SVB Financial Group (SIVB) 2008 Q4 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group fourth quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you, Ms. O'Leary, you may begin your conference.

Thank you, today Ken Wilcox, our President and CEO, and Mike Descheneaux, our Chief Financial Officer, will discuss SVB's fourth quarter and year end 2008 performance and financial results. Following this presentation, members of our Management Team will be available to take your questions.

I'd like to start the meeting by reading the Safe Harbor disclosure. This presentation contains forward-looking statements within the meaning of the federal securities laws, including, without limitation, financial guidance for the full year 2009. Forward-looking statements are statements that are not historical facts. Such statements are just predictions, and actual events or results may differ materially. The information about factors that could cause actual results to differ materially from those contained in our forward-looking statements is provided in our press release and our last filed forms 10-K and 10-Q. The forward-looking statements are made as of the date of broadcast and the Company undertakes no obligation to update such forward-looking statements. This presentation may also contain references to non-GAAP financial measures. A presentation of and reconciliation to the most directly comparable GAAP financial measures can be found in our press release.

Now I'd like to turn the call over to Ken Wilcox.

Good afternoon, and thank you for joining us. As you can imagine, all of us here at SVB have mixed feelings about this quarter. For obvious and understandable reasons. All told, it was a very mixed quarter. In many regards, I am very disappointed with our results. In many other regards, I believe that we have a lot to be proud of and a lot to be enthusiastic about.

I would like to start with my disappointment. Our earnings for the quarter leave a lot to be desired. Our first three quarters this past year were all record quarters and we were honing in on a record year. And then in the final quarter, we effectively lost our chance for what would have been a record year. Instead of the $0.60 to $0.70 we were all expecting, we barely broke even. As should be clear from the press release we issued a week ago, the short fall is almost 100% attributable to the provision. Instead of our usual $5 to $10 million, we took a $67 million provision in Q4. As a result, we almost doubled our reserve.

So I imagine you are all wondering why. The rise in the provision is partially due to approximately $24 million in net charge-offs in Q4. And it's partially due to $3 million to accommodate growth. But, primarily, approximately $40 million is to build our reserve. So what specifically happened? After what we have all been through in the past three months, I can imagine that the answer is fairly obvious. The deterioration in the overall economy, both domestically and globally, has finally caught up with us here at SVB. I know that I don't have to describe to you what has happened in the overall economy.

Look at it from a broader perspective, and by that I mean from an overall perspective, not necessarily ours, we all entered into a new era in these past couple of months. Beginning in October, markets froze as fear began to dominate emotions and to control behavior. By virtually every single measure of economic health and progress, both the US economy and most of the global economy continued to deteriorate, and that deterioration after October was deeper, more dramatic, and more pervasive, than almost anybody had expected. And as a result, this time even the world of venture-backed technology and life-science companies have been affected as well.

Just during the past couple of months a lot has happened, almost all of it negative. On average, we believe, the sales at our portfolio companies have dropped off somewhere between 5% and 15%, and in a few cases potentially even more. Venture funding has dropped off significantly in these past couple of months, Both in terms of the amount of money that traditional LPs have been willing to commit to new funds, and in terms of the amount of money that VCs have been willing to invest in new companies. After rising every year since 2003, venture capital investment fell from $31 billion in 2007, to about $28 billion in 2008. During the same period, fund-raising dropped over 21%, from about $35 billion in 2007, to $28 billion in 2008.

Exits are few and paltry. There are no IPOs and relatively few trade sales. And even those few trade sales are at valuations that are significantly lower than has been true for a number of years. LPs are struggling, largely due to the so-called denominator effect. Because the values of the other parts of their portfolios have dropped dramatically, they are, in effect, overcommitted in so-called alternative assets, which include venture capital. I would like to emphasize, however, that this has not, at least not yet, resulted in them not responding to capital calls. To the best of our knowledge, and our knowledge is extensive, LPs have continued to respond to capital calls. But on the other hand, because of the denominator effect, they are reluctant to commit money to new funds, and may be for some time. Fortunately, there is enough dry powder in the system, and by that I'm referring to money that limited partners have already committed and have not yet delivered, enough money in the system to last for some considerable amount of time.

The result for the world we live in has been as follows: Across the board, venture capitalists are forcing their companies to tighten their belts. And across the board the CEOs and CFOs of our portfolio companies are worried about two things: Will their own customers continue to buy product? And if they do, will they themselves be able to find funding to support those sales? And the impact on us is, in part, I am sure, obvious. We are seeing some of our portfolio companies struggling to a greater extent than has been true for years. As we experienced in the fourth quarter, things can change very dramatically and very fast. Our warehouse facility with HRJ Capital is a case in point. HRJ is a Company that we had worked with for 10 full years with a proven track record, a talented team, and access to some of the best venture capital funds in the world. We had never seen them struggle to raise money from limited partners. But that changed in 2008, and HRJ and by extension, SVB, found ourselves in the unfortunate situation that we have since discussed.

