SVB Financial Group (SIVB) CEO Gregory Becker on Q2 2019 Results - Earnings Call Transcript

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About: SVB Financial Group (SIVB)
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Earning Call Audio

SVB Financial Group (NASDAQ:SIVB) Q2 2019 Earnings Conference Call July 25, 2019 6:00 PM ET

Company Participants

Meghan O'Leary - Head, IR

Gregory Becker - President, CEO & Director

Daniel Beck - CFO

Michael Descheneaux - President, Silicon Valley Bank

Conference Call Participants

Kenneth Zerbe - Morgan Stanley

Jared Shaw - Wells Fargo Securities

Ebrahim Poonawala - Bank of America Merrill Lynch

Steven Alexopoulos - JPMorgan Chase & Co.

John Pancari - Evercore ISI

Christopher McGratty - KBW

Brocker Vandervliet - UBS Investment Bank

Tyler Stafford - Stephens Inc.

Aaron Deer - Sandler O'Neill + Partners

Gary Tenner - D.A. Davidson & Co.

Brett Rabatin - Piper Jaffray Companies

David Chiaverini - Wedbush Securities

Jennifer Demba - SunTrust Robinson Humphrey

Operator

Welcome to the SVB Financial Group Q2 2019 Earnings Call. My name is Adrianne, and I will be your operator for today's call. [Operator Instructions]. Please note, this conference call is being recorded.

I'll now turn the call over to Meghan O'Leary, Head of Investor Relations. Meghan, you may begin

Meghan O'Leary

Thank you, Adrianne, and thank everyone for joining us today. The President and CEO, Greg Becker; and our CFO, Dan Beck, are here to talk about our second quarter 2019 financial results and we'll be joined by other members of the management for the Q&A. Our current earnings release as well as our quarterly earnings highlights slide and CEO letter are available in the Investor Relations section of our website at svb.com.

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 the 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 a 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 Becker

Great. Thanks, Meghan. Good afternoon and thanks everyone for joining us. Before we get started, I just like to remind everyone that were doing something different on this earnings call. We're not going to be reading scripts. Now I know that's going to really disappoint many of you, but we're just going to get to a couple comments in the beginning and then Q&A. But we have what we filed today, you've got our full Q2 2019 earnings release that was filed a short slide deck, and the summary letter highlighting the key drivers and themes of the quarter and providing some relevant color on our markets and strategy. The documents are available in the Investor Relations section of our website. By adding a short highlight deck and summary, we intend to focus on the most important aspect of each quarter's results and spend our time on the call answering your questions.

I'm going to add just a few comments about the quarter and then we'll dive into Q&A. Bottom line, we had an outstanding quarter with record earnings and profitability driven by a strong client market continued effective execution on our strategy. It's important to note that even with the backing out of the extraordinary warrant gains, we still exceeded expectations on pretty much across-the-board. Credit quality was excellent as well. Our strong balance sheet growth generated healthy net interest income, and although we're seeing NIM headwinds, we are proactively managing the impact of declining rates on our business. But potential for declining rates aside, we see continued opportunities for growth in the near- and long-term and are continuing to doing our best in driving growth and creating operating leverage.

So with me to open up for questions, Dan Beck our CFO, as Meghan said, Mike Descheneaux, our bank president and myself. Mark is actually out on a family emergency, so any credit-related questions will be directed to Mike and myself, and that's a good quarter to have that, since credit quality is really solid.

So with that, operator, can you open up the line to questions?

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from Ken Zerbe from Morgan Stanley.

Kenneth Zerbe

Maybe let me start off on the expenses. Can you just talk about how much flexibility you have to limit the amount of expense growth, especially as we head into 2020? And specifically, I'm just trying to understand, is it possible to actually achieve positive operating leverage given the expectation that the Fed is going to cut rates a few transition probably a few times next year?

Gregory Becker

Yes, Ken. So this is Greg. I'll start and then I'm sure Dan will want to add some commentary. So the answer is, do have flexibility? Yes, we have flexibility to do that. But we have a pretty big project spend, and spend that we have in place. That being said, if you just go to the forward curve and a couple rate decreases are built-in, to be honest, I don't expect that we're going to make any real changes to the expense guidance, and for a lot of different reasons, right? One is a couple rate changes, to be honest, really shouldn't change the trajectory of our investment in the business, whether it's project initiatives, we're investing for growth. So I just -- I wouldn't expect to see much of a change. Now if we saw more headwinds and there were other issues that came up, that's a little bit of a different story, but with the forward curve the way it is, I wouldn't expect to see a lot of change.

