SVB Financial Group
Q4 2014 Earnings Call Transcript

Published: 23 Jan 2015

[Operator:]

Welcome to the SVB Financial Group's Fourth Quarter and Full Year 2014 Earnings Call. My name is Bathsheba [ph], and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Meghan O'Leary, Director of Investor Relations. Meghan, you may begin.

[Meghan O'Leary:]

Thank you, Bathsheba [ph], and thank you everyone for joining us today. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux, are here today to talk about our fourth quarter and full year 2014 results. They'll be joined by other members of the management for the Q&A. Our current earnings release is available on the Investor Relations section of our website at svb.com. We'll be making forward-looking statements during the call and the actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information. The disclaimer applies equally to statements made in this call. In addition, some of our discussion today 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. We commit [ph] the call, including Q&A, to an hour. And with that, I will turn the call over to Greg Becker.

[Greg Becker:]

Thank you, Meghan, and thanks everyone for joining us today. The fourth quarter of 2014 was a strong end to a very good year for SVB. We delivered earnings per share of $1.14 and net income of $58.8 million for the quarter. That includes the sale of our non-bank financial company in India which impacted EPS by approximately $0.23. For the full year 2014, we delivered earnings per share of $5.31 and net income of $264 million, versus EPS of $4.70 and net income of $216 million last year. We were very pleased with our financial results for 2014. We saw innovation and robust activity across all types and stages of clients, and we experienced broad-based growth across our business. We grew average loans by 23% or $2.1 billion, to $11.5 billion. As a reminder, this is the full year average. We grew average total client funds, that is deposits plus off-balance-sheet client investments, by 32% or $14.5 billion, to $58.4 billion, also a full year average. We grew net interest income by 23% to $857 million. We maintained excellent credit quality with net charge-offs of just 32 basis points for the year. We grew core fee income by 20% to $210 million, and we delivered a healthy return on equity of 10.46%. We delivered these outstanding results, thanks to our continued focus on our strategy, which is to build deep relationships with fast-growth innovation companies and their investors, and leverage our platforms and expertise to grow our market leadership. This focus enabled us to significantly expand our client relationships on our business in 2014. For example, we grew our net client count by 21%. This growth came from strengthening our dominant position with earl-stage companies that drive expansion in the innovation industry. At the same time, we had a number of larger late-stage companies we work with. We maintained our market share of the best companies. Sixty-four percent of the U.S. venture-backed innovation companies that went public in 2014 and 2013 were SVB clients. We significantly expanded our activities with private equity firms. We added more than 100 new private equity clients in 2014 who contributed significantly to our growth, increasing loans to private equity clients by more than 50% and fee income by approximately 45%. We increased core fee income by 20%. This increase was driven primarily by higher foreign exchange and credit card fee income. Foreign exchange volumes and revenues increased by 42% and 25%, respectively. Credit card transaction volumes increased by 46%. And we are working with disruptive Fin Tech [ph] clients to be the backbone of their payment systems by leveraging our own systems here at SVB along with those of our partners. We successfully leveraged our private bank and wealth advisory to expand our client relationships. We gained more than 350 new clients in the private bank in 2014, and grew average loans by 26% to just over $1 billion. And finally, we increased our global client count by 60% year over year, adding more than 1,000 new clients, compared to 645 in 2013. Our global balance sheet grew strongly with 61% growth in average loans and a 100% increase in average deposits year over year. And in another significant milestone, we applied for our local currency license in China this month and hope to receive approval later this year. As our 2014 results demonstrate, we are executing effectively and delivering growth. In addition, our clients in our markets are performing well overall. While concerns over global economic growth continue to upset the markets, the U.S. economy at least is showing gradual improvement and unemployment continues to decline as consumer confidence increases. The NASDAQ rose by 15% in 2014 and the Dow closed the year near all-time highs. And although the markets are off to a somewhat rocky start in 2015, the long-term trend remains positive. The venture capital industry just enjoyed one of its strongest years in a decade, investing $48 million and raising an additional $30 billion for new investments. These sums are in addition to the capital infusions from corporates and angels and other sources of funding that we've been talking about for the past year. As a result, new company formation is stronger than ever. Exit activity was also strong. In 2014 there were 109 IPOs of U.S. venture-backed innovation companies. Another 455 companies exited by merger or acquisition. And the aggregate value of these deals was the highest in history. Valuations for the most promising companies and for companies overall continue to decline. While some of these companies are priced for perfection, they are priced that way because of their strong performance and the potential value of the markets they're disrupting. Business models overall are better. Many of these companies are staying private longer, strengthening the business models and growing much bigger before turning to the public markets as mature companies. Their valuations reflect that. In addition, the demand among public market investors, corporate investors and institutional limited partners for investment and innovation economy is growing. That too is contributing to higher valuations. Against this backdrop of strong performance and improving economy and a positive environment for our clients, we're starting 2015 on strong footing. As you can see from the full year outlook in our press release, we have increased our outlook for loans, deposits and net interest income. While we're optimistic about 2015, we are facing several persistent challenges that we've discussed before. The current rate environment is extremely challenging, and although the Fed is expected to begin raising interest rates towards the end of 2015, we believe we're unlikely to see much benefit from such an increase this year. Competition remains intense and shows no sign of letting up. As such, we will continue to focus on our differentiation and value-add, while remaining committed to maintaining our underwriting standards. And the regulatory burden continues to grow, particularly as we approach $50 billion in assets. But as we have said before, we've been preparing for this eventuality, though we expect to have some time before reaching that threshold. In the meantime, we continue to invest in people, systems and processes to ensure that we can support our continued growth. Despite these challenges, we feel good about our strategy, our target market, and our people, and we remain focused on being the best partner as possible to our clients. The expertise we build over 30 years of banking high-growth innovation companies enables us to guide our clients through every stage of their development, from scaling up from a bare-bones startup, to running complex global enterprises. Although we are larger than we've ever been, and we operate globally, we remain agile, client-focused and able to move quickly to meet our clients' needs. As we enter 2015, we are focused in delivering high-quality growth and expanding our client base, our capabilities and our global reach. We see ample opportunities ahead both near term and long term, provided that U.S. and global economies will remain relatively on track. We believe our amazing employees and commitment to being the best at what we do are keys to our success and will continue to differentiate us. Thank you. And now I will turn the call over to our Chief Financial Officer, Mike Descheneaux.