We have learned from this, and we are refining our processes to help us avoid such instances in the future. Not only are we monitoring our larger credits more closely than we have in the past, but we are also modelling out for a broader set of future economic scenarios to better understand what extreme changes in the economy, such as we saw in these past couple of months, would mean to each individual credit. While on the other hand, we are seeing some of our portfolio companies struggling, on the other hand, and I'm sure that this is not so obvious, we believe that our portfolio companies are still doing surprisingly well, particularly in light of what is happening in the rest of the economy. In many cases the products that they are developing or selling are actually even more necessary to their clients in a recession, than they would be during a boom. I would like to underscore, even in a recession there is likely no better part of the economy to invest in than the world of venture-backed technology and life sciences companies. I would also like to underscore that in 26 years of lending exclusively to this industry, I have never seen it so affected by developments in the larger economy as we are seeing today.

Let me now turn to the good news. The part of the quarter that I believe we deserve to be proud of, and that continues to feed our enthusiasm. Our capital base is strong, and I would argue stronger than it has been for some time. Our liquidity has improved significantly. Our success in attracting deposits out of our broker dealer and onto our balance sheet, has driven our loan to deposit ratio from 97% down to 74%. And I would like to underscore while loans have continued to grow, and our fundamentals continue to be strong, deposits have grown 62% in the last year. Loans have grown 33% in the past year, and will continue to grow, albeit at a smaller or slower pace than 2009.

Commercial banking fee income has grown 15% in the past year. And would have grown more had it not been for the drop in rates. And our NIM, while reflecting the continued drop in the Fed Funds Rate, has held up, I believe, surprisingly well. In a year when the Fed Funds Rate dropped 400 basis points, our NIM lost only 151 basis points. And we have continued to control our expenses, even while investing in our future. Year-over-year non-interest expense dropped 9%, inclusive of the fourth quarter incentive compensation and employee stock ownership plan reduction of $24 million.

Finally, a few words on the outlook. While I can't tell you how long or how deep this recession will be, we will continue to focus on the long-term benefits for you, the shareholder, and for our other constituencies as well. And, of course, we continue to focus on the fundamentals, growth in loans, growth in deposits, credit quality, growth in fee income, NIM, expense control, and the strength of our balance sheet. And we believe as importantly, we continue to focus on the future and preparing ourselves to take maximum advantage of it on your behalf.

We believe that the economy will eventually turn around and that our sector will turn around with it. America has not given up on innovation, nor will it in the future. Every year, we see growth in the number of fundable ideas. Capital is still, at least in theory, available in abundance. And the world continues to clamor for the kinds of products and services that the companies we work with produce. And that is where we see opportunity in this chaos. If we continue to support our clients and invest in our future, I'm confident that we will emerge from this recession far stronger than our competition. Until then, we are ready for whatever may come our way.

In these economic times, being ready begins with capital and liquidity. Throughout 2008, we worked hard to ensure that we had adequate levels, both in terms of safety and soundness, and to ensure we could fund our growth. With that, we've made refinements to products both in terms of loans and deposits, some that produce greater flexibility for our clients. We are better prepared today to help them meet their financial needs, no matter their size or location. And most importantly, as a result of these investments, when this recession does come to an end, we will be better positioned, we think, than our competition.

No matter how disappointed any of us are, employees or investors, let's not lose sight of an essential fact. This Company earned $80 million this year, a year when most banks struggled to make a profit. That's something we can feel good about. Finally, we are ready for whatever may come, because we have over 1,200 dedicated employees. To all of the SVBers listening on this call who have performed so well in this difficult year, I want to recognize you and thank you for your valiant efforts in the face of an increasingly challenging economy.

And now I'd like to turn thing over to our CFO, Mike Descheneaux.

Thank you, Ken, and thank you everyone for joining us today.

