SVB Financial Group
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Operator:]

Welcome to the SVB Financial Group's First Quarter 2015 Earnings Call. My name is Bakibha [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, Bakiba [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 first quarter 2015 financial results. As usual, 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, which applies equally to statements made in this call. In addition, some of our discussion may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release. We'll limit 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 first quarter was a very strong start to the year. We delivered quarterly earnings per share of $1.71 and net income of $88.5 million significantly beating street expectations. These results reflect continued healthy conditions for our clients and strong execution which enabled us to deliver 10.6% average loan growth, 4.7% average total client funds growth and 5.2% core fee income growth. We also saw substantial gains on equity warrants and investment securities. Our strong performance is due to three primary factors, first our focus on the innovation Markets and their investors. Second, our commitment to adding value to our clients. Third, our effective execution on our growth initiatives. The innovation Markets which have helped provide outstanding growth for us continue to thrive. VC's raise $7 billion in the first quarter compared to $5.8 billion in the fourth quarter. This continues momentum in fund raising combined with resources from angels, incubators and corporate's has provided an ongoing supply of ample capital for good companies. USVC Investment remained healthy in the first quarter with $13.4 billion invested in 1,020 deals. This is a strong number, nevertheless we're paying attention to investments that are early stages which have declined in the past four quarters to see whether that decrease may impact our new client acquisition and so far, it has not. At just over 1,000 new clients in Q1. We were on par with the pace of the last five quarters or four quarters. The VC backed exit Markets remained healthy. Although Q1 numbers were down following an exceptionally active Q4 in 2014. The innovation economy continues to outperforming the broader economy and our annual innovation economy outlook offer that evidence that many companies are delivering strong performances and are generally optimistic about the environment. 76% of the 1,100 executives and entrepreneurs we survey this year said their company met or beat revenue targets in 2014 and 71% expect even better conditions in 2015. This is the second highest level of optimism among our survey respondents in the six years; we'd be doing this research. These factors are all contributing to momentum in our business. Momentum we are reinforcing through our unique ability to add value to our clients. We do this through our deep connections and long experience with innovation companies and their investors. Our ability to move and adapt quickly to client needs and our ability to partner and connect clients with resources and people. Let me give you just a few examples of how we do this. In just the past week, we introduced 12 of our most promising client CEO's to corporate development, business development and product leads of a NASDAQ 100 company interested in potential opportunities for partnership and acquisition. We also hosted a conversation with one of the most accomplished successful investment venture capitalist and a small number of client entrepreneurs, so that they could ask questions and hear the VC's views on the state of the industry. We also recently partnered with one of the leading accelerators to bring together 20 of their hot portfolio companies many of them are clients, with 20 corporate's interested in investing partnering and acquiring. And we brought a group of Oregon entrepreneurs to Silicon Valley to meet where they had the opportunity to talk and make connection with VC's. We heard just this week, that one of these entrepreneurs is expected to get funding as a result of this meeting. These are just a few examples of what we do every day in our Markets. Making hundreds of touch points on every front. Advising, helping and connecting our clients with the people, expertise in resources to help them move forward. This approach, our passion about making a difference for our clients is what creates that strong bond and sets up apart from every other bank. Our strong client relationships have enabled us to maintain our leadership among start ups and increase our market share in key client segments such as private equity and the private bank. Our focus on private equity in particular has enabled us to win nearly 300 new clients in the last year and has contributed significantly to grow loans, total client funds and fee income. Likewise, our private bank initiative although still relatively small is growing rapidly with more than 500 new families added in the last year. These efforts have dovetailed with our global growth imitative contributing non-US loan balances that reached $1.2 billion during the first quarter, a 36% growth year-over-year. We continue to make progress in our global initiatives and expect to see strong annualized growth in that area. Our successful efforts to track clients have also been helped by continued advancement or enhancement of our global product offering. Some recent examples of this, where our move to a 24x7 foreign exchange desk in Q4 and a launch of our business debit card in the UK in the first quarter. And finally, we are optimistic our China joint venture will receive its license to lend and take deposits in RMB sometime this summer. So we have a positive outlook because we have a variety of growth initiatives. But our success at winning and keeping clients is also about working with the best companies. We've devoted significant resources to identifying high performance companies using metrics other than valuations such as margins, revenue and growth rates as well as our unique access and insights into our target Markets. We are succeeding at this and our focus in working with and cross selling to the best clients group is driving high quality results. While vibrant client Markets have driven strong growth they come with some challenges, which we discussed on past calls. Increasing valuations are something we are paying attention to, while many companies are achieving clients and revenue traction that appears to justify their valuations some will not live up to expectations. We believe building deeper relationships with the best companies is the right strategy in this environment. In addition, our deep engagement and long experience in innovation Markets are significant advantages in managing our business. We continue to see heated competition. With some lenders taking risk on loan size and structure that we believe are unjustified. We are choosing everyday to be disciplined about growth even when it means walking away from a deal. We said that $1.5 billion to $2 billion is an optimal annual range for smart loan growth over the coming years. Assuming the Markets hold and we remain comfortable with those levels. Finally, we are keeping an eye on our asset growth. Given the higher regulatory bar for banks with more than $50 billion in assets because we are a commercial bank with a holding company structure, we have been investing in a robust regulatory and compliance infrastructure for years. With that in mind, we expect more of a continued ramp and a sudden leap in expenses. We are also active in DC to raise the $50 billion threshold. Since we think $50 billion is too low for designating a systematically [ph] important financial institution. As we look at our first quarter performance and our outlook for 2015, we are pleased with our continued momentum and optimistic about the year ahead. Our client base is growing and doing well and the broader economy continues its march to recovery. Short of a major economic disruption, we believe we're on track to deliver another strong performance in 2015. We have not assumed much help from rates this year, but every day is a step closer to a rising rate environment, which we expect will have a tremendous positive impact on our business. In the meantime, we remain focused on executing on our growth plans being the best at what we do and maintaining a reputation as the go-to partner for innovation companies and their investors worldwide. Thank you and now I'll turn the call over to our CFO. Mike Descheneaux.