[Mike Descheneaux:]

Thank you, Greg, and good afternoon everyone. We had a strong quarter across the board, marked by significant growth in loans and deposits, as well as substantial private equity and venture capital related investment and warrant gains. I would like to highlight a few items in my comments today, which I will cover in more detail shortly. First, significant loan growth. Second, growth in total client funds, which includes on-balance-sheet deposits and off-balance-sheet client investment funds. Third, higher net interest income despite a lower net interest margin. Fourth, continued strong credit quality, with a higher provision for loan losses related to loan growth. Fifth, higher non-interest income due to investment securities and warrant gains, offset partially by the sale of our Indian NBFC. And sixth, our capital ratios and the related impact of growth in the quarter. In relation to this, I will comment later on the shelf-registration for senior debt securities that we filed today. Additionally, I will provide an update on our outlook for 2015. Let us start with loans which grew substantially in the fourth quarter. Period-end loans grew by 20% or $2.4 billion, to $14.4 billion. A significant portion of this growth was driven by higher utilization of existing capital call facilities by our private equity clients, but we also saw strength across the board. In fact, the utilization rate in the private equity portfolio increased by 10 percentage points to 38%. Average loans grew by 11% or $1.3 billion, to $12.7 billion, due to healthy activity across the loan portfolio, particularly in private equity. Given that we have substantial loan growth in the fourth quarter, I would like to provide some clarity on how we view this growth. In the last three years we have seen notably stronger period-end loan growth during the final quarter of the year, particularly the last month of the year. These period-end balances typically decline somewhat in the first quarter. As of January 20th, period-end balances have declined by approximately $600 million from yearend levels. With this in mind, we believe period-end loan growth could temper or even be flat in Q1. We would also expect a return to a more typical pace of growth in 2015. Notwithstanding that pattern, we are raising our 2015 outlook for average loan growth to the mid-20s and believe there are still potential upside from private equity software and the private bank. Moreover, we would expect to meet our 2015 average loan growth targets even if period-end balances were to temper. Now let us move to total client funds. Again this includes both on-balance-sheet deposits and off-balance-sheet client investment funds. In the fourth quarter, average total client funds grew by 6% or $3.7 billion, to $64.5 billion, due to continued healthy funding and exit markets for our clients, and strong client acquisition. Positive growth was particularly strong among our early-stage growth and private equity clients, who helped drive average deposit growth of 10% or $2.9 billion to $32.6 billion. Period-end deposit balances increased by 10% or $3.2 billion, to $34.3 billion, primarily driven by our early-stage and growth clients. Moving to net interest income and the net interest margin. Net interest income increased by $14.2 million or 6.4%, to $235.2 million in the fourth quarter. The increase was driven by significant loan growth and higher average balances of fixed income securities due to strong deposit growth. Interest income from loans increased $8.5 million, driven by growth but offset by yield compression of 27 basis points, primarily due to increasing private equity capital call lines of credit which tend to have lower yields. Our ability to grow loans has historically driven higher overall net interest income, but we expect loan mix, particularly significant growth in capital call lines, as well as competition and the low-rate environment, to continue to pressure loan yields moving forward. Investment interest income increased by $6.5 million. The increase was driven by higher average balances of fixed income securities, that is available-for-sale securities and held-to-maturity securities, which increased by $2.4 billion or 13% to $20.6 billion. The yield on a total fixed income portfolio decreased by 7 basis points to 1.56%. Normal runoff of higher-yielding mortgage securities and a slight increase in premium amortization expense contributed to the modest decline in yield. New purchases during the quarter averaged 1.63%. Portfolio duration remained stable and ended the year at 2.8 years, compared to 3 years at the end of the third quarter. Moving to the net interest margin. Our net interest margin declined by 7 basis points in the fourth quarter to 2.66%, compared to 2.73% in the third quarter. The decline was driven by increases in our investment securities portfolio due to deposit growth and to lower yield on loans due to loan mix given the significant growth in capital call lines of credit. Now, turning to credit quality. It remained strong overall during the fourth quarter. We recorded provision for loan losses of $40.4 million, versus $16.6 million in the third quarter. The majority of our provision was due to loan growth, which accounted for approximately $24 million of the total provision. Net charge-offs added $4 million. And the rest was due to an increase in specific reserves related to a single loan. Net charge-offs were exceptionally low at $4.1 million or 13 basis points of total gross loans, reflecting low growth charge-offs of $5 million, primarily related to early-stage loans. Our allowance for loan losses for performing loans remained relatively consistent at 1.04%, versus 1.05% in the third quarter. Non-performing loans increased to $38.1 million, compared to $11.7 million in the third quarter, primarily due to one loan in our software niche. At 27 basis points of total gross loans, our non-performing loans remain very low and the credit performance of our overall portfolio remained strong. Now let us move on to non-interest income. On -- excuse me. On a GAAP basis, non-interest income was $167.6 million in the fourth quarter, compared to $80.2 million for the third quarter. Non-GAAP non-interest income, which is net of non-controlling interests, was $90.3 million, compared to $75.3 million in the third quarter. We encourage you to refer to the non-GAAP reconciliations in our press release for further details. The major components of non-GAAP non-interest income were $36.8 million of gains from investment securities and warrants and $55.3 million of core fee income, offset by a $13.9 million loss related to the sale of our non-bank financial company in India. I encourage you to refer to our 8-K filed on January 16th, for more information on the India sale. Now I will go into the details of our non-interest income. We have private equity and venture capital related investment gains of $16.6 million net of non-controlling interest. These gains were due to strong distributions and increases in valuations stemming from positive investment and exit trends for our clients. Our fourth quarter gain compares to losses of $1.1 million in the third quarter. Those losses were primarily related to our FireEye holdings, and you will see in our press release that we have reduced our position significantly since the end of the third quarter. We had equity warrant gains of $20.2 million, compared to gains of $13.2 million in the third quarter, primarily due to valuation increases. Turning to core fee income. Core fee income remained healthy, increasing 3.6% or $2 million to $55.3 million. Core fee income includes foreign exchange, credit cards, letters of credit, deposit service charges, lending related fees, and client investment fees, and is a non-GAAP measure. Again please refer to the non-GAAP disclosures in our press release for more information. The increase in the fourth quarter was due primarily to an increase in lending related fees due to higher unused commitment fees, an increase in foreign exchange fees related to higher transaction and trade volumes, and an increase in credit card interchange fee income, partially offset by higher credit card rewards expenses. Moving on to capital. Our capital position remained strong overall, although deposit growth has increased our average asset base and continues to pressure our tier 1 leverage ratio. Despite the offsetting impact of our strong earnings growth in the fourth quarter, our bank level tier 1 leverage ratio decreased by 40 basis points to 6.65%. Our risk-based capital ratios, total risk-based capital and tier 1 risk-based capital, decreased by approximately 100 basis points at both the holding company and the bank level, due to our significant period-end loan growth. We continue to closely monitor the trend in our capital ratios, the bank level tier 1 leverage ratio in particular for which our general target range is between 7% and 8%. We filed a shelf registration statement this morning that provides us with the flexibility to issue senior debt from time to time. Depending on market conditions, we expect to access the debt market in the near term in order to raise additional capital at the holding company level. Now moving on to our 2015 outlook. Please note this outlook is for the full year 2015 versus the full year 2014, and the balance sheet numbers are based on full year averages. Starting with loans. We expect average loan balances to grow at a percentage rate in the mid-20s, a significant increase over our preliminary outlook of the low double digits that we provided in October. This increase is driven by better-than-expected loan growth in the fourth quarter. As you may recall, we said we could have upside to loan growth from private equity, and that is indeed what happened in the fourth quarter. We expect average deposits to grow at a percentage rate in the low 30s, also an increase from our preliminary outlook of the high 20s. We expect net interest income to grow at a percentage rate in the high teens, again an improvement on our preliminary outlook of below double digits. As Greg pointed out, we are not expecting any meaningful help from interest rates in 2015. We expect our net interest margin to range between 2.4% and 2.6%. We expect credit quality to remain comparable to 2014 levels. Specifically we expect our allowance for losses for performing loans, net loan charge-offs and non-performing loans to be comparable to 2014 levels. We expect core fee income to increase at a percentage rate in the mid-teens, which is consistent with our preliminary outlook. And finally, we expect non-interest expense to increase at a percentage rate in the mid single digits, again consistent with our preliminary outlook. In closing, we delivered very strong financial performance in Q4 and for the full year 2014, meeting or exceeding all of our balance sheet growth and credit quality metrics and exceeding our initial outlook for net interest income and core fee income. Moving in to 2015, we remain optimistic due to our healthy and growing client base and our continued success in implementing our growth strategy. While low rates and intense competition will remain challenges in the near term, we believe we are well-positioned for 2015. Thank you. And now I would like to ask the operator to open the line for Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question is going to come from Steven Alexopoulos from JPMorgan.