I want to start by addressing the obvious challenges we had during the quarter and some of their effects, and then I will talk about some of the high points. In the fourth quarter of 2008, we reported diluted earnings per share of $0.09, and net income available to common shareholders of $2.9 million, compared to $0.80 and $27 million in the third quarter. For the full year 2008, EPS was $2.33, net income available to common shareholders was $79.1 million. Return on equity for 2008 was 11.2%, which is a respectable number for any year, but particularly for 2008. One of the driving factors behind our fourth quarter numbers was an increase in our loan loss provisions. Fourth quarter results were also affected by lower client investment fees, a result of the historically low rate environment. We had another solid quarter of loan growth thanks to our hardware and software industry clients, although there are existing head winds to future growth. We delivered outstanding deposit growth, and we're pleased to announce our total assets reached a milestone of $10 billion in the fourth quarter. Finally, we were fortified our already strong capital position through our participation in the treasuries capital purchase program.

Now, let me move into some specifics. Credit quality: Clearly, credit quality had the largest impact on Q4 earnings. I'd like to start with that. Our provision increased from $13 .7 million to $67.3 million from Q3 to Q4, which reflects the impact of increasing our allowance for loan losses, from 1.13% to 1.87% of total gross loans. This increase was primarily due to the impact of the deteriorating economic environment and its current estimated impact on loans, as well as reserves related to HRJ. Our net charge-offs increased from 47 basis points in the third quarter to 171 basis points in the fourth quarter. Non-performing loans also rose to 1.57% of total gross loans or $87 million, versus 18 basis points in the third quarter or $9 million due again primarily to HRJ and a private client services loan.

I want to make a few points before I move on. First, we do not believe these elevated charge-offs are indicative of overall weakness in our underwriting. As you know, larger loans of 10 to $20 million and above have been a key part of our growth in recent years, and we have a history of strong underwriting and monitoring. Moreover, we have just concluded an additional review of all loans in our portfolio larger than $20 million, and concluded that our underwriting standards are effective and appropriate for this type of lending. We are disappointed with increases in provision, as we have said in the past, if the economy continues its downturn, we would expect to see more of an impact on our loan portfolio in incoming quarters.

Given current economic conditions, we are increasing our vigilance and will continue to monitor our portfolio closely, and to address matters in a timely manner. This assessment of the economic environment in relation to our portfolio, along with the rise in charge-offs, caused us to significantly increase our level of allowance for loan losses as a percentage of total gross loans in the fourth quarter from 1.13% to 1.87%, inclusive of specific reserves for impaired loans. Excluding specific reserves for impaired loans, our allowance as a percentage of gross loans was 1.41% for Q4 '08 versus 1 03% for Q3 '08.

Moving on to loans, we finished the year the way we started it, with strong growth in the fourth quarter. Average loans grew 7.5% to $5.2 billion in the fourth quarter, primarily as a result of loans to our hardware and software clients. This growth was partially offset by decreases in loans to venture capital funds for capital calls. It's worth noting that we continue to take in a considerable number of new warrants for early stage lending, especially given the tightness of the credit markets right now. In 2008, we took 556 new warrants compared to 374 in 2007.

Now, let me move on to deposits, where our focus on a strong balance sheet continues to pay off. We grew average deposits in the fourth quarter by 18% or $853 million to $5.7 billion. End of period deposits grew by an astounding $2 billion or 38% to $7.5 billion. This increase was driven primarily by our decision to fully utilize our own balance sheet suite product, which we introduced in 2007, and to transition away from third-party off balance sheet products. We also expect to see some additional increases on the balance sheet in January as a result of that strategy. Our results demonstrate the success of our approach to growing deposits and funding loan growth by adjusting our strategy for on and off balance sheet funds that meet our clients' risk profiles and needs. And in 2008, average deposits grew 24% to $4.9 billion and period end deposits at $7.5 billion grew 62%. This is a dramatic turnaround from two years ago when average deposits were down almost 6% year-over-year.

Now I'd like to move on to net interest income and the margins. Our net interest margin held up relatively well at 5.42% in the fourth quarter compared to 5.73% in the third quarter. This decrease was driven primarily by certain reductions in our prime lending rate in response to fed rate cuts in the fourth quarter. It is important to note that as part of our broader focus on pricing, we decreased our prime rate by only 100 basis points in the fourth quarter, while the fed decreased rates by 175 basis points. The tight credit markets and increased risks are allowing us to proactively increase our pricing. Lower interest rates on our short-term investment portfolio also contribute to the decline in NIM, and were offset by lowered interest expense from reduced short term borrowings. Net interest income increased slightly, by 1.9%, to $96.9 million in the fourth quarter, owing to a decrease in interest expense from short term borrowings and strong average loan growth. Net interest income for 2008 was down only 2% to $372 million, primarily as a result of fed rate cuts during 2008, even though fed rates were down 123% or 400 basis points.