Daniel Beck

The only thing I'd like add to that, Ken, is as we talk about for next year, it's early, but we're still looking at expense guidance discussions in the high single digits. And there's really no change in expectations with that. The thought is with that, we would be able to continue to invest. And that's the focus.

Kenneth Zerbe

Okay. Great. I guess, in the terms of capital term lending, I assume, that is now up to 50% of total loans. Can you just talk about your appetite or your willingness to increase your exposure to capital call lending above that 50% level?

Gregory Becker

Yes. This is Greg again. So we said on prior calls we are comfortable going over to 50%. Our kind of soft guidance is kind of a 55%-range, and again, have some room to go up. And just maybe to think about -- to share how we think about it, one is, remember when you look at our balance sheet, loans are only half of our overall balance sheet. So capital call lending is roughly been 25% of the balance sheet, roughly, number one; number two, the portfolio itself in private equity services is incredibly diversified. It's diversified from venture to private equities and then within private equity, which is it still in the preponderance. That is very diversified from fund-to-funds into small-cap buyout, mid-cap, large-cap buyouts. So geographically dispersed. So it's very, very diversified. So yes, we're comfortable going above 50%. But we're also looking at and saying, at some point, we do need to be more sensitive to it. So we're looking at different ways to syndicate those loans and other ways to create participations, so that we can still allow for the growth of the clients, but manage the overall exposure from a dollar amount perspective. Mike, you want to add?

Michael Descheneaux

No, I think that's exactly right. I mean, Ken, the one thing that's very, very clear for us is to continue to be in the market for clients, irrespective of this threshold and this number we're talking about. And there's other means in addition to what Greg said about syndication and partnerships, et cetera, that's also the uses and credit default swaps as well that were looking at that would also help facilitate our runway -- that extended runaway.

Kenneth Zerbe

Got you. Okay. Just one last question, if I could. There's actually a sentence in the prepared remarks, it talks about [indiscernible] basis point cut, I think it was like a $40 million to $50 million annualized number. There's a lot assumption you made in there, and I'm just trying to understand it. It says, "this estimate assumes deposit beta between 50% and 70%." I'm just trying to understand, your deposit costs are insanely low. What am I missing here? Like how do you get a 50% to 70% deposit beta of this at cost 100 basis points and you're only at 36 basis points currently?

Daniel Beck

Yes. Ken, when you look at the 30 basis points number, that's total cost of deposits. The interest-bearing cost of deposits are right around 1.27%. So we do have flexibility to decrease from there.

Operator

[Operator Instructions]. And your next question comes from Jared Shaw from Wells Fargo.

Jared Shaw

Maybe just starting on the loan side, we were seeing strong exit activity and strong deposit growth. When do you think that's going to really start to flow-through into sort of stronger levels of loan growth away from the capital call lending? Should we expect to see at the life sciences and software and hardware start to ramp up as categories as you go through the year and you start seeing more of that money reinvested on the products as the season peaks?

Gregory Becker

So Jared, this is Greg. It's, I'd say, a little bit hard to predict, and here's why. There's two parts to the answer. One is, are we adding new lending relationships in technology, life sciences, private bank is growing outstanding, but let's just stick to technology and life sciences. The answer is yes, we are growing new relationships, new credit relationships. The challenge and the headwinds that can be a positive or a positive, but all the liquidity did exist. So we've seen these very large rounds of financing get done. We're closing this working capital loans, but they're not willing to borrow because they have $50 million, $60 million, $70 million, $100 million, $200 million of liquidity on their balance sheet. So from that standpoint, it is -- that is a headwind. When that balance comes out, that I don't know. We do expect to see some of it. But again, it's still a little bit of a headwind just given all the liquidity we have in the market.

Daniel Beck

The only thing I would add is, just the competitive environment in terms of pricing size and structure and kind of when we reflect on where do we want to play for smart growth? And I think, growing loans is in a sense, you can actually grow loans, but can you grow the right kind of loans to get the right kind of returns given the risk profile as well? So that's something we're certainly keeping an ion but again that's kind of natural when you have an environment like we have today, where there's just so much liquidity available in the marketplace.

Jared Shaw

Okay. And then looking at the cash balances, and that continues to grow as we look at a likely falling rate environment, how should we be thinking about that cash being deployed over the next few quarters?