[Mike Descheneaux:]

Thank you, Greg and good afternoon, everyone. As Greg, noted we had a very good quarter across the board. I would like to highlight a few items in my comments today, which I will cover in more details shortly. First, healthy average loan growth. Second, strong growth in total client funds. Third, higher net interest income and modest margin compression. Fourth, a lower provision due to flat period-end loans and continued solid credit quality. Fifth, higher non-interest income due to strong investment securities gains, warrant gains and core fee income. Sixth, solid capital ratios which reflects the impact of our recent debt raised and new Basel III requirements. And finally increased expenses in the impact of seasonal compensation items and growth in FTE. Let us start with loans, as we expected. Period-end loans were stable at $14.4 billion reflecting a modest degree of repayment on capital call lines of credit that was offset by modest increases in other segments of the portfolio. Average loans grew by 10.6% or $1.3 billion to $14 billion reflecting the impact of our substantial period-end loan growth in the fourth quarter. Capital call lines of credit have proven to be somewhat more resilient than we anticipated and utilization of capital call lines of credit remained elevated at 6 percentage points higher than normal. While we continue to see good momentum and an active pipeline, our commitment to smart growth for the long-term means we would expect the pace of the loan growth in the coming quarter to trend towards an annualized run rate in the range of $1.5 billion to $2 billion assuming no changes in the Markets. Now let us move to total client funds which includes both on balance sheet deposits and off balance sheet client investment funds. In the first quarter, average total client funds grew by 4.7% or $3 billion to $67.5 billion due primarily to continued healthy funding and exit Markets for our clients. In a shift from previous quarters, growth in our off balance sheet funds exceeded growth of on balance sheet deposits, due to our ongoing efforts to use those products when appropriate. Average client investment fund balances grew by 5.5% or $1.8 billion to $33.6 billion. This growth was driven primarily by a early stage and private equity funds and much of it occurred in our off balance sheet suite product, which is approaching $10 billion. Average deposits grew by $1.3 billion or 3.9% to $33.9 billion also driven by our early stage and private equity clients. On a period-end basis, deposits were down at $33.9 billion compared to $34.3 billion in the fourth quarter. On the other hand, period-end client investment funds increased by 8.7% or $2.8 billion to $35.2 billion. Again, we believe this shift is due to our increased focus on ensuring our clients are using the right products and we will monitor deposit levels with an eye towards potentially tampering our outlook for deposit growth if our efforts continue to succeed. Moving onto net interest income and net interest margin. Net interest income increased by $4.1 billion or 1.8% to $239.3 million in the first quarter despite too fewer days in the quarter. The increase was driven primarily by higher average loan and fixed income securities balances as well as lower deposit interest expense. This was offset by lower loan yields and an increase in debt expense related to our senior debt issuance in late January. Interest income from loans increased to $3.7 million to $165.5 million driven by loan growth. The loan yield fell by 27 basis points as a result of loan growth in lower yielding private equity capital call lines and lower prepayment activity in the loan portfolio. We expect loan mix, completion and a low rate environment to continue to press loan yields moving forward. Investment interest income increased $1.3 million to $82.5 million driven by higher average balances of fixed income securities, which increased by $499 million or 2.4% to $21.1 billion. The yield on the total fixed income portfolio remain stable at 1.58% primarily due to the benefit of fewer days in the first quarter. New purchases of $1.3 billion in the quarter consisted of US Treasury and Ginnie Mae Securities with average yields of 1.66%. Portfolio duration remained relatively stable at 2.7 years. Moving on to our net interest margins. Our net interest margin declined slightly by two basis points, to 2.64% driven by higher balances of investment securities and lower yields on loans due to loan mix and lower loan fees. Now turning to credit quality. It remained strong overall during the first quarter .we recorded provided of loan losses of $6.5million compared to $40.4 million in the fourth quarter which was elevated due to significant period-end loan growth. The majority of the provision in the first quarter was due to specific reserve related to the problem software loan we talked about last quarter. This increase was offset somewhat by five basis point our reserve for performance loans to 99 basis points. This reduction was attributable to portfolio mix that favour capital called lines of credit which continue to experience excellent credit quality. Net charge