Moving on to capital management: Due to our outstanding asset growth in the fourth quarter, our ratio of tangible common equity to tangible assets decreased to 7.5% from 9.2%, albeit it still remains at a strong level. In December, we received $235 million in capital through the Treasury's capital purchase programs. As we disclosed earlier, we intend to use these funds for continued growth, particularly lending to the markets we serve. Moreover, the additional capital will allow us to absorb potential credit and investment losses should they occur without interrupting our lending activities. We have been asked why we applied for these funds, given our strong capital levels, and the answer is that we felt the uncertainty of the current economic environment and our growth plans called for maximum flexibility.

Moving on to non-interest income: Non-interest income was sharply lower in the fourth quarter at $28.9 million compared to $41.7 million in the third quarter, primarily due to net losses on investment securities from venture related investments of $9.8 million. The bulk of these losses were related to lower valuations of investments within our managed funds. As you may recall, we only own a small percentage of these funds, so that net of minority interest, only about $1.1 million of the loss actually fell to our bottom line. As I mentioned earlier, client investment fee income in the fourth quarter was lower at $9.5 million, compared to $13.6 million in the third quarter, primarily due to lower margins earned on certain off-balance sheet products owing to historically low rates in the short-term fixed income markets.

Average client investment balances, also known as off-balance sheet funds, decreased by $1 billion to $21 billion, primarily due to our decision to fully utilize the on-balance sheet suite product we introduced for clients in 2007. And transition away from the third-party off balance sheet suite product we had previously offered clients. End of period balances were $18.6 billion compared to $21.5 billion in September of 2008. Although we had great success in growing our off balance sheet products in recent years, the extremely weak IPO market in 2008 has hampered those efforts. However, we have succeeded in our efforts to provide clients with a range of on balance sheet products that meet their needs and that has resulted in our attracting on to our balance sheet some funds that would have previously gone off balance sheet.

I would like to turn to non-interest expense now. Through the third quarter of 2008, we exceeded our targets for controlling expense growth. But while in the fourth quarter, non-interest expense was substantially lower at $62.9 million compared to$ 80.4 million in the third quarter, that drop was primarily due to lower incentive compensation expense as a result of below budget results for the quarter, and for the year.

Now I'd like to review our outlook for 2009. We are taking a slightly different approach this time in light of current economic conditions, and are aiming to provide more insight on additional items. Having said that, I am sure you can all appreciate that it is difficult to forecast what will happen in the coming year, given the uncertain and rapidly changing economic environment. We expect 2009 to be challenging in terms of suppressed valuations for our client companies, a lack of exit opportunities, continued pressure on our net interest margin and the high probability that we will see rising credit costs. Our outlook reflects our expectations for the full-year 2009 versus the full-year 2008. Although we will revisit and update our outlook each quarter, it is an annual outlook. Please refer to our press release for additional information.

For 2009, we expect average loan growth at a percentage rate in the mid-teens, with a significant amount of this increase relating to the full-year effect of our 2008 loan growth on average balances. We expect average deposit growth at a percentage rate in the high 30's, again primarily related to the full-year effect of 2008, deposit growth. Most of this growth will be in interest-bearing deposits. We expect net interest margin to range from 4.7 to 5%, assuming no changes in our own prime rate and market expectations for LIBOR and short-term treasury yield. We expect credit quality to be under continued pressure in 2009, as a result of the continued economic downturn, with our allowance for loan losses at approximately 1.4% of total gross loans, exclusive of specific reserves for impaired loans. We expect net charge-offs to be approximately 1.3% of gross loans. We expect growth at a percentage rate in the mid-single digits in fees for deposit services, letters of credit and foreign exchange, in aggregate, as a result of continued negative economic pressures. We expect client investment fees to decrease by roughly half compared to 2008 levels, as a result of lower expected client investment fund balances, and lower margins on certain products tied to the short-term fixed-income markets.

Although deviating from our norm a little bit, we want to talk about our expectations for some of the more variable items that contribute to non-interest income. Specifically warrants and SVB capital venture-related investments. As I pointed out earlier, these items are challenging to predict in the best of times, but I would like to talk to you about our expectations at this point. We expect net gains on warrants to decline modestly compared to 2008, owing to a lack of IPOs and continued pressure on M&A and venture capital investments. Owing to these same market forces, we expect net losses on investments in our venture capital related activities to SVB capital, net of minority interests to increase modestly. Finally, we expect non-GAAP, non-interest expense growth at a percentage rate in the low 20s.

