where I think you've just got a competitive advantage, if you look at the total $400 billion worth of client funds. You have clients that may want to look for some higher rates which we could offer on the balance sheet and money market as we did during the last cycle and still by doing that, end up with a very low cost of deposits and deposit base. So I think your first 25 basis point to 50 basis points, no big shifts in client behavior, 75 basis points to 100 basis points on this one, you start to see a little bit more migration. And again, I think that's where the liquidity that we have really plays in our favor. To be able to have managed between that on-and-off balance sheet put to use some of these products that we've been developing here over the last couple of years.

That's great. Thanks, Dan. Maybe a follow-up, I heard from one of your peers yesterday that they obviously are going to try to take down some of the rate sensitivity as rates go up. I know you have the pages on the balance sheet, but since you're interested the appetite to moderate it a bit, if we get the forward curve.

Yeah, Chris, this is one where almost by the balance sheet growth that we've been experiencing, we've been moderating asset sensitivity naturally. So just look at what we've been doing and moving cash, liquidity into the investment securities portfolio. As we're seeing, at least some movement in the rate environment out in term that,

That helps dampen some of that sensitivity, and in effect, lock in some of that rate environment that we see. So you're generally seeing more organically, by the way, we're putting that money to work in the investment securities portfolio, some dampening of the asset sensitivity. And we're taking advantage of those rates in the environment that exists today. So I will -- we will always be asset-sensitive just by the nature of the balance sheet. But certainly seeing it being tempered in this environment by the actions for taking with the portfolio.

Thank you.

Your next question comes from the line of Chris Kotowski with Oppenheimer & Co. Your line is open.

Yeah. Let me start with another shot at the equity and warrant gains, just in the sense that in your portfolio today is about $2.5 billion. And back in 2018, 2019, it was like $600 million to $900 million, so it's roughly 3 times. And a normalized level should still be bigger than what we saw in 2019, that's the first part of it. And then secondly, am I right in thinking that you probably wouldn't put an equity position on your balance sheet if you didn't expect the kind of mid-teens to the cycle return - ish?

Hey Chris, it's Dan. I think the way to think about it is that they're highly granular position. So as you think about the fact that we've got warrants and close to 3000 individual companies. Those individual companies obviously react to what's happening from a market condition perspective. Now, what's actually happened over the last couple of years is we've gone from a warrant portfolio of 1500 granular names to closer to that 3000. So it actually more variability there today than back in the previous period. So it's really hard to meet and if it were easier, we would certainly have guidance range about it, the broader assumptions that you're making.

Yeah. I know, but I was wondering specifically. I realize the bonds are particularly different, but --

Presumably on the equity position that you take, presumably you will be targeting a mid-teens return. Granted that there's lumpiness, but through the cycle.

Yeah. In many cases, those equity positions are the results of the conversion of the warrants into equity positions while we're in the lockup period. So there's no return threshold. In particular, are associated with it. So the conversion of that into the warrant post the IPO.

Okay. And then on the $2.5 billion that is on your balance sheet today, is there a mark-to-market risk or is that primarily at cost or lower cost of market?

Yeah. The vast majority of that is mark-to-market. So that's a ready mark-to-market and we've got the details included in the last 10-K of the mark-to-market methodology associated with it. So that's marked on a quarterly basis and is up-to-date as of 12/31, based on the market activity.

And then secondly, just if you could give very detailed guidance on an annual basis and it makes our job very easy. And I was just wondering, do you have a view on the cadence that we should expect through the year, either from environmental factors or from internal factors like the fact that you've brought on this big team of bankers that we start strong or should we just step it up ratably during the quarter or to -- does a team start coming on strong early and then kind of flatten out later? Again, if you don't have a view that's, but I'm just curious if you have a view on the cadence of the year that we should expect.

I think with balance sheet growth that we've seen, it's been fairly progressive as liquidity has been raised. If you look at core fee income lines, you've generally less subject to seasonal factors on a quarterly basis. I think if we look at areas where there would be more volatility, you'd be looking at investment banking types of revenues which are just much more subject to what's happening in marking additions from quarter-to-quarter, along with the investment and warrant gains that we just talked about. And then they'll just, as there always has been a bit of a progressive build from an expense perspective quarter-to-quarter. Generally speaking, that's a good way to think about it. There's really no perfect way to break out the quarters.

Okay, fair enough. Thank you. That's it for me.

Your next question comes from the line of Jennifer Demba with Truist Securities. Your line is open.

Good evening. Question on Leerink. So what's a broader sector focused now? What is the revenue potential for this company over the next few years? How big a business could this be relative to the rest of SVB?

Yeah. Jennifer, it's Greg. I'll start and Dan may want to add. You can see our guidance is for this year, which I would describe it as we're hitting on at least, in technology and Healthcare, it's like four cylinders of an eight-cylinder engine. So we're kind. The halfway there. When I when I think of the full potential, I don't think that's really going to be reached until '23 or maybe even a little bit of '24. But the answer to your question is difficult in the sense of there's two ways to think about it, right? So one way to think about it is your team and their potential. And the second part is the robustness of the market and the revenue opportunity, the fee opportunities that exist. So, that's, that's the, that's the more unknown. Do I see this business or could I see this business as a billion-dollar revenue business in the next three years? The answer is yes. And that's a combination of the quality of people we have, the breadth of the products that they're providing to the market and I think the market 's staying relatively healthy. So that's the top line. And then you could have done the bottom line, you see pretax margins that you can be in the 20% to 25% range, which maybe even a little bit higher than that as we gravitate towards more M&A. Yes, I feel really good about the potential for this business to grow.

Thanks so much.

Yes.

There are no further questions at this time. I will now like to turn the call back over to the Chief Executive Officer, Mr. Greg Becker.

Great. Thanks, everybody. I just want to really thank you all for joining us today. We're certainly proud of what we delivered this past year and very excited about the year ahead. And the work we're doing to deepen with our clients the relationship, add value and insights and continue to make meaningful differences in their success. It's one of the things we track how our clients feel about our ability to have an impact on their success. And we had great uptick in that last year, and we certainly expect it to play out that way this year as well. Obviously, based on the questions, we're keeping an eye on the markets and wouldn't be surprised given the current kind of volatility, to see some volatility in private company valuations. But again, as we said, the market is still so robust. There's so much potential there is so much dry powder that we remain still very optimistic on. The bottom line is that we've been here before. We've seen our clients go through many cycles, large and small. We know from experience that those cycles are short but in no way do to the diminish the power of this innovation economy that is just getting more and more attention. So I just want to thank our employees around the world for always giving their best to SVB, to hanging in there during the pandemic and taking care of each other and their colleagues and especially the clients. I want to thank our clients for their partnership and trust in us. And finally, as we hopefully are in the final stages of the pandemic, I certainly look forward to more in-person meetings, in-person dinners, and getting to spend time with members of our team and clients in the market. In the meantime, while we wait for that to play out, hopefully everyone stays healthy and take care of themselves. Thanks a lot, and take care.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.