Daniel Beck

Yes, Jared, we're focused on putting that money to work. So our anticipation is that we're going to put anywhere between $2 billion to $3 billion of that cash to work in the form of investment securities at least in the third quarter. So we're constantly looking at that and managing those balances and deploying them to investments.

Jared Shaw

Okay. And maybe switching over to the margin, just really quick second. The guidance that you have there, does that assume that the pre-payment loan fees stay at sort of a similar level as we go through the rest of the year? Or could we see that pull back a little bit? I mean I think that added 4 basis points?

Daniel Beck

Jared, we expect them to pull back. So in our guidance, we factored that out for the remainder of the year to get to the base 3.60% to 3.70% range.

Operator

And the next question comes from Ebrahim Poonawala from Bank of America.

Ebrahim Poonawala

I just wanted to follow-up and clarify something to Ken's question earlier. When we look at the interest-bearing deposit cost, is it safe to assume then, based on what you said, that if we get a Fed cut next week, this should be the peak in terms of deposit cost for the bank?

Daniel Beck

No. The expectation is that, from a rate perspective, the cost will go down. But there is also an expectation that the mix is going to continue to shift towards interest-bearing. If we think about serving clients and using relationships with the clients, that's the #1 objective for us. That's where -- that's the stickiest relationship, and that's where we get additional value as well. So we expect that interest-bearing deposit balance to continue to increase as we get through the rest of this year, which could drive, I would say, a more stable deposit cost from where we are today for the remainder of this year.

Ebrahim Poonawala

Understood. So interest-bearing deposit cost would go down? Got it.

Daniel Beck

That rate would go down, but the total cost of deposits should remain more stable in that environment.

Gregory Becker

That's a volume versus rate issue.

Ebrahim Poonawala

Yes. I mean if the rate would go down, I get the volume and I get the growth is coming from there, so the actual expense associated with those would go higher. Just more philosophically, Dan, if you could help us understand, deposits are coming in at 1.25 to 1.50, you're buying securities at 2.30 to 2.40. Like what's the rationale of growing the security's book and using it as opposed to rechanneling some of these deposits back off-balance sheet. And I mean I recognizes a good reason for that, but I would love to hear sort of how you think about it?

Daniel Beck

Yes. So it's really three things: first is what I was just referring to before, that what we noticed when we had a less competitive product in the market in terms of rate is that our clients were moving some of that money to other financial institutions. And quite frankly, that doesn't make sense for us. We have the primary relationship with them and it makes sense for us to continue to be their primary depositor. So that's number one. And with that comes the additional value we're deepening with the clients. Secondly if we just looked technically from a treasury perspective, to the extent that we're able to generate at this point of the cycle, 50, 75 basis points of excess fund, the fact of the matter is we have excess capital. That makes sense for us with the ancillary benefit to that relationship to continue to put that money on the balance sheet, and that's the better situation than having that money off the balance sheet at this point. So take those two factors into consideration, and that's why we think it continues to make sense. The third piece I will mention is, once it makes sense, we've now proven that we have the ability with time, and it will take a quarter-or-so, to shift that dynamic. So these decisions aren't baked in stone and forever.

Ebrahim Poonawala

Got it. And just a separate question on the capital allocation, it looks like it includes two completing their buyback you've announced last year, about I think $493 million bought back. Just any updated thoughts around the capital -- capital deployed? Obviously, you're creating tangible book value quite strongly despite the buybacks. I'm just wondering if, given where we are in terms of the buybacks that will be in use, could we see more than just the remaining $7 million in the next quarter?

Daniel Beck

So to be clear, we did complete the full buyback at this point, so that's been fully executed. And as we mentioned, we do continue to accrete capital. So that definitely gives us flexibility as we look ahead. We do have opportunities to continue to invest those dollars, but at the same time, we are considering options for capital return. I think it's too soon right now to make those decisions, and we'll have more as we come back with the guidance for next quarter on what we're thinking.

Operator

And our next question comes from Steven Alexopoulos from JPMorgan.

Steven Alexopoulos

I wanted to start, for Dan, so you last disclosed in the 10-Q that you were 14% asset-sensitive, and if I look at the $40 million to $50 million reduction, you're calling out today, it implies about 8%. How did asset sensitivity dropped so much, particularly in a quarter where most banks are saying it's that economical to have hedges?