Let me reiterate that while this expense growth number may seem high, our success at controlling expenses in 2008 and the exceptionally low compensation expense in the fourth quarter, suppressed non-interest expense during 2008 to levels that are not sustainable. Particularly if we are to continue investing and building our business. If the 2008 non-GAAP, non-interest expense was normalized for the unusually low incentive compensation expense in Q4, 2008, then our non-GAAP non-interest expense growth for 2009 compared to the full year 2008, would be approximately, or would be expected to be approximately 10%.

Before we move to Q&A, I'd like to summarize briefly. Despite a truly terrible year for banks and the global economy, in 2008, we delivered a solid return on equity, as well as outstanding loan and deposit growth, which are both the twin engines of our business. We have proven that we are able to execute on our strategy. While in the fourth quarter demonstrated we are not immune to the problems plaguing the broader economy, we remain confident in our underwriting approach to our loan portfolio and will maintain a high level of vigilance in underwriting and monitoring our loans. We are making the decisions we think are necessary to continue to operate successfully and effectively in this environment, and we are focussed on ensuring continued prudent credit monitoring, as well as maintaining a strong balance sheet. While we work to navigate the current market environment successfully, we are also laying the groundwork for growth and efficiency beyond this market cycle. As always, our employees are the key to our success, not only weathering the current storm, but in preparing for better days ahead.

This concludes the review of our 2008 fourth quarter and annual results. With that, I would like to ask the operator to open the call for questions. Thank you.

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from Aaron Deer with Sandler O'Neill, your line is open.

Good afternoon, hello, everyone.

Hello, Aaron.

I would like to ask about the cash on the balance sheet. You have a tremendous amount of cash there, and I guess it's the de employment of that cash that is going to help so drive of of this margin compression that you see. Can you talk a little bit about how you intend to invest that and how quickly and maybe you can specifically, I imagine some of it is just going to be deployed into securities near-term here and what kind of securities you might be putting that in and what kind of yield you're seeking?

This is Mike Descheneaux here. In general, we will be continuing following our investment policy which is traditionally into fixed income securities. Now, I think you raised an important point about a distinction between here in the short term, as well as more in the long term. Our biggest priority here right now is maintaining security of those funds, as well as liquidity. I mean, those are two extremely important variables. So right now, certainly we are very heavily focused more on the short-term overnight investments, and as we begin to understand more clearly the behavior of deposits, in other words, will they end up sticking on our balance sheet, how sticky will they be, that will begin to dictate more or less where we start to invest the monies in longer term securities. Again following the premise for safety and liquidity. As far as yields right now, again, I'm not prepared to comment on this, at this moment.

Okay. It sounds as though you're comfortable just letting this sit in cash or cash-like products here for the time being.

Until we see a little bit more clarity on that deposit behavior, I think that the extremely most sensible thing in this environment. The last thing we want to do is all of sudden, get locked into a longer-term decision that we don't have the clear vision on what's going to happen with that deposit behavior. Again, one of the things to also remember why we were also after this driving these assets on balance sheet, again, is more focusing on our loan to deposit ratio to make sure we had the appropriate funds to be able to lend for the future.

All right. Thank you. I'll step back.

Your next question comes from John Pancari with JPMorgan, your line is open.

Good afternoon.

Hi, John.

Can you give us some color on what drove the rest of the increase in non-performers in the quarter? I know we had obviously the portion of HRJ move move on there. So if you can give us some detail of what drove the rest of that increase.

John, this is Dave Jones, and what we experienced was the HRJ, as you mentioned, and Mike referenced in his presentation, one of our private clients services relationships moving into non-performing, and then after that, there were a number of much smaller relationships, consistent with what we've seen in past quarters.

Okay. So no discernible trend on what's moving into non-performer at this point, whether it's any -- any deterioration in your early-staged DC backed tech lending, or anything?

This is Dave. We are seeing a deterioration in the early stage business to be expected. And that is a key part of our business and then -- and in an environment like we have today, we will see some uptick in non-performings in that category, and that uptick and our perspective of that segment of the portfolio for the foreseeable future, is a part of the decision behind the reserve increase.

Okay. Now, if you could just talk to me about how there may have been a change in what your expectations from last quarter for that specific portfolio, I know you had described it in the past that it was -- that VC-backed tech companies had comprised 30% of your loans during the dot-com bust ,and now they're 10%. Losses on that portfolio peaked at 6% during the downturn, if you extrapolate that out to the 10% contribution now, you could on a normalized loss ratio of around 60 basis points or so. So can you tell me how that compares to what you're starting to see now?

And, again, this is Dave. We are not seeing loan losses at that level as yet. And what we are sensitive to, is that we may experience over the balance of 2009, loan losses from the early-stage portfolio rising to be somewhat comparable with what we saw in the 2000, 2001, 2002 time frame.