[Steven Alexopoulos:]

Hello everyone.

[Greg Becker:]

Hey, Steve.

[Steven Alexopoulos:]

Maybe I'll start. So, period-end assets grew almost 50% in 2014. And at this pace you'll become the CCAR bank it looks like in 2016. So my question is, is there a plan B to slow the deposit growth beyond the off-balance-sheet product which is having a relatively limited effect? Or are you guys bearing the costs and just fully anticipating that you're going to become a CCAR bank over the next one to two years?

[Greg Becker:]

Hey, Steve, this is Greg. I'll start and Mike might want to add as well. The growth we saw in the fourth quarter was exceptional, and we do believe that's a little bit faster than what we'd ordinarily see. A couple of things. As we've said in the past, and we're not waiting for this to happen, but it is -- it will eventually happen and it will be a catalyst for moving some of those deposits off the balance sheet, and that's when rates start to increase. We hope, and I know a lot of the banks are hoping the same thing, that sometime in 2015 that'll happen. And that will have an impact on being able to move that deposit -- to move those deposits off balance sheet. Second part is, we talked about this in the past, but we have a strategy to move more of the money off balance sheet through incentives, being more focused on ensuring we get the right return over the overall relationship. So I think there's a variety of different ways that will slow down the growth in overall assets, we approach $50 billion. That being said, we do expect we will be hitting $50 billion at some point, whether it's 15 months out or 24 months out. We could see that happening. And as we talked about, we've been preparing for that for a while both from a systems perspective and processes, hiring the right people that will help us get there. So I think that's how to answer it. I don't know, Mike, if you'd add anything.