off remain very low at $3.9 million or 11 basis points of total gross loans. Gross charge offs of $5.5 million came mostly from our early stage clients. Non-performing loans increased by $6 million to $45.5 million in the first quarter and also remain low at 31 basis points of total gross loans. Now let us move to non-interest income. GAAP non-interest income increased by $4.4 million to $172 million in the first quarter. Non-GAAP non-interest income which is net non-controlling interest was $108.9 million compared to $90.3 million in the fourth 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 $58.2 million of core fee income, $20.3 million of gains and warrants and $19.6 million of gains from private equity and venture capital related investment securities. Now I'll go into the details of our non-interest income. We had private equity and venture capital related investment gains of $19.6 million net of non-controlling interest compared to $16.6 million in the fourth quarter. The strong first quarter gains were split between valuation increases from positive investment and exist trends for our clients and related gains from distributions inclusive of a $3.3 million from the sale of our remaining investments in FireEye. We had equity warrant games of $20.3 million of which $10.9 million was related to four companies. Valuation increases accounted for $16.5 million of the gains with the remaining $4 million due to warrant exercises. We are pleased with the performance of these investments in the first quarter. However, it is important to note that while we continue to see elevated gains from these lines items, these gains are significantly greater than average historical levels. Turning to core fee income, core fee income remained healthy increasing 5.2% or $2.9 million to $58.2 million. Core fee income includes fees from foreign exchange, credit cards, letters of credit, as well as deposit service charges, lending related fee and client investment fee and as a non-GAAP measure. Again please refer to the non-GAAP disclosure in our press release for more information. The increase in the first quarter was due primarily to higher credit card volumes which drove interchange fee income and higher letter of credit volumes. Foreign exchange fees were lower by approximately $900,000 during the quarter following a record fourth quarter, although we continue to see pressure on spreads. Moving on to capital, our capital levels remained healthy. In the first quarter Basel III requirements became effective and as a result our holding company risk based capital ratios decreased during the quarter, primarily as a result of new risk waiting requirements for unused loan commitment and equity investments. Total risk based capital decreased by 54 basis points to 13.38% and Tier 1 capital decreased by 49 basis points to 12.42%. Our bank level capital ratios increased due to our $350 million debt raise, the proceeds of which we downstream to the bank. Our bank level Tier 1 leverage ratio increased by 79 basis points to 7.43% and our bank level total risk based capital ratio increased by 123 basis points to 13.35% inclusive of the impact of the new Basel III requirements. We continue to closely monitor the trend in our capital ratios. The bank level, Tier 1 leverage ratio in particular and at this time, we expect it to remain within our target range of 7% to 8% for the remainder of 2015. Turning to expenses, non-interest expense rose by $10 million to $196.1 million. This increase was mainly due to an $8.5 million increase in compensation and benefits expenses as a result of seasonal increases in 401K contributions and payroll tax expenses as well as higher FTE. Moving onto our outlook, we are on track to meet our 2015 guidance in all categories with the exception of expenses. We are raising our expense growth outlook for a mid-single digit to the high-single digits driven by our strong performance and the expectation of higher incentive compensation related to that performance. Outside of this performance related increase in incentive compensation expense, expense growth is in line with our expectations. In closing, we are pleased with our strong financial performance in the first quarter. The momentum we are seeing in our Markets in continue execution of our growth strategy. Growth levels and valuations are extremely strong given the current rapid growth rates in the innovation Markets. We are well positioned in our Markets, however the challenge is posed by low rates against the backup of intense competition have underscored our commitment to reasonable and smart growth and building for the long-term. Thank you and now I would like to ask the operator to open the line for Q&A.

[Operator:]

[Operator Instructions] and our first question is from John Pancari from Evercore ISI. Please go ahead.

[John Pancari:]

I've a question regarding loan growth. Your capital call lines, they're only declined a bit it looks like for the quarter, I had expected a bigger decline than what you saw, so can you just give us a little bit color on what you're seeing there on those balances and how should we expect that they trend in coming quarters?