Okay. All right. All right . I'll step back.

Thanks, John.

Your next question comes from Erika Penala with Banc of America, your line is open.

Good afternoon.

Hello, Erika..

Just a follow-up question I guess on the back of what John was trying to ask. But the 130 basis points of loss guidance that was given for '09, could you give us a sense in terms of what your expectations are for losses, and dividing it into your early-stage portfolio, your mid-stage type portfolio and then your VC capital call line portfolio?

This is Dave, and what we have done is we have gone through exhaustively in our portfolio, and we have looked at our criticized book of business. We have looked at our early-stage lending, and we are anticipating trends within the venture capital investment activity that will make some of our early-stage companies vulnerable. We have also evaluated the merger and acquisition activity that operates as a secondary source of repayment for the early-stage companies, and we have seen a greatly diminished appetite for companies to offer and then to close on the M&A activity. We have concluded, therefore, that -- that that part of the portfolio is going to experience a difficult 2009, and a significant part of the loan loss forecast that we have is in that portfolio. And we cannot ignore the 90% of the business that is not in that portfolio and we recognize that given the economic climate, that we are going to some loss possibility, loss experience, and that other 90% of the portfolio, and it balances out the loan loss forecast.

And how are you thinking about, is it portfolio that comprises the VC capital call lines? Because traditionally, you had no losses and it's very short in duration. So in terms of when you look to formulate this guidance, what were you thinking there?

So there is an important distinction to be drawn between what we have historically done with our capital call lines of credit, and the HRJ relationship. And I am -- I will remain very confident that the $1 billion of lending activity that we would do with capital call lines of credit, is still going to be a very high quality portfolio, I'm not expecting that we're going to have material changes to suggest we may not have any change, in our loss experience for capital call facilities. Again, the distinction there is HRJ was not a conforming capital call facility.

Right. I guess with HRJ, can you just remind us what the remaining exposure is, and if you could, if there is any update in terms of the potential agreement that you're trying to forge with managing one of their funds.

Again this is Dave. What we have shared with folks in a release in the mid-December time frame was that we had $68.6 million of exposure. What we are updating is that we have experienced $10 million of collections against that facility, and we also indicated that we have had a loss experience in the fourth quarter for part of the relationship. So I don't want to be too detailed with an individual client experience, but I think you can see that right there there's a pretty significant decline.

All right. Thank you.

Thanks, Erika .

Your next question comes from Joe Morford with RBC Capital Markets, your line is open.

Thanks, good afternoon, everyone.

Hi, Joe.

I guess also on the charge-off side, Dave, maybe you could talk a little bit more about, it sounded like maybe a large software credit that was charged off and any other notable items in the fourth quarter there.

Yes, thanks, Joe. And relative to the almost $24 million of net charge-off referenced, I just mentioned that there was a part of it that related to the HRJ relationship, and Mike indicated that there was a part slightly larger than HRJ in the one software company. And that experience related to a piece of term debt that was underwritten to cash flow with that one borrower. And after those two loss experiences, then we had loan losses that would reflect much of what, Joe, you would have seen in the third quarter, second quarter, first quarter, before that.

Okay. Fair enough. And then I guess the other question I had was for Mike. You talked about the expense side of things, and even normalizing for the ICP, and stuff, it was maybe the outlook was like for a 10% growth. But, it still strikes me a little high given the current environment and revenues under pressure, I was wanting a little bit more color on that if I could and also what kind of major growth in investments you're planning on making that would drive that to?

Yes, Joe, this is Ken. Let me start out and then we'll turn it over to Mike, because you explicitly requested, Mike. For maybe a little bit more numerical analysis. But there are a couple of things that we need to consider here. One is that a volumes are -- have grown considerably in this last year. I think you noticed the 60%-plus increase in deposits that are on the balance sheet. And you notice the 30%-plus increase in loans, and you also probably noticed in Mike's guidance for 2009, that we're anticipating that there will be further increases in activity. There has been -- has been an increase, there have been increases in absent numbers of clients, there have been increases in market share, there are increases in fee-based income.

It's a little bit difficult, and you and I discussed this 10 years ago, the last time the Fed drove rates down to historical lows. It is a little bit difficult to reduce expenses significantly, given that most expenses are head count, just because rates have dropped, while volumes are increasing, because the number of people that you need to do this job is a function of how many clients you have and how many things they're are buying, it's not really a function of where the fed funds rate has gone. The other thing I would say is that in an era of extreme economic deterioration, such as we're all experiencing right now, and with anticipated increased credit costs, that reducing expenses, which is tantamount to reducing headcount, is probably not something that would benefit the shareholders over the long haul, and of the third thing that I would say is that in many, many regards. I think that we are gaining steam, and have for the last year, and continue to in 2009, and I don't think that it would be good for the shareholders, at least the long-term shareholders, to do anything that would reduce the potential for capitalizing on our increasing market share in the future.