Daniel Beck

So there's two aspects of the asset sensitivity, and we try to outline this in one of the earnings slides. So one is the static balance sheet sensitivity, and one is our forecast. The static balance sensitivity takes into consideration a 100 basis point parallel shift in overall yields. The big difference for us is with the redeployment of investments securities. On a regular basis, we're investing between $1.5 billion to $3 billion. Into the rate environment we're in, we wouldn't anticipate 100 basis points shift down in the yield curve associated with the investments where we're investing. So between that and the deployment of the cash that I mentioned earlier, we get to what we expect to happen in reality, which is the $40 million to $50 million of annualized impact for every 25 basis points.

Steven Alexopoulos

Okay. That's helpful. Dan, were you able to reduce the 14% at all for the quarter? Or is it still sitting at that same level.

Daniel Beck

It's sitting at 12% right now. So we have been making progress against that.

Steven Alexopoulos

Okay. And then looking up the Slide 12 where you're looking at the different levers in the changing rate environment. You said in your comment, where it said on the bottom here, that you believe you can improve the efficiency ratio in a lower rate environment. Are you saying that you could improve that? Is that what you're seeing in the backdrop of the Fed reducing its short-term rates?

Daniel Beck

What we're saying there is that we don't believe that we can improve the operating efficiency ratio, but what we do have our levers to drive more scalable growth before the business. So the revenue side of the equation will clearly be impacted with Fed funds rate declines. But we do have options and have been investing to drive more scalable operations.

Gregory Becker

So it's more operating efficiency versus an operating efficiency ratio. So it's not that improvements are going to be made, it's just the ratio itself may not change.

Steven Alexopoulos

Okay. And just so we're clear there, do you guys plan to more aggressively manage expenses if the NIM starts coming down sustained if the Fed just keeps cutting rates? I know what you said that you were going to continue investing. But what are the overall thoughts on the pace of the expense growth?

Gregory Becker

Steve, here's what I think about it. I think, if you just -- as I said, if you just look at the forward curve, it's got two baked in. The Feds, where it settles down, I don't think you're going to see a lot of change with our investment philosophy and how we approach. Once you start getting beyond that, if it goes to 1/3, if it goes to 1/4, we'll be sitting down and making decisions around that. At this point, I can't tell you that we will slow down investing because it's going to be a function of whether we see the opportunities or not to invest in growth that will pay out over time. So it's just I don't have more information than that, because we'll make a judgment call at that point. What's important though, as I said at the beginning, we do have the flexibility. We do have the flexibility. Whether we choose to use it or not, that's still undetermined at this point.

Operator

And your next question comes from John Pancari with Evercore.

John Pancari

Back to the expense question on 2020, I know you indicated that you're still confident in the high single-digit expense growth rate for 2020. Is that including Leerink or excluding Leerink?

Daniel Beck

That includes Leerink for this next year.

John Pancari

Okay. All right. Got it. And then also on the Leerink topic, last quarter indicated that you lowered the expense growth outlook for the bank, but maintained it for the company as a whole. Meaning you're essentially increased the expense outlook for Leerink. Is that -- were there any changes this quarter on that?

Daniel Beck

No. We didn't reduce the expense outlook for Leerink that was just specific to the bank. And at this point, based on where we stand, I believe that we're going to be at the lower end of the guidance range for the company as a whole, including Leerink.

John Pancari

That's helpful. And on the bond portfolio, you did mention strategies to continue to extend the bond portfolio duration. And it looks like the duration right now is around 2.6 years and was 2.2 years last quarter. What's the outlook there? How much further are you willing to extend that portfolio?

Daniel Beck

So just to be clear, I think you were looking very specifically at the available-for-sale. When you look at the combined portfolio, the duration is sitting out in the three. four-year range. At the same time, as we look at it, we have been buying consistently, and this is over the last year period, let's call that four to six year range. So we're going to continue to do that at this point to protect against the possibility for rates falling further, and to the extent that we're surprised that rates picked up quite quickly, that would be a good positive outcome for us. So we're really here right now just protecting against the risk of a further downside.

Operator

And our next question comes from Chris McGrady from KBW.

Christopher McGratty

Dan, a question on CECL any updated thoughts now that we've got your four to five months implementation, is -- are you product about waiting until October to give an update on the capital return if there's more, predicated it all on CECL or maybe other initial assumptions?

Daniel Beck

The two were not related. We're refining our estimates where we think what CECL is going to look like, and get ready for more of that in the third quarter. But as we're looking at our early estimates, we don't see a material change. But again, that's still early, and we'll be able to come back with more details in the third quarter.