[Mike Descheneaux:]

No, I think that's fair.

[Steven Alexopoulos:]

Okay. That's fair. And then a question on this capital call growth. Could you guys talk about what was the largest loans book? I'm trying to get a sense if this was a couple of very large credits or how granular it was. And can you talk about how the duration of the capital call portfolio changed through the year? Maybe it ended. Because I know the PE lines tend to be longer duration. Thanks.

[Mike Descheneaux:]

Steve, this is Mike. I'll give -- I'll start, and then Marc Cadieux can jump in here. But when you get a chance to go through fully the press release, you'll note in there that we have the concentrations of loans greater than $20 million, and so you'll certainly see a large rise in the balances related to private equity that are greater than $20 million. We had some disclosures in there that [inaudible] the number of loans increasing there as well. But I think the main point to say is that, yes, there were a fair number that were over $20 million certainly during the quarter.

[Marc Cadieux:]

Yup. I think I would add to that -- this is Marc Cadieux -- would add to that that it was driven primarily, as Mike had mentioned before, by utilization, versus having added a lot of new borrowers in the quarter. I think net-net there was maybe 20 to 25 new meaningful credit facilities added in the quarter for new clients, and the rest of it really all came from the utilization.

[Steven Alexopoulos:]

Okay. And I know this has been a focus, but when you look at this growth, I think, Greg, you said that you tend to see a jump at period-end, but we've never seen a jump to this magnitude. Is this quarter a game-changer for that business the way you guys view it?

[Greg Becker:]

I'll start, Marc. This is Greg, and Marc may want to add to it. The growth was we've seen the spike as we have in prior quarter -- Q4s, but this was a more significant jump than we've seen in the past. Again, thinking about the utilization rates, kind of going from a 28% to a 38%, that's substantial across a portfolio like that. We just believe it was a complement [ph] of events where we've added new clients over the years and the activity levels at the end of the year was just very strong. As Mike pointed out though, we did see a -- we've already seen a decline in those balances so far in the first part of the year, and we could even see period-end, at the end of Q1, period-end balances be lower as we've had in some prior years than we did at the end of the year. So it's somewhat of an anomaly but it also has been an area of focus for us as you pointed out.

[Marc Cadieux:]

Yeah. The only thing I would add to that is I certainly don't expect that utilization will stay at 38%. It's probably going to shake somewhere between the 28% and 38%. And going back to, realizing belatedly we didn't answer your question about duration, the private equity funds do tend to borrow a little bit longer, but that difference in duration is, you know, tends to be 180 to 270 days versus the typical capital call borrowings of 30 to 90 days. And just looking at the portfolio and where the borrowings came from, it's more the shorter-term variety than the occasional longer-term borrowings we get from certain of our fund clients.

[Steven Alexopoulos:]

Okay. I appreciate that color. Thank you.

[Greg Becker:]

Yup.

[Operator:]

Thank you, Steven. And our next question is going to come from Casey Haire from Jefferies. Please go ahead with your question or comment.

[Casey Haire:]

Hey, good afternoon guys.

[Greg Becker:]

Hey, Casey.

[Casey Haire:]

Mike, a question for you on the debt raise. Number one, can you just give us a reminder of how much cash is currently available at the hold column, what that might -- that opportunity might be to downstream to the bank. And then secondly, last spring's equity raise, I believe you guys settled [ph] for about an 8.3 tier leverage ratio. Should we expect something similar this time around?

[Mike Descheneaux:]

Well, first off, related to the question, I mean we've been maintaining roughly between $280 million and $300 million or so of cash at the holding company level for the last couple of quarters. Now in our prepared remarks, as you said, is we did file that shelf registration this morning. We did say that we expect to raise debt in the near term, but we haven't commented any specifics of that if we do indeed go.

[Casey Haire:]

Okay. And then just as a follow-up, on the expense guide kind of holding steady, pretty impressive leverage. I know in the past when you guys have upped your revenue guide, that has brought along the expenses with it. Just curious as to what -- how you're able to keep the expenses flat. And if we were to get further, you know, a better story as the year develops on revenues, would that leverage still hold or would you in fact up the expense guide?

[Greg Becker:]

Yes. So, Casey, this is Greg. And you remember obviously historically how this works, which is we set out certain targets. We reset kind of our incentive comp towards those targets. And then if we exceed those targets, the incentive compensation would grow, which is typically where we have seen higher expense levels than our original forecast. And so the same holds true this year, which means we've set out our guidelines, and if we were to see performance over and above that, you could see incentive comp increase, which would take us to potentially beyond the ranges that we've talked about already.

[Casey Haire:]

Okay, thanks a lot.

[Greg Becker:]

Yup.

[Operator:]

Thank you, Casey. Our next question is going to come from Joe Morford from RBC Capital Markets. Please go ahead with your question or comment.

[Joe Morford:]

Thanks. Afternoon everyone. Good, strong quarter.

[Greg Becker:]

Thanks.

[Joe Morford:]

The release highlighted that new clients accounting for about 27% of the period-end deposit growth. How is that contribution ranked or ranged to historically? And is it outsized now because of the larger financings these companies are getting?

[Mike Descheneaux:]

So, Joe, we haven't really commented that often on that number the last couple of quarters. But I would characterize that as a bit higher than usual. I mean what comes to my mind is somewhere between 15% and 20% is what it had been at, the few quarters that we had disclosed, so I would characterize this one as a bit higher.