Few comments, Joe, since you did call my name. Let me just assure you. we are extremely focussed on expense. and we have not lost sight of the importance offer that and the power that can bring to the bottom line. To recall a little of the things in 2008, we did invest considerably in our people in 2008, particularly in new heads, new FTE and new employees that we added, in addition to loan portfolio management. We saw some time ago we needed to put more people on monitoring our loans, which we did. We're building out our global practice. You may recall we got our license in India to lend in our non-financial bank corporations. We also opened up an office in Israel. Again, all things that will contribute in the long-term to our growth. Finally as well, we have been investing in infrastructure systems, which in the long term, will help us be more efficient. Those are certainly some of the areas we have added and maybe one last thing is even in our analytics business, if you look at the traction that's starting to get in the revenue growth, those are some of the areas we've been spending our money on.

Okay. So it sounds like with these costs building through the year you got kind of a higher core run rate in the fourth quarter, you know, adjusting for the incentive comp thing. And then it's just your kind of more normalized growth rate off of the level is that fair to say?

Exactly.

Thanks a lot.

Thank you.

Your next question comes from Fred Cannon with KBW. Your line is open.

Thanks, a lot of my questions have been answered. Two quick ones, first, your prime rate I believe in the press release is 4.0% in the industry, the 3.25%, I was wondering if you are getting push-back from your clients as a result of holding your prime rate up higher from the industry.

Fred, this is Greg Becker, as we think about pricing overall, we're really spending majority of our time from pricing from the standpoint of risk reward balance and you can go look in the market and credit spreads overall including credit spreads are increasing pretty dramatically. So if you look at the total loan spreads that we have, I would say, number one, they're actually reasonable, and there's actually, we believe, room for for increases in that against the risk reward, looking at the overall credit exposure in the market, so we -- we feel good about where our margins are, and the upside that we have during the course of the year.

Okay. Thanks, Greg. And then just following up Joe's question to Ken, two things on the expense control, Ken. I guess, can you give us some confidence that if we see continued weak quarters like we have in the fourth that the comp won't be up at the budgeted levels that there is some underlying expense control.

Absolutely.

And is there any concern the you're taking TARP, you pay a lot of TARP funds out in expenses.

Fred, first of all it is difficult to hear you because although we can hear everybody else there is something wrong with your -- with the connection between you and us right at this minute so I believe I know what you asked and I'll answer what I thought you asked and you tell me if I give you the right answer. But the bulk of our -- the vast majority of any expense growth that we're anticipating in 2009 is infrastructure, IT backbone, and products that it's not in head count.

Okay. And then -- so that but that would imply, then, Ken, that if you do have a short fall in revenue you wouldn't have the ability to adjust expenses.

To the contrary. In either case, whether you're talking about investment in product, in IT infrastructure, or whether you're talking about head count, you always have the option of making adjustments. But I think that if we did a run into the kinds of difficulties that you're implying, that we always have the option, and it's probably much, much easier if your growth and expenses on the project side, as opposed to the people side is much, much easier, I think, to modulate that. So I think the answer is that we definitely are going to do our best on the expense side and if it -- if the picture evolves in a way that -- that suggested it would be prudent to modulate that, you can be assured that we will do so.

Okay. Thanks.

Thanks, Fred.

Your next question comes from James Abbott with FBR, your line is open.

Yes, hi. Good evening.

Hello, James.

Quick question on on, you touched on this a little bit earlier but I was wondering if you could give us some of the loss assumptions that helped you arrive at the 7 -- I believe the 7.4 or -- yes, 7.4 million net charge-offs on HRJ, what sort of assumptions were you using on that as far as discount and cash flow, and so forth?

James, this is Dave, and I'm not sure that with the client confidentiality information that we have as an obligation that I want to and need to get into that much detail.

Okay.

James, this is Greg Becker. The other part is looking at the whole, charge-offs and reserves, and looking at that on a combined basis, that's really the best -- the best way to look at it. So between the two is it is roughly $30 million.

Okay. So you've collected 10, so you're down to roughly 58 or $59 million. You charged off 7, so $50 million, and then the additional reserves, and then you feel like you've got the losses covered through that analysis, is that correct? So we should expect that to run through the charge-offs, then, is that a fair way of saying that, then?