[Greg Becker:]

Yes, John this is Greg and then Marc Cadieux, Chief Credit Officer will add to it. So we did see a little bit less of a decline than we thought as we saw a significant run up from the fourth quarter, so that was good for the average growth in the quarter. And I think, it goes back to what I said earlier, we're still seeing a lot of activity. We had a great growth in the fourth quarter, but it still was a very active quarter both on a venture capital and a private equity basis plus, you know we continue to add clients. The combination of those things is still allowed to be a solid quarter albeit obviously slightly down from Q4.

[Marc Cadieux:]

Yes, I think the only thing I would add to that is that our growth is in recent years has been increasingly tilted towards the private equity fund end of the spectrum and those funds tend to borrow larger amounts and keep them outstanding for longer periods of time then and I think that is contributing to what maybe becoming a new normal in terms of utilization of credit facilities in that segment of the portfolio.

[John Pancari:]

So it's more sticky, it's not a timing factor.

[Marc Cadieux:]

Yes, I think that's yes.

[John Pancari:]

Okay, all right and then separately, if I can just top over to expenses. Just a higher level question again, I think you've been asked this in the past. But I want to see, if you have an update on how SVB is preparing on the regulatory and infrastructure side in preparing to cross $50 billion in assets. I know you're just shy of $40 billion now, but can you just possibly give us some more detail on where you're spending and where you stand in that investment process?

[Mike Descheneaux:]

John, this is Mike here. We've been investing and ramping up for quite some time. I mean just given the nature of our model and how we bank? We've been required in looking at a look other requirements for the $50 billion for quite some time such as the capital stress testing, such risk appetite statement, such as risk committee on the board and so forth. So we feel that we're on the right track, but certainly there is always many things to do. The regulators do continue to raise the bar and expectations and that will continue overtime, but nonetheless again we don't expect as Greg was saying any massive ramp up in expenses, but certainly you know expenses will continue to grow overtime related to these areas, but again we just don't expect anything to just jump up significantly overnight.

[John Pancari:]

Okay and then last, if I could just ask one more, just around the increase in the NPA's the two loans. Can you give us just a little more detail on the industry and the type of credits and also were they, they weren't loan participations, were they?

[Marc Cadieux:]

No, they weren't. This is Marc Cadieux. Both loans, the additional split almost evenly between the two. There is no trend or commonality in terms of industry, those loans were both 100% ours. And that's pretty much it.

[John Pancari:]

Okay and were they hardware credit?

[Marc Cadieux:]

One would be in our software portfolio, the other would be broadly described as clean tech.

[John Pancari:]

Okay, great thank you.

[Mike Descheneaux:]

And maybe just reiterate, I mean on the non-performing loans of which you were referring to, is just they remain extremely small overall John. I mean, when you look at it, we have $45.5 million which only represents 31 basis points of total gross loan. So again very solid levels.

[Marc Cadieux:]

I think that's right and the other comment would be that, more than half of our non-performing loans remained centered in that one loan we talked about last quarter.

[John Pancari:]

Great, okay. Thank you.

[Operator:]

Thank you. Our next question is going to come from Jared Shaw from Wells Fargo Securities. Please go ahead.

[Jared Shaw:]

Just want to finish up from the asset quality there. With the growth in the allowance for the impaired loans, having them [indiscernible]. Should we expect to see some charge offs increasing in the future quarters from that and so, do you think the allowance is adequate here specifically around those less than that?

[Marc Cadieux:]

So most of the increase in specific reserves is related to that one problem loan from the fourth quarter that we referenced. It's too early to tell, how that will turn out, but I'd say for the moment. I'm feeling confident that would be reserve is adequate, both for that loan and then overall.

[Jared Shaw:]

Okay and then shifting to loan growth. What was the growth in the accelerator early stage sector, this quarter? So specifically what was the dollar of the growth in the end of period balance and any dollar growth of billings over $20 million?

[Mike Descheneaux:]

This is Mike, so we'll come out with the detailed disclosures by segment here over the next week or so, as we get closer to the 10-Q. So we'll have that updated detail information for you, but perhaps maybe Marc, just general color of what we're seeing in this, the loan in that area.

[Marc Cadieux:]

Generally, our loans in software niche continue within broader technology to be in the strongest through the rest segments.

[Jared Shaw:]

Okay and then I guess, finally do you anticipate the water crisis in California is going to have any negative impact on the premium line business, is early to stress the portfolio for that or you migrating any of the loans to hire risk revenues, given the drought?

[Marc Cadieux:]

So our current view is that, it's Marc Cadieux again. If the drought were to continue for another couple of years then, invariably it is going to have some impact on harvest and ultimately output, but it's really I think too early to tell and certainly too early for us to be changing credit risk ratings for example, with regard to that segment of the portfolio.

[Jared Shaw:]

Okay, great and just finally. Given how assets sensitive the loan, the deposit mix is in the core balance sheet. Would you consider going further at curve at all, with the investment portfolio or should we expect in going forward that is to say, really short.