[Joe Morford:]

Okay. And do you think that's partly a function of these larger financings, or what do you think's driving that?

[Greg Becker:]

Yeah, Joe, this is Greg. Clearly these substantial rounds have contributed to that. You know, if you go back in history, we -- I can't ever recall rounds of financing that are, on a private basis, that are $300 million, $400 million, $500 million, maybe even a billion dollars, of -- in a single round. And so clearly that contributes to both the number that you described just with -- and with the overall deposit growth.

[Joe Morford:]

Okay. And then, any sense of the timing of when you might hear back on your application for a local currency license in China? And can you just talk about how you see that helping the growth of your business over there?

[Greg Becker:]

Yeah. So this is Greg again. As I said in my comments, we just filed for it in early January, so, a few weeks ago. And clearly when you're dealing with the regulators, you don't know exactly when you're going to hear back. Our hope is that kind of a late summer, later half of the year, we would hear back, and hopefully be moving forward with that. Right now we continue to develop our systems and processes to be able to have the RMB capabilities, assuming the approval goes through. And how it helps is really this. We've been operating in the JV with a little bit of our two arms tied behind our back, meaning we have to operate in foreign currency, meaning onshore U.S. dollars. There just really aren't that many onshore U.S. dollars or foreign currency there, although we've grown that business. So really being able to do RMB or local currency really provides us upside for really the long term. That's really a key fundamental part of our strategic plan, so that's why we highlighted it as an important milestone in our development.

[Mike Descheneaux:]

So, Joe -- one item to remember is that it is a joint venture. And so if there is any growth in there, let's say in terms of loans, you're not going to see those loans consolidated on the balance sheet. You're just going to see it as an equity pickup in the line item on gains on investment securities or gains of losses.

[Joe Morford:]

Okay, that's helpful. Thanks, Mike.

[Operator:]

Thank you, Joe. Our next question is going to come from Jared Shaw from Wells Fargo Securities. Please go ahead with your question or comment.

[Jared Shaw:]

Hi, good afternoon. Just following up a little bit on the growth on the VC/PE side. Were you seeing -- was most of that on early stage or late stage? Or where in the scale would you saw a lot of that growth is coming from in terms of what they were funding?

[Greg Becker:]

So, Jared, this is Greg. And because it's a private equity, this would be more mature companies. These are cash flow positive companies typically. And we break down -- we kind of have venture capital, private equity services all under one bucket, venture capital and private equity. Again most of these came from private equity, which is later-stage, mature companies, EBITDA positive, is where really those are being funded into, in a variety of different industries. So that's where the majority of that came from.

[Jared Shaw:]

Okay. All right, thanks. And then on the asset quality, the impaired relationship of $27-1/2 million, is that a multiple loans or is that in one loan? And what bucket of categories would that be?

[Marc Cadieux:]

Jared, this is Marc. The uptick in non-performing loans was related to a single loan that falls under our software niche, and it's not indicative of any systemic trends or anything else that we think would cause there to be additional challenges in our loan portfolio.

[Jared Shaw:]

Okay, great. Thank you very much.

[Marc Cadieux:]

Yup.

[Operator:]

Thank you, Jared. Our next question is going to come from John Pancari out of Evercore ISI. Please go ahead.

[John Pancari:]

Good afternoon guys.

[Greg Becker:]

Hi, John.

[John Pancari:]

Wanted to see if I can get just your thoughts on the concentration of the PE, VC portfolio. It's now about 31% of loans, and obviously it's impacting the margin here. So, wanted to get an idea how to think about that concentration. Could it move up from here or do you expect that this is probably the peak level where you'll let it be?

[Greg Becker:]

Hey, John, this Greg. I'll start, and then Marc Cadieux will add some commentary to it. So we obviously, we have concentration limits that we look on a regular basis, and private equity services is approaching that level, which makes sense. When you start looking at any loan segment that would be a third of your loan portfolio, you got to pay attention to it. That being said, it is by far our lowest risk part of the loan portfolio historically. Again, across our capital call lending, we have approximately zero losses over the 20 years we've been doing it. So we feel very good about that. That being said, you're still watching it. What's important to note, and Marc commented on this and so did Mike, is that the growth was, in the fourth quarter, was mainly about utilization. So when you think about that, Marc said it's going to go back to, we believe, a more normalized level, somewhere between a 28% and 38%, that's a big drop. And so that, combined with the fact our portfolio, the rest of the portfolio, we expect to continue to grow, will keep that in balance. We still have room to grow, but we're watching what the utilization rate will settle in at.

[Marc Cadieux:]

I think Greg covered the highlights and I think -- it's Marc -- the only thing I would add goes to your comment about yields. Continued growth in that segment of the portfolio would be expected to have continued pressure on our NIM.

[John Pancari:]

Okay. And then also on the -- back to the leverage ratio, the fact that you mentioned the debt shelf and that there's a potential near-term ways [ph] to address it. Can you talk about the mix? Is it primarily, you know, are you kind of implying here that it's primarily going to be debt, or could there be an equity component?

[Mike Descheneaux:]

You know, John, what we filed this morning was the shelf registration specifically for senior debt securities.

[John Pancari:]

Got it. All right. And then, Greg, you commented that you don't expect much of a benefit in 2015 from Fed hikes. Is that only because you're expecting the hikes to materialize mid to late 2015, and accordingly, the full-year benefit really wouldn't materialize till 2016? Or is there something about the balance sheet positioning that you think could mitigate the near-term impact?