James, this is Dave. The analysis that we have to do would require us to think about that cash flow stream, collections down the road on a net present value basis. And to be thinking about it from reasonable, sometimes on the conservative side. So I would not want to suggest that the reserves are going to run through the charge-offs. We are going to do everything we can to as quickly as we can, collect all of the monies that are due us, but there are risks inherent in that process, and it is incumbent upon us to have a reserve for those risks and thus we do.

If I could just add to this, James, this is Ken; that the reserves are there in the -- in the case that we fail to achieve what we hope to achieve, not because we anticipate to fail to achieve, what we hope to achieve.

Thank you. Understood. On another question on the appetite of venture capital firms to cut the weaker companies, what are you hearing in that regard? Obviously the early-stage companies have been weaker as has been discussed earlier on the call, but are you hearing that the venture capital firms are trying their best to keep the commitments going or are they going now making the decision we have to cut a couple companies loose from the portfolio. What are you hearing there?

James, this is Greg. Again, clearly venture capitalists are looking at their portfolio and making decisions about which ones are going to be good performers and survivors in this market. So we're seeing some of that. I think it won't -- it won't be as dramatic as what you read in the -- in the press and in the magazines out there. Venture capitalists have capital. There has been a fair amount of money that's been raised. Even the numbers that Ken quoted when you look at how much money was raised in venture capitalists, from venture capitalists last year, that is still a substantial amount of money.

Now, they're going to be slower to deploy that. They're decreasing their reserves on a company by company basis to support them longer, so all of those things going in into our analysis of the risk of the early stage portfolio. So, yes, we're seeing some of it on the one hand. And on the other hand, there is still a fair amount of money to invest in early-stage companies.

And that is a little bit of a change from maybe three months ago, though, I think as I've asked this kind of question over a few times, over a period of time, but is that correct, is it maybe three months ago, they were still trying to hold on, and now they're cutting back? Or is that -- or am I mistaken in that?

This is Greg again, James. And I would absolutely agree with you that there was a pretty significant change in attitude and perspective over the last 90 days, and we saw that across, you know, all our markets both domestically and even internationally, so, yes, it did change pretty abruptly.

Okay.

If I could just add to that, I would like to underscore that because in the same way, and I know that all of you look at all sorts of different things and familiar with a much wider variety of industries and aspects of the market, probably than we are, but I am in the same way that you noticed, I think, on across the board basis, a sudden and more dramatic change in people's attitudes in October and November, than had been true prior to that. That has -- that has reached into our market as well. And it was just as sudden and unexpected for us as it was for you. When I say sudden -- when I say that, obviously everybody who pays any attention to the economy has noticed shifts, but I think everybody noticed that function shift in October and November.

Okay. Well, good luck with the deposit balances, that should be a nice offset to some of the credit. So good luck with that.

Thanks, James.

Thanks, James.

Your next question comes from John Pancari with JPMorgan, your line is open.

All right. I have a quick follow-up . A couple of housekeeping things. What was the amount of the IC comp reversal in the

John, this is Mike Descheneaux, we'll have that more in our MD&A section when we release the 10-K, but it was approximately around the 24 or $25 million mark pretax, of course?

Okay.

We'll give you more insight in our SEC filings.

How much was that existing specific reserve, you know, for impaired loans? What is the amount that you're using for that. I want to make sure I have the right calculation.

On the specific reserves amount?

Yes, just looking at your outlook on credit, you gave the outlook for the loan loss reserve. And in that you said, you know, exclusive of specific reserves from impaired loans.

John, this is Dave Jones, and the reserve for impaired loans is approximately $23 million.

Sorry, what was that amount, again.

23.

All right. Good. And then lastly, I know this one will probably be more challenging to help me out with, but I'm just trying to look at which type of run rate going into next year on a core basis, given your guidance, in terms of EPS, and just looking at a more normalized level here, given your guidance, I'm -- I guess I'm coming out with EPS in a 30 to 40 -- $0.30 to $0.40 range on a quarterly basis. I don't know if you can give us an expectation on an EPS level here, given all of the moving parts? Is there any way you can help us hone in on that?

John, this is Mike Descheneaux. As you know, we don't provide the guidance on EPS. What we tried to do this quarter is help you guys a lot out by giving more insight on this. At this point we're not going to comment on that.

All right. I figured I would try .

All right. Thanks, John. Nice try ,

This concludes the question-and-answer portion of today's call. I'll now turn the call back to the speakers for any additional or closing remarks.

There are no closing remarks. Thank you very much.

This concludes your SVB Financial Group conference call for today. You may now disconnect.