Christopher McGratty

Okay. Great. And if I could sneak one more on the deposit mix that you talked about. With the Fed kind of reversing course pretty quickly and now expectations there are cut, does it make -- and maybe I'm interested in your thoughts on growing now and just bringing deposits from here on a dollar basis? Or should we kind of be sitting in a flat year-over-year growth this quarter?

Daniel Beck

So our expectation is, as we continue to build client relationships, at [indiscernible] we had a really strong quarter in terms of fine acquisition, 1,205 coming into the franchise. The expectation is that over time, we will continue to build noninterest-bearing deposits. But at the same time, we do have private equity fund distribution, things along those lines, that impact deposit balances. So net-net, as we continue to grow clients, the expectation is that over time, we'll continue to grow non-interest-bearing. It's just going to be at a slower pace because of where we are in the rate environment -- the customers and clients are still because of what's in the rate environment looking for yields on the deposit. And I think it will change several reductions in Fed funds for that phenomenon to change.

Operator

And your next question comes from Brocker Vandervliet from UBS.

Brocker Vandervliet

Just turning to the Slide 9, I was doing some quick math in that model. Taking our NIM down based on these two Fed cuts to get into that range of 3.50% to 3.60%. That's -- and roughly, I'm coming up with a Q4 NIM of 3.34%. Is that reasonable to exit the year given two cuts in that -- around that level?

Daniel Beck

So are just taking a look at the scenario where you'd expect two rate to funds: one in July; one in September, thinking about where you exit the quarter -- in the third quarter, you're in that, let's call it 3.20% to 3.30% range in terms of name. At the same time, that's also highly dependent upon the amount of non-interest-bearing to total deposits. And their expectation is that we'll be in the mid-60% range for those figures. So that's kind of the exit rate based on those assumptions.

Brocker Vandervliet

3.20% to 3.30% for the fourth quarter?

Daniel Beck

Yes.

Brocker Vandervliet

And relatedly, do you expect to hedge more aggressively going forward? Or do you feel like, given what's implied by the forward curve, you're going to fight near your foxhole from here?

Daniel Beck

The expectation is to continue to increase the hedge portfolio. As of now, we're sitting at $2 billion, and our expectation is, depending on market conditions, to head up closer to the $3 billion to $4 billion range. Again we view this as insurance over the long term potential further rate declines, and we think it's smart for where things are in the cycle to continue to flex that insurance on. So that's what we're doing here, and again, if rates spikes in any other direction, let's say, it grows positive for us.

Operator

And our next question comes from Tyler Stafford from Stephens.

Tyler Stafford

At Investor Day in that slide deck, you guys laid out that you can generate 10% sustainable EPS growth to flat rate. So I'm just curious, what type of EPS growth you think you can generate given where the Fed is implying rate cuts right now? Can you still generate positive EPS growth with down rates?

Gregory Becker

Yes, Tyler, this is Greg, let me start. Seems like a long time ago when we did have rate cuts in this scenario. So I think the way you think about it is that we do believe -- and again, there's a lot of variables that are obviously going through it, but we believe would be able to get a little bit ahead of break even when you got rate cuts built-in. So we're still shooting for a positive EPS with a couple rate cuts. When you see more than that, it depends on how fast and all that stuff, then it starts to get more challenging. But with the couple that are built into this forward curve we think were going to be positive.

Daniel Beck

The only thing to add is, of course, the growth rate, excluding the rate cuts, the expectation is that we'll still able to grow in that strong 10% range. So the underlying growth is still strong.

Gregory Becker

The caveat I would add to it just to be clear, is that when we think about it, it's excluding the extraordinary gains that we've got from warrants and securities. Obviously, those have been nice -- really nice icing on the cake right now. And if that goes back to a low number -- it goes to a low number, that would make it more challenging. So the main part of the business, excluding those gains.

Tyler Stafford

Yes. So ex those investment securities gains and warrant gains, with cuts flat to hopefully slightly up EPS growth, assuming, Dan, to your point, that the business is not changing, you can still grow in that environment. Is that a fair summary?

Daniel Beck

Yes.

Gregory Becker

You're right on that.

Tyler Stafford

And on the prepared comments mentioned, the lower end of the expense growth range for 2019, I believe you have rate hikes embedded in to your internally budgeted ROE. So I'm just wondering what the expense growth range might look like for 2019 if we do, and do you get two cuts rather than hikes?