[Mike Descheneaux:]

No, I think at this point the duration we have in the portfolio is very sensible. Particularly when you consider the size of our investment securities portfolio in relation to our total assets. So at this point, the notion or the idea of going out longer in this lower rate environment, I just don't see it's really going there.

[Jared Shaw:]

Okay, great. Thank you.

[Operator:]

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

[Ebrahim Poonawalla:]

I just wanted to focus back on sort of your statement on loan growth and expectations of $1.5 billion to $2 billion in annualised loan growth. I guess, we think through in terms of where period-end loans were at the end of first quarter. Is it fair to assume granted quarter-to-quarter volatility that, we should grow loans around in that $1.5 billion to $2 billion annualized range going forward?

[Greg Becker:]

So Ebrahim, this is Greg. I will start and them Mike or Marc may want to add it. But what we said is because we had such a strong fourth quarter and the average of loan growth and the first quarter was so significant, we really just wanted to go back and calibrate for everyone to say, as we look out and we said this, as you know for the last few years. We said that, kind of $1.5 billion to $2 billion per year is where we're comfortable at, but we could see some higher growth than that in certain areas and one area we would highlight and have highlighted is private equity services, which is what the fourth quarter was all about and the average growth in the first quarter was really tied to. So if you kind of normalize that, you get back to that range of kind of $1.5 billion to $2 billion. So we're really just kind of giving what we would say, kind of forward look on what we expect and what we anticipate so that people can build that into their models.

[Ebrahim Poonawalla:]

And let me ask this another way, you mentioned the capital call lines have been stickier than you sort of initially expected. Do you see those balances declining meaningfully from where they were at the end of the quarter? Given sort of the overall activity within that space.

[Marc Cadieux:]

You know, it's, this is Marc Cadieux here. It's always challenging to forecast what the borrowings will be for that segment of the portfolio or generally speaking, you see repayment coming, but then you don't know how much of that will be replaced because it's so dependent on deal activity, which has remained robust. Certainly now for a second quarter, we see a higher utilization and that is being driven I think in the main by the private equity fund borrowers in the capital call product and I'm well, two quarters is perhaps not a long trend given that we're increasingly weighted towards private equity, given that they do they to borrow for longer period to time. It's becoming in my mind at least increasingly likely that what have been more our historical normal utilization in the mid to high 20s could be creeping up into the mid to high 30s, time will tell.

[Ebrahim Poonawalla:]

Fair enough, I've got that and just on a separate topic. I think, Mike talked about and increase in off balance sheet fund I think for the first time in many quarters exceeded on balance sheet deposit growth. Is that, sort of can we read into that and think that that's the first of the next few quarters in terms of the strategies that you've instituted and the success of that in terms of being able to move these clients off balance sheet or too soon to tell?

[Greg Becker:]

So this is Greg, I would love to tell you, we have this perfect dial that moves it on and off balance sheet, but that clearly isn't the case. So what we really try to do is create balance, but really again as Mike said, get our clients and the right products for them. So if we were to sit back and said, what would be, if I did have a dial, what would that look like the dial would be, the growth rates that we talked about, that really about half would be on the balance sheet, about half would be off the balance sheet. Now if you look at last year and the year before that, it was mainly on balance sheet with a little bit going off and the first quarter we saw more go off. So you may see a quarter-to-quarter swings, you know maybe one quarter goes more in balance sheet, one of the quarters that will go more off balance sheet, but if we were to say what's that threading needle look like about half of the growth would be on and about half, it would be off.

[Ebrahim Poonawalla:]

That's helpful, thanks for taking my questions.

[Operator:]

Thank you. And now our next question is going to come from Aaron Deer from Sandler O'Neill. Please go ahead with your question.

[Aaron Deer:]

Circling back to the subject of expenses. I know there is a lot of seasonal noise in the first quarter, but I was wondering if any of the lift that we saw this quarter, might be part of the compensation that you talked about and that some of that might be tied to the outsized warrant and equity gains in the quarter and then related that with respect to your guidance, is there any way that you can breakout kind of how the expense increased with respect to comp [ph] breakout between say performance, expectations versus new producers that you're hiring versus say the kind of regulatory cost that you're taking on?

[Mike Descheneaux:]

So, Aaron the first part of your question is in relation to let's say incentive compensation warrants and investment gains. So the answer is yes. So some of the increase in expenses is related to those outsized gains, that we did have. The second part of your question, I would just perhaps refer to you when we come out with the 10-Q that will have more of that disclosures and breakdown of expenses related to the questions that you're asking there.

[Aaron Deer:]

Okay and then, since you highlighted the private bankers, one of the other areas we saw, some better growth this quarter, I [indiscernible] talked about much not definitely part of the portfolio, but I'm just curios. Can you give us a sense of how that book breaks up between say real estate secured product in mortgages versus restricted stock loans or unsecured lines? What all this kind of in, what you consider be the private bank book at this point?