[Greg Becker:]

So, John, this is Greg. You know, it is almost exclusively related to the fact that we expect it to happen towards the end of the year. What we've, you know, if you go back a few years, we had what would be clarified as SVB Prime, which was at a higher level. We've been converting almost exclusively to regular prime, which means that when rates do start to pick up, that will actually be almost across the portfolio. Roughly more than two-thirds of the portfolio is variable rate, floating rate, which means that that would be impacted when rates -- short-term rates finally do impact or go up.

[John Pancari:]

Okay. All right. Thank you.

[Operator:]

Thank you, John. Our next question is going to come from Ebrahim Poonawalla from Bank of America Merrill Lynch. Please go ahead with your question or comment.

[Ebrahim Poonawalla:]

Hey guys. Good afternoon. A quick question, Greg, just outside of the PE and the first quarter impact on the loans. Like if you can talk about what you're seeing in terms of client activity that could drive growth, in line with your guidance or better, just in terms of what are the dynamics there in terms of increased liquidity coming for all these companies, vis-à-vis the borrower demand or the growth that you're seeing when you talk to your lenders in these businesses?

[Greg Becker:]

Yes. So this is Greg, Ebrahim. So there's really two things when I think about growth. There's the new client additions and the loan growth from that and liquidity deposit growth. We've already talked about the deposit growth or total client funds. We still see it being robust. Our goal is to just continue to direct more of that off balance sheet. And just to comment about that a little bit. I do believe it will temper a little bit because growth, when you think about total client funds growth last year on an average basis, $14.5 billion, 2014 over 2013, that's just such an incredible number. I don't expect it to grow at that level. But new client activity we expect to continue to be robust. Now on the lending side, again, what's important to note is, although private equity services gets a lot of attention because that's been such an outsized component of the loan growth, even if you take that away and look at the average loan growth of the rest of the -- kind of industries that we serve, meaning buyout loans, private equity service -- or global private banking, corporate finance, we saw growth across that whole area consistent with what tram [ph] lines we've talked about before which is kind of an absolute numbers of kind of $1-1/2 billion of growth per year. So we expect that mix of growth to be consistent with what we've seen in the past. Our teams are seeing that. We see those opportunities. And it continues to go back to being in this innovation market.

[Ebrahim Poonawalla:]

Understood. And I'm sorry if I missed it, did you provide an update in terms of the international, the Europe portfolio, where we were at the end of the quarter? And what was the growth in the fourth quarter?

[Greg Becker:]

We didn't specifically in the fourth quarter. Here's what I would say. We finished the year with more than $1 billion of total global loans, meaning -- and it's mainly concentrated in three markets obviously which would be the U.K., Asia non-joint-venture, and third, it would be Israel. Those are kind of the three buckets. And the accumulation of those three was over $1 billion. So we saw very nice growth this past year. And as I said in other earnings calls looking at a year-over-year growth, what gets us excited is that that's a market -- those markets collectively, you could see 30%, 40%, maybe 50% growth on an annualized basis, which is one of the reasons we're in those markets.

[Ebrahim Poonawalla:]

Good. Thanks for taking my questions.

[Greg Becker:]

Yeah.

[Operator:]

Thank you, Ebrahim. Our next question is going to come from Aaron Deere from Sandler O'Neill. Please go ahead.

[Aaron Deer:]

Hi. Good afternoon everyone. Most of my, I guess, big questions, had been addressed. I just have a couple of quick follow-ons. One is I guess, following on with the global strategy question, because you guys have had such good success on that front and given that India is, you know, seems to be such a strong innovation market, I was hoping you could give a little bit more color behind your decision to sell the India finance subsidiary area.

[Greg Becker:]

Yes. So this is Greg, let me start. We've had -- we've been successful, to your point, and especially in the U.K. and in Asia. But I'll tell you. It's hard work. You have to deal with additional regulatory constituents in those markets, the operational complexities. And also we want to make sure we're not spreading ourselves too thin. So what we continually do is look at opportunities to say, does this still provide a long-term growth objective for us? And so we really sat back in the last 12 months and looked at India and said that we've, you know, our long-term strategy was to set up a branch there at some point, a banking operations. And when you looked at the regulatory environment and the challenge that we had, we actually were turned down for a branch license a couple of years ago, we just said it's better for us right now to double down on what we're doing in Asia, double down on what we're doing in the U.K. You know, longer term, maybe look at Europe, and just be even more focused. And we believe that's the right thing for our clients, it's the right thing for our long-term strategy. That being said, we still have, as we've talked about in the past, a group called Global Gateway, which means we still have a team of people that still goes to certain markets such as Brazil, Australia. And as companies are looking to come to the U.S. or come to our other markets, we want to capture the best companies that are coming to those markets. And India will remain in that category. So this isn't something like we're giving up on India. It's just we're taking a different approach for now because we've revised what our view is of the long-term outlook for our business.

[Aaron Deer:]

That's great. Thanks, Greg. And then, Mike, just to make sure, the -- is it safe to assume that your -- the outlook that you've provided includes whatever volume of sub-debt you might be taking on?

[Mike Descheneaux:]

No.

[Aaron Deer:]

Okay. Thank you.

[Operator:]

Thank you, Aaron. Our next question is going to come from Julianna Balicka. Please go ahead with your question or comment.

[Julianna Balicka:]

Good afternoon.

[Greg Becker:]

Afternoon.

[Julianna Balicka:]

I have a couple of follow-on questions. One, in terms of thinking about your reserve coverage, you said that you want to keep the reserves to performing loans comparable to 2014 levels, which at the end of the quarter had that tremendous growth in PE, which is one of your lower loss ratio portfolio. So as that flows off, should we be thinking about a lower overall dollars of reserves or will the existing dollars of reserves just get reallocated so we may see an increase in coverage ratios?