Daniel Beck

We are looking right now at the lower end of the range, and that's with our forecasted set of assumptions to the extent that we get rate cuts out from here. It's going to provide a little bit of benefits, but it won't be that significant for 2019. It will still be within that lower end of the range.

Tyler Stafford

Okay. And then just lastly for me, it's in the prior question, you mentioned adding a couple more billion dollars of swaps. How do we think about the expense associated with that? I'm just curious if the cost of those swaps is included in your NII guidance that you gave?

Daniel Beck

Yes. The cost of the swaps are included in the NII guidance to the extent that we went, look, let's say up to the -- up $4 billion range, we'd have another couple million dollars with expenses. So it's not that material to the year.

Operator

And our next question comes from Aaron Deer of Sandler O'Neill.

Aaron Deer

A question about the deposits. I think when you guys first started pushing this new on-balance sheet product that they're -- if I'm not mistaken, please correct me if I am, but I felt like there was a one year period of when the rate was set, is that -- am I remembering that correctly?

Daniel Beck

At this point, what we have -- we don't have any set rates within the first year. One of the new products that we're looking at implementing is something that will have a year rate associated with it. But as of right now, no.

Gregory Becker

Yes. We didn't say it, but Aaron, there wasn't a one year requirement for flat rates.

Aaron Deer

Okay. So your full flexibility to bring down the offered rates?

Gregory Becker

We do.

Aaron Deer

Okay. And I'd just, I guess, just looking at the other side of that, with the prospect of -- in a potential higher fund year funding cost still coming up, how does that make -- obviously, you're working with the bond portfolio to maximize your yields curve. But what about of loan book inspires your price now? It obviously did the market pricing decision, but it's -- if you're higher deposit costs are funding cost cause you to rethink or your pricing your loan book and serve options thereto may be get some better yield?

Daniel Beck

No. At this point, we're comfortable with the origination yield. What we've seen in the markets and we've made mention of that, is strong competition in particular on the private equity services book. There has been some pricing margin compression there, but all in, when we look at the overall yields and our very low cost to funding, you're still looking at a 37 basis points worth of all in average cost to funding. That really doesn't impact our pricing or competitiveness in the market. We still have quite strong pricing power.

Aaron Deer

And how effective has your efforts to put forth in place in your new production been?

Daniel Beck

We've been doing fine with it. It just has a much smaller impact to the overall NII sensitivity than what we can get with the investment securities portfolio as well as what we can do on the swap portfolio. So it's been effective, but at the same time, it's not going to provide as much protection until you get past 50, 75 basis points worth of reductions. And even then, it's on a smaller part of the book.

Operator

And the next question comes from Gary Tenner from D.A. Davidson.

Gary Tenner

Let's talk about on-balance sheet deposits, obviously your off-balance sheet volumes also increased this quarter. And I'm just curious really, just have you kind of comment on the impact of the client investment fees line item in a down rate environment? At the rate that you're essentially getting in the queue line?

Daniel Beck

So that rate remains constant in this quarter and what we're looking at is the extent that we do see a July Fed funds decrease, largely, we think that the rate overall and abundant basis would remain about the same. We think it would be probably with the second rate decrease that we would see about a basis point worth of compression in that fee margin for every 25 basis points. So we've got at least this first 25 basis points without that much compression, and after that, the expectation is for every 25 basis points, it would come back down by about a basis point.

Gregory Becker

And the only thing I would add is, it's clearly market-driven like what other people are doing in the market. So we'll certainly keep a close eye on that because if the overall market starts to lower than 70, we may be obligated to try to bring that down as well.

Operator

And the next question comes from Brian Florian [ph] from Autonomous.

Unidentified Analyst

Just to make sure I'm working off the right base and also understanding the NIM exit, so I guess, when you say you can grow EPS a little bit even with falling rates, but it's excluding the extraordinary gains, I mean it sounds like $20 plus or minus that the EPS base that you're kind of thinking of in your head that you can grow slightly off of? Or I guess, is $20 a nice round number that you're thinking that you can grow slightly off of?

Gregory Becker

Brian, it's Greg. We don't give EPS guidance. I think when you do the models out there as we described it, we're just trying to make it as simple as possible. It's like -- as you put that together and rebuild the model, again, if we get two rate increases, it's going to be a slight increase -- I'm sorry, rate decreases. I keep thinking rate increases. Rate decreases, you'd see a little bit of a growth in EPS kind of on a core business perspective.