[Marc Cadieux:]

So very consistent with Mike's last response. We'll have more detail and more breakout there in the 10-Q. Broadly speaking though, real estate and primarily mortgage lending would have been the majority of average loan growth in the first quarter.

[Aaron Deer:]

Okay, thank you.

[Operator:]

Thank you. Our next question is going come from Joe Morford from RBC Capital Markets. please go ahead.

[Joe Morford:]

Thanks, good afternoon everyone and congratulations on another strong quarter. I guess first just following up on the growth in the off balance sheet deposits. Just wanted to give you kind of provide an update in terms of some of the actions, you're doing to help drive that activity along those lines, I noticed that quarter-to-quarter rates paid on your money market deposits and your now deposits on balance sheet were down quite a bit and I wondered if, some this activity is being just encouraged by lower pricing that's driving people off balance sheet?

[Greg Becker:]

Yes, Joe this is Greg. I'll start and so as part of it, but I would say it's really the bigger driver was really just getting attention on it. And really having our sales, team's our relationship teams being able to articulate to our clients. Where there options are and you know encourage them to look at off balance sheet and again, historically and I would say it's still not easy to do it because whether even if we move our, what we're paying for on balance sheet deposits 5 basis points or 7 basis points. It's still isn't that much, there really isn't very much yield to get either on or off and so it really is just educating clients on how to create kind of more a balance in having your maybe long-term or long-term cash off balance sheet and your shorter term cash on balance sheet. So I would say it's probably more education, than anything else.

[Joe Morford:]

Okay, fair enough that's helpful. I guess other question was just on the global network. I noticed, VC investment activity in London specifically is been steadily growing and actually up significantly in the first quarter. I just wondering, if you could give us an update on how the UK strategy is progressing and also an update on where we stood at period end in terms of footings and all?

[Greg Becker:]

So Joe, this is Greg. When I look at, how UK is going, I would say it's at or exceeding expectations and we've talked about over the last few years. We've said that's an area of growth and we expect that area to grow kind of in that what is originally in the early days to kind of 40% to 50% growth and kind of temper that a little bit to kind of 30% to 40% growth and that's really where we have ended up. As I mentioned in my comments, the global loans are really, they hit about $1.2 billion at the end of the first quarter and when you look at those numbers. There are more of it, is in the UK and Israel. So roughly $800 million in that category and about $400 million in what I'll call Asia and so when I look at that, you're going to see that growth. I would say pretty consistent from kind of growing proportionally to those two numbers, but still very good about what's happening in the, we had a great team and it's both again, the point is to make is, it's not just working with UK companies, but it's also working with the mix of US clients that are going setting up operations in the UK and banking them there as well. And that's the added benefit and that's why the client account is growing and that's why the loan growth is increasing in a nice pace there as well.

[Joe Morford:]

Okay and thanks so much, Greg.

[Greg Becker:]

Yes, thanks Joe.

[Operator:]

Thank you. Our next question is going to come from Jennifer Demba from SunTrust Robinson. Please go ahead. Go ahead, Jennifer your line is open. Jennifer, if you're on mute, please un-mute yourself.

[Meghan O'Leary:]

Why don't we move on to the next question.

[Operator:]

Okay, thank you. So our next question is going to come from Steven Alexopoulos from JPMorgan. Please go ahead.

[Steven Alexopoulos:]

Onto start, when you about getting ready across $50 billion, we've seen other banks like New York Community and First Republic slow their growth to give themselves more time. You guys seem like you're pretty far ahead of the curve in terms of investing, but what that in your prepared comments, you did say you're keeping a close eye, you're lobbying you need to tweak the strategy at all to give yourself more time to cross or do you think you're potentially ready at this juncture?

[Greg Becker:]

So Steve this is Greg. Couple comments and one is, I don't think ready yet for it, but I just want to pile into Mike's comment about kind of expense growth that we've seen. I really believe we talk about this a lot, that we're more prepared than most banks to eventually cross a threshold because of what we've had to build over the last 3 years, 4 years, 5 years, 6 years and again as I mentioned you got - holding company structure that adds additional complexity that we've had prepared for. We operate in an international basis, which we're prepared for. There is a lot of other things that we had to do, we have been doing stress testing. All these things that I think are really laying the foundation that we've done. I would say, the team's done an excellent job on, so I feel really, really good about that. There are things that we would have to do, no questions. But as we've done a high level analysis of it, we sit back and I guess there really isn't on a lot things that I would lose sleep over kind of crossing that $50 billion threshold. So that's kind of one side of it being prepared for it. The second part is, then is are we at all slowing growth because we're worried about crossing it and we were not, we look at, the growth that we have whether it's deposit on or off balance sheet. It's really a function of, the growth in our client business. It's having our clients and the right product, the right time and it's looking our capital ratios and so we have done, what we believe the right thing is to ensure that, even if we do have more deposit growth that our capital ratios are going to be in good shape. So we're definitely not slowing growth in fear of crossing a $50 billion threshold.