[Greg Becker:]

So, Julianna, this is Greg. I'll start on the -- in looking at it. I would say going back, and being very focused on what we said, we think about the non-performing ratio, coverage ratio being consistent, we look at that from a performing loans, exactly the way it's -- we look it'd be consistent generally with this past year. So clearly there's changes that could happen in the portfolio. But you have continued improvement in charge-offs, assuming that trend continues, meaning looking at the reserves, kind of what we look at reserves relative to our charge-off ratio. So you have that factor happening, combined with the mix of the portfolio, which kinds of leads us to believe that the, again, coverage ratio for performing loans would be consistent.

[Marc Cadieux:]

The only I think I might -- excuse me, it's Marc -- would add to that, is that non-performing loans, while they went up in the quarter, are still very, very low at only 0.2% -- 0.27% of total loans. And so, yeah, any movement upwards to I'll say a more normalized level of non-performing loans could offset whatever benefit we get in the performing loan segment from higher capital call lending.

[Julianna Balicka:]

I see. That makes sense. And then in terms of the capital call lending pulling back during next year, and you had referenced flat to potentially down loan growth, would it snap back to 3Q levels or would it just trend down from where it is here? Like there's some segment that it's going to stay in there in terms of the overall dollar growth?

[Greg Becker:]

So, Julianna, this is Greg. Let me start. So when I talked about a potential decline or flattening in period-end or consistent levels, I'm talking about Q1, so, meaning we could be a Q1 period-end decline. That being said, we still believe, I certainly believe that we'll still end up seeing growth overall in private equity services. What we wanted to highlight though is we don't expect -- didn't expect and will not expect the tremendous growth we saw in the fourth quarter continue. And now, because the utilization rates will come back down, do we believe we'll continue to add new clients? In a similar, maybe a little bit slower pace that we did to 2014, yes, we do. We expect to add new clients in the private equity services arena. The slight decline of utilization would actually just slow down the overall growth. But it would still see growth.

[Julianna Balicka:]

I see. Okay, that makes sense. And then final question, if your loan growth, or if your balance sheet growth rather, exceeds your current expectations, what is the risk that we may see higher expense growth related to getting ready for CCAR crossing $50 billion market, et cetera, or is that fairly well-phased-in so we may actually not be shocked by a spike in expenses so to speak?

[Mike Descheneaux:]

As Greg was mentioning, that we've been preparing this for quite some time, so you actually have certain level of expense run rate that's in there related to preparing for that. So I think you'll continue seeing us prepare and invest in people, resources and systems. But at this juncture, we don't necessarily anticipate a big, massive spike in the new elevated higher level anytime soon. Hopefully that can change, but at this point we have a good run rate in our expense growth.

[Julianna Balicka:]

Very good. So we should expect any expense -- higher expense surprises to come basically from positive growth and therefore incentive comp?

[Mike Descheneaux:]

Well, so compliance costs and things like that, preparing to get to $50 billion is one thing. And then -- but when you talk about incentive compensation, so on other words, if we continue to grow and exceed our targets, as Greg was mentioning, you're certainly going to see an increase in incentive compensation if people exceed their targets. So again, fairly similar to what we have seen in the prior years when we exceed our targets. Hopefully that makes some sense to you.

[Julianna Balicka:]

Yeah, that makes sense. Thank you very much.

[Mike Descheneaux:]

Okay.

[Operator:]

Thank you, Julianna. Our next question is going to come from Jennifer Demba from SunTrust. Please go ahead with your question.

[Jennifer Demba:]

Thank you. Good evening. Just curious if you have any borrowers that have outsized exposure to the energy industry at this point?

[Marc Cadieux:]

This is Marc Cadieux. Excuse me. The answer is no, we do not.

[Jennifer Demba:]

Thank you very much.

[Marc Cadieux:]

Yup.

[Operator:]

Thank you, Jennifer. Our next question is going to come from Brett Rabatin from Sterne Agee. Please go ahead with your question.

[Brett Rabatin:]

Yeah, hi. Good afternoon. Wanted to just ask, and I remember last quarter you kind of mentioned that you'd kind of seen a ratcheting of price competition in several of the business lines. And I was just curious, thinking about the fourth quarter and what you're seeing today, how that played out through the quarter and kind of how that's looking so far in 2015 in terms of what transpired the past maybe six months.

[Greg Becker:]

So, Brett, this is Greg. I guess our comments about the competitive landscape have been kind of a consistent beat we've talked about for the last few years, and it hasn't changed. It's very competitive out there. As we said in the past, we continue to really sharpen our pencil, looking at deals and saying, is this the right deal based on both a risk and a return metric? The good news, as we said in the past, and again we talked about this for years, is we're in a really an unenviable target market. There's two benefits to it. One is the market's growing, so that's a good -- that's a really good thing, you kind of have the wind at your back. Second part is we really spent a lot of time looking at how we can add value to our clients, and I know that's an overused term, but when you think about it, because one of our teams have concentrations of you're a software lender or a hardware lender or a clean tech or something, your expertise and your ability to add value is much greater than other institutions. And you combine that with the information that we're sharing and the other connections and relationship building exercise that we go through, that's really valuable. Our clients value that relationship and they value what we bring to them. So that's what we're doing. And then you combine that with the broad product set we have, so like a broad product set which delivers majority, if not all their needs. You've got value-add that delivers it in a very unique way that we believe is, you know, no one else can do. That's a big differentiator. It doesn't mean we can't, you know, we don't have to sharpen our pencils. We do. But I think we have an advantage over our competitors. And our goal is to make sure that advantage remains.