Unidentified Analyst

Okay. And on NIM, the 3.20% to 3.40% in 4Q, I mean, obviously something is going to happen in the rates in 2020, but is that like fully where the dust settles? Or all else equal, is there like a little bit of deposit pricing lag and catch up that would happen in the first half 2020 and give it a lift? I guess, what I'm really asking, is that 3.25% midpoint of that range, like where the NIM settles out with the two cuts? Or is that just 4Q? And then there's still some lag effects happening in the first half of 2020 that may be lifted back up?

Daniel Beck

Yes. It's hard to predict with certainty, where -- what we see heading into the end of the year with two cuts and expectations for further growth in interest-bearing is in that 3.20% to 3.30% range. We would expect -- assuming we stop at two cuts, we'd still see some momentum and increase in interest-bearing deposit as a percentage of the total deposit base. So that could be a driver of some additional cost on deposits as we get into the 2020. But we have to see how the rate environment plays out, and it's really too early to speculate and to lock-in on a margin for 2020.

Gregory Becker

There's so many different variables that come into play, that's why it's hard to give an answer, because you can look at the reinvestment rates, what those look like, what are the deposit rates are going to look like. And if that blend becomes way too compressed, it becomes uneconomic to bring it on-balance sheet. We may again change products around to direct more of it off-balance sheet, and that could have an impact on the NIM as well. So there's just -- there's so many variables that will come into play here over the next three, four, or five months, it's hard to give you a real clear picture on 2020 at this point.

Daniel Beck

And Brian, we'll be coming back in the next quarter's earnings for the preview into next year. So that will be when we really set our view on what we think is going to happen in 2020.

Unidentified Analyst

And if you could just clarify very quickly or a reminder, the minimum capital you're comfortable on, what's the metric on the level?

Daniel Beck

Yes. We focus on Tier 1 leverage at the bank level. And we feel comfortable between the 7% and 8% range. But we're currently over that range, and that was one of the main reasons that we were comfortable with the share buyback that we just completed. But we're over that at this point.

Operator

And our next question comes from Brett Rabatin with Piper Jaffray.

Brett Rabatin

I wanted to ask about Slide 6, and just talking about VC/PE investment. And looking at that slide, it says, at this stage, is set for continued growth. Can you just talk about your expectations for PE deal values, DC exit values, if you think that will continue to move up, and then how you kind of see liquidity? I know you talked about this a little bit, but just if that continues to be as strong as it has? Or if [indiscernible] for a little bit?

Gregory Becker

Yes. There's a lot of different parts to your question. One is, let's just talk about the exit values, right? So obviously, first half of the year from the exit value perspective, the [indiscernible] market, but life science and technology companies has been exceptional. That being said, there's a number of companies that are lined up behind it given how the companies have gone public have a stock prices have held up or increased, in some cases, pretty dramatically. So that again, assuming the market has some stability, the exits for the balance of the year in venture capital reasonably will continue to be robust. So that's one category. Talk about exits and private equity. Private equity actually in the first half of the year were slower, pretty dampened. And our crystal ball and talking to the market would say that again, market holding, that's going to actually be a little more robust in the second half of the year.

So I would say exits, again, assuming the market doesn't change dramatically, looks positive. And then on the fundraising side, if these markets again stay where they are, there's more money and ones to come and access this alternative assets makes venture capital and private equity, our expectation are that they're going to continue to see a nice momentum there from a funding perspective. On the last point is, that's just VC/PE. But there's a whole other source, as we described in the letter of capital flowing in from sovereign wealth funds from our family offices, high net worth individuals, corporate venture capital, all those that's also fueling liquidity in the market. So it's not just VC/PE, it's also these other areas. And that's kind of causing us to have that positive outlook in the second half of the year as well.

Operator

And our next question comes from David Chiaverini from Wedbush Securities.

David Chiaverini

Just one left for me. So the interest-bearing deposit growth was roughly equal to the off-balance sheet growth. I'm just curious, are the rates that you're offering on-balance sheet still roughly equal to what you're offering to off-balance sheet?

Daniel Beck

Yes. They're pretty close to one another. There were been probably 5 basis points, somewhere along those lines right now. So roughly [indiscernible] at this point.

David Chiaverini

And as you approach that range, the Tier 1 leverage, 7% to 8%, is that when you start toggle-down or reduce that rate on-balance sheet to slow it?