[Steven Alexopoulos:]

Okay, so the increased success in the quarter of moving deposits off balance sheet, isn't not related to a strategy to give yourself more time?

[Greg Becker:]

No, it goes back to what I said. One way of the questions which is, if I were to be able to have the perfect dial for me would be kind of 50% on balance, a 50% off balance sheet. But of course on a quarterly basis, we can't dial it in that close. Which means that again some quarters, you're going to more on, some quarters you're going to have more off and the first quarter was just more went off?

[Steven Alexopoulos:]

Okay and then shifting gears. Looking at the decline in the period-end software loan. I'm assuming that was sponsor led buyout, slowed a bit is my guess, can you talk is the competitive environment heating up or did the market just slow a bit? Thanks.

[Mike Descheneaux:]

Hey, Steve. So I'll let Marc talk about kind of what quarter-to-quarter fluctuation, but let me comment about the competitive landscape on sponsor led buyout. So the sponsor-led buyout is absolutely a very competitive market and what we have seen is, more firms are looking to chase yield and clearly that's one area where yields have been up on a higher level basis, when they have been that way for quite a while. Although clearly the margins have gone down from their peak. What we're seeing is, you're seeing some bank competition, but you're really seeing more non-bank competition again from one of the reasons I talked about it, had a good track record from a credit quality perspective number one and number two. You know the yields there are better. So you're seeing more senior lenders and you're seeing more mezzanine lenders and they're willing to put pretty aggressive terms on the table. So a lot of refinances and a lot of that is being driven by competition and the availably of what I'll call more flexible, cheaper debt. That being said, we're still seeing a lot of opportunities and what I'll say, as I said on the call. We're kind of picking the deals we want to play and then which ones we want to kind of pass on.

[Marc Cadieux:]

Yes and that might be the thing I would add, since growth in sponsor-led buyout slowed roughly four quarters ago, what I've been encouraged by in notwithstanding leverage levels that have gone up and increased competition. Leverage levels that have gone up in the market I should say in terms of loan demand and increase competition was encouraging to me that we're still seeing good opportunities from good sponsors, who value the speed, uncertainty that we bring in helping them close transactions and that, going back to the smart growth that we mentioned. How our ability to continue to win business but win it without reckless level of leverage or weaken loan structures is again for me that's pretty encouraging.

[Steven Alexopoulos:]

Okay, maybe just one final one. You had a nice quarter in the Life Sciences area, are these new client wins or you're seeing clients get more active, just any color there? Thanks.

[Greg Becker:]

Yes, this is Greg. Steve. Aside it's across the board. We have an exceptional team in Life Sciences and I think they have their hand on the pulse of the market probably better than anybody else, I would argue and so that's helpful in deciding what I had said earlier, which is I guess is very important in all markets, but it's especially on Life Sciences that to make sure you're working with the best companies the ones that have, if it's a drug company the ones that multiple drugs out there and not just for letting on one drug going to market and if that drug fails, but the whole "in question". So they're incredibly thoughtful about it and I think the combination of having this team together for a long period of times allows them to pick deals and they've been very successful in the first quarter they have been very successful. Last year on our market share and that market is actually been increasing.

[Steven Alexopoulos:]

Okay, thanks for taking my questions.

[Greg Becker:]

Yes, take care Steve.

[Operator:]

Thank you. [Operator Instructions] our next question is going come from Julianna Balicka. Please go ahead.

[Julianna Balicka:]

In terms of your outlook, in terms of the deposit growth that you're looking for in your outlook, what kind of rate environment are you assuming for the rest of the year in that outlook?

[Mike Descheneaux:]

So our rate environment is pretty much what the forward curve is showing. So essentially fed funds rate increased towards the very end of this year just one small modest one. So I wouldn't say that, the rates would really have a whole lot of impact on us for 2015.

[Julianna Balicka:]

Okay, so if one were to hypothetically have an assumption that rates would raise sooner or further, then one should lower deposit growth assumptions with idea that, with higher rates, more deposits would slow off balance sheet.

[Mike Descheneaux:]

You know in theory may perhaps for a lot of other banks that is probably true. But particularly for our clientele, you typically at least what we've seen historically is where is the first couple rates moves, tends not to have a dramatic impact perhaps when rates are more up 100 basis points, 150 basis points. Then certainly you're going to have perhaps more attention to the rate increase and perhaps more dialog on moving deposits from on balance sheet, off balance sheet, but if it's just a typical 25 basis point move initially one time it tends not to have a dramatic effect, initially.