[Brett Rabatin:]

Okay. That's great color. And then I guess the other thing I was curious about was, Greg, you talked about in maybe the past quarter or two, a little bit of frothiness, and some other things you were saying. But it sounds like you're pretty comfortable with a lot of the valuations that you're seeing in some of these companies today and maybe more certainty about the prospects for cash flow and what-have-you. Would that be a fair characterization of kind of how you view the market?

[Greg Becker:]

Yeah. There's kind of two aspects when you think about valuations. There's the credit aspect of it. And I think sometimes people think about that valuations -- if a valuation -- company goes from $100 million to $250 million or $300 million and it goes back from $300 million back to $100 million, that all of a sudden the credits -- there's a risk to the credit. And for the most part, that's actually not true. So we look at credit, and as Marc has articulated, we feel very good about where we are from a credit perspective of keeping with our underwriting standards, et cetera. And this other part of just, you know, valuations and what do we look at and how do we feel about valuations? As I said, valuations have absolutely increased. And some of the valuations are, I'll use the words, very specifically priced for perfection. That being said, we have, in my history, have never seen the growth rates -- revenue growth rates of these companies and the market opportunities they're going after. So I'm not the expert to tell you whether the valuation, it's a $5 billion or $1 billion or $10 billion is the right level, but I will tell you that the companies are performing exceptionally well. And when you look at public markets, you kind of say, yeah, they do in some cases make sense. But it is at the higher end clearly.

[Brett Rabatin:]

Okay. Thanks for the color.

[Greg Becker:]

Sure.

[Operator:]

Thank you, Brett. Our next question is going to come from Gary Tenner from D.A. Davidson. Please go ahead with your question.

[Gary Tenner:]

Thanks. My questions have been answered.

[Greg Becker:]

Okay.

[Operator:]

Okay, thank you. [Operator Instructions] And our next question is going to come from Ken Zerbe from Morgan Stanley. Please go ahead with your question.

[Ken Zerbe:]

Great, thanks. Just in terms of your loan growth this quarter, how much of the loan growth came from acquisition-related financing? And how's that changed over the last couple of quarters?

[Greg Becker:]

So if we go back to private equity, by extension, that would have been acquisition financing done by our private equity clients where they borrow on the capital call lines. Separate, apart from that, sponsor-led buyout was up in the quarter, but not dramatic. I believe it's about 10% growth for the quarter -- 11% growth for the quarter.

[Mike Descheneaux:]

Yeah, it's approximately about 6%. And what we noticed in Q4, Ken, was, you may recall, in Q2, Q3 was some headwinds on the loan growth in these areas, and then we did -- it was kind of nice to see actually Q4 it rebounded and starting to show growth. This is the sponsored buyout area of our portfolio.

[Ken Zerbe:]

Got it, understood. Sorry, just to go back to the first part, you said it was based on the private equity guys were doing on the capital call lines? Is -- I assume that's very temporary financing. I guess I was thinking more of the longer-term financing.

[Greg Becker:]

Right. So the longer-term financing would be the sponsor-led buyout.

[Ken Zerbe:]

Got it.

[Greg Becker:]

That we saw the 6% growth in.

[Ken Zerbe:]

Got it. Okay. All right. Thank you.

[Operator:]

Thank you, Ken. Our next question is going to come from Tyler Stafford from Stephens, Inc. Please go ahead with your question.

[Tyler Stafford:]

Hey. Good afternoon guys. Just a follow-up on the global portfolio. I know you got a global loan balance at yearend, but I was hoping you could get the global deposit balance at yearend. I think it was $4 billion last quarter. And then just any thoughts of crossing that $10 billion of foreign exposure threshold?

[Greg Becker:]

Yeah, Tyler. This is Greg. If you would have asked that question a quarter ago, I would have said $10 billion is a really far -- far away. But we actually approached $7 billion -- in fact we were a little over $7 billion deposits on a global basis. Now there's a couple of things that are in there that I think is important to note. We have focused less on creating an off-balance-sheet opportunity than what we have in the U.S. And if you would take the same mix on and off in the U.S. and apply it to global, you'd end up with about $3-1/2 billion on, $3-1/2 billion off. So that's a big area of focus for us, coming up with products that can move more of that money off balance sheet, which we're planning to do. So I believe we've got the right focus on moving more of that money off balance sheet right now. But we did see a very nice tick-up in foreign deposits or global deposits.

[Tyler Stafford:]

Okay. Thanks guys.

[Greg Becker:]

Sure.

[Operator:]

Thank you, Tyler. And at this time we have no additional questions. I'd like to turn the call back over to Greg Becker, CEO, for closing comments. Thank you.

[Greg Becker:]

Great. Thank you. I just want to thank everyone for joining us today. You know, 2014 was a great year. When you look at the numbers, we are just thrilled with the growth that we've had. And it really is, you know, the growth was great, the credit quality was strong, great client acquisition. And we're just really fortunate to have the clients that we have, which we certainly believe are the most interesting and vibrant companies in the world, and really a key to our success. I want to thank all of them, and thank the SVB employees for making this such a great year. And as we move into 2015, we're going to continue to invest in being the best partner and delivering value to our clients. As I said, that's really the key differentiator for us. It goes beyond just being kind of a simple banking relationship. And we're really all committed to ensuring that we're really building a strong franchise for the long term. And with that, I want to thank all of you guys. Have a great day.

[Operator:]

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