Daniel Beck

That would be one of the things that we pay attention to. The other things is that we mentioned was just the overall net spread that we can get on to the overall investments. And again, the focus is on meeting client expectations and needs. And there was a desire for on-balance sheet money market accounts at this point. So kind of measuring all of those things together, paying attention to the capital forecasts or levers that we're looking at to make the decision of moving on- versus off-balance sheet.

Operator

And the next question comes from Ebrahim Poonawala from Bank of America.

Ebrahim Poonawala

I just had a follow-up Dan. I'm just thinking about the math in terms of your 2% guidance for NII, going for 25 basis points hit, implies about 8 basis points of margin compression. So 3.60%, give or take, with the prepaid income going back lower, still gets you to something like 3.40%. I'm just trying to understand what the discrepancies between the 3.20% to 3.30% you talked about versus somewhere around 3.40% implied by that 2% hit from each 25 basis points cut?

Daniel Beck

Yes. It's a good question. If you think about the deposit composition, our expectation is that we will continue to see continued growth in interest-bearing, one of the points that we make in the slide is the expectation between here and the rest of the year is that the growth will come primarily from interest-bearing. So as that mix continues to shift, that's the other element that's generating some of the margin compression.

Ebrahim Poonawala

Right. So the 2% is off or for the static balance sheet?

Daniel Beck

The 2% is in off of a static balance sheet, but also takes into consideration the shift in mix that we expect between now and at the end of the year. So balance is the same, but mix is different.

Ebrahim Poonawala

Understood. And just one follow-up question. Wondering if there's any update on Canada? I mean, so you had a change in leadership there, Greg. Just any color, I know it's early days in terms of -- since you've got that bean on the ground with the loan office, like if there's any update you could provide?

Michael Descheneaux

It's Mike Descheneaux here. I mean, we definitely have some prospects, and it's such a very exciting opportunity in Canada. And look, I think we'll probably tell you in a couple of months, but that business is doing well. It's going to strive, and we're very excited about doing things in Canada.

Operator

And our next question comes from Jennifer Demba from SunTrust.

Jennifer Demba

A question on Leerink. Just wondering if you could give us some cover on the Leerink quarter? It looks like the fees were kind of flattish sequentially?

Gregory Becker

Yes. This is Greg. I will start. So I guess, let me just talk about SVB Leerink overall, and how we're feeling about it. I would say we're feeling very, very good. When I think about, again, the leadership team over there, the team that are doing the execution, their connection to their clients, it is I would say everything we expected and more given the level of engagement. Their numbers are a function of the market, and we had built in a pretty healthy market into the forecast. And they're on track with numbers for the year. Obviously, you see a little bit of quarter-to-quarter variability, but overall, as far as our expectations, what we have built into the plan and forecasted our outlook that we communicated, things are on track with that. So I know there's much more to add on that, but it's on track and we feel very good about it.

Operator

And this concludes our question-and-answer session. I'll now turn the call back over to President and CEO, Greg Becker.

Gregory Becker

Great. Thanks. I wanted to thank everyone for joining us today. I feel obviously great about the quarter. Record quarter, record net income EPS-wise, and net income, and you can look at the client funds growth, the new client growth, just overall, been incredibly strong. And on top of again, a strong, robust kind of core business you have on top of that these gains from both warrants and securities that we feel really kind of icing on the cake. So really hitting in all cylinders from that standpoint. Yes, we have headwinds potentially with rates. But as we articulated, if we even have a couple rate declines, we expect to be able to generate positive EPS from the kind of the core side of the business. But one of the things when I reflect on the questions and the Q&A, we spent a lot of time talking about the numbers and what's going to change quarter-to-quarter.

What I think it's missed a lot in is our strategy in what we're doing and why we're doing it and where we're positioned in the market. And quite honestly, that's what excites me more than anything else. It's great talking about what happens on a quarter-to-quarter basis. But I sit back and still believe that number one, we are in the best market that anyone could hope for; and number two, we've got the best clients that you could ever ask for; and three, we've got the best employees executing on this. And it's really those three things that gives me a lot of confidence in where we're going over the long run. So I want to say thanks to our clients, thanks our employees, and look forward to talking to you guys next quarter. And then last part, as I said in the beginning, as you guys obviously experienced, this is a very different format than we've had. We'd love feedbacks, so please pass it along to Meghan, and let us know what we can do to provide even more clarity to all of you. And with that, thanks a lot, and have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.