[Greg Becker:]

Julianna is that, again we have a lot of balances, off balance sheet and that's more of the long-term cash, that's the one that is really paying, should be paying more attention to from a yield perspective. The more the operating cash which is on the balance sheet. Our clients tend to burn through that relatively quickly and replenish it with another rounds of equity financing. So again to Mike's point they spent less time thinking about what yield is around that, just because it's shorter term cash.

[Julianna Balicka:]

Okay, I see that makes sense and then another question, if I can back to the $1.5 billion to $2 billion kind of long-term kind of healthy loan growth rate. As you grow bigger, should we think about that range expanding with your balance sheet growth because you're incrementally adding lenders or is that range kind of going to be consistent whether you're $40 billion or $50 billion because that's kind of healthy and digestible in terms of underwriting and picking up the best client from your target market?

[Greg Becker:]

So Julianna this is Greg. And if you look at the next, I would say few years. I think you're going to be in that range again, there may be something that move it up or down, but I think that range as I said, we feel pretty comfortable eventually, as you look out as certainly we may expand in other areas, global maybe taking off accelerating even if it stays at this pace. It will grow at a faster, at an absolute dollar. So those are the things that could have an impact. But I think again the next few years in that category $1.5 billion to $2 billion, we feel pretty comfortable

[Julianna Balicka:]

Okay that makes sense and then in terms of your reserve coverage with the growth in PE and VC loans in your portfolio when we look out, right now in the benign credit environment, but when we look forward a more normal credit environment, what is the kind of reserve coverage of VC, PE loans in your book that would be appropriate as we think about, where your reserve coverage may go where, through the past cycles.

[Marc Cadieux:]

So it's Marc Cadieux, certainly private equity loans or capital call lines are credit in our portfolio. As well, I guess I'll back up here. For the 20 years plus that we've been doing this, we never had any loan losses in that segment of our portfolio and so long as that remains true. The concentration that we have with that segment of our portfolio should in affect help keep loan loss reserves to a more a lower level, than they otherwise would be say, if it was a smaller part of the portfolio.

[Greg Becker:]

And only to add on to that Julianna is again, even though Marc's obviously accurate about the not having losses. We still take reserves against that obviously because we can't, we don't - -can't believe that will happen forever. So when you look at the performing loan coverage the roughly 100 basis points. So the more you add, right there would be pressure just from a accounting perspective to move that down. What happens to the overall mix because we could expect critical losses will increase if we start to see a bump in the road. But you're right, if all things being equal, if we continue to PES the same rate, you would see that number more than likely being driven down under performing basis.

[Julianna Balicka:]

Okay that makes sense and then in terms of FTE, since you added this quarter. Could you provide us a little bit more color, are these front line lenders or are these back office personnel infrastructure compliance?

[Greg Becker:]

Yes it is definitely a mix across the board. You can look at people in the UK its operations, it clearly on the compliance side and the risk management side, front line sales. There isn't one area that you look out and say, oh! my gosh the quarter was way weighted in one category and quite honestly it’s been that way for quite a while. If you go back the last two years or three years to Mike's earlier point. We probably had an increase in the proportion going to risk management in compliance, but again it hasn't been a huge number. It's just increase as a percentage over the last few years.

[Julianna Balicka:]

Okay that makes sense and then finally could you remind us, what the duration of the PE versus the VC capital callings are?

[Greg Becker:]

Yes, like all things there is a spectrum but generally the venture capital side of the capital call line portfolio tends to repay quicker and repayment terms tend to be on average more in 90 days to 120 days period. Repayment terms on private equity funds by comparison can have repayment terms between 180 days to 270 days sometimes 364 days. Again not all firm keep their advances out that long, some pay back more quickly, some pay back less quickly. But generally speaking it's about 1.5 times to 2 times longer outstanding for the private equity and this for venture capital.

[Julianna Balicka:]

Got it. Thank you very much.

[Operator:]

Great, thank you and at this time, we have no additional questions. I will now turn the call back over to our CEO, Greg Becker for closing remarks.

[Greg Becker:]

Great. I just want to thank everyone for joining us today. We're really pleased with the first quarter and as Mike and I both articulated. We feel good about the momentum we have and the outlook for the balance of 2015. We described some challenges that we were dealing with and it's just part of the market that we're in it, it's competitive because it's a great market and we got low interest rates and we're watching the compliance cost related the $50 billion as we approach it. But all those things we feel good, we have under control. At the end of the day, we just remain focused on execution, long-term plans and strengthening our position as the financial partner to the market that we think is the most interesting and most dynamic market and that's the innovation ecosystem. I want to thank our clients for trusting us. It's just remarkable every single day, we look at our clients and I do believe we have the best client, period end of story and also thank our employees for making those client relationships possible. So thank you everyone for joining us and look forward to talking to you, next quarter.

[Operator:]

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