SVB Financial Group (SIVB) 2009 Q4 法說會逐字稿

Good afternoon, and welcome to the SVB Financial Group Q4 2009 earnings conference call. I will be facilitating the audio portion of today's interactive broadcast. 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). At this time, I would like to turn the event over to Meghan O'Leary.

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 2009 performance and financial results. Following this presentation, members of the management team will be available to take questions.

I'd like to start 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 year 2010. Forward-looking statements are statements that are not historical fact. 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 Form 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. The presentation of and reconciliation to the most directly comparable GAAP financial measures can be found in our press release.

Now I would like to turn the call over to Ken Wilcox.

Thank you, Meghan, and thank you all for joining us today. I'm happy to report that SVB Financial Group delivered another solid quarter, with earnings of $0.16 per share and net income of $6 million against a backdrop of higher credit quality. Excluding the charge related to our repayment of TARP, we made almost $18 million or $0.47 per share. Our results were driven by higher net interest income and higher noninterest income, and were offset to an extent by a higher provision and somewhat higher expenses.

Before I talk about the quarter, let me remind you of the conversation we were having a year ago on this call. SVB had just announced a provision of $70.9 million. The economy had fallen off a cliff, and we had seen sales at our portfolio companies drop by as much as 15% in the single quarter. Venture capital funding was rapidly contracting. Limited partners were pulling back drastically from investments, and exits were almost nonexistent. Our stock was at $22, and was just six weeks away from its lowest close in more than 10 years.

Despite the deteriorating economy and the challenges at that time, we were confident about several aspects of our business. First, we believed our underwriting and portfolio management were fundamentally strong. Second, we felt we had ample capital and liquidity to weather the economic challenges ahead, to continue lending to clients, and to continue building our business. And third, we were open for business, meaning that we were able to meet the needs of our clients and many new prospects as well -- and beyond that, in a position to leverage the downturn to gain market share and emerge from the cycle stronger than ever.

Looking back on 2009, our confidence seems to have been justified. While the year was challenging, we performed well, thanks to our focus on those areas -- and I might add, with very little thanks to the economy.

First, we were profitable. I believe that is no small feat, given the economic environment of the last year.

Second, we delivered higher credit quality. We maintained our already rigorous underwriting and portfolio management, and we proactively identified and addressed other potential problem credits ahead of the curve. And through persistent and consistent effort, we significant reduced our levels of classified and impaired loans. We resolved the few significant issues we did have early, and further improved our visibility into our portfolio in the process.

Third, we added to our liquidity through strong deposit growth. As a result, we increased net interest income by almost 4% in 2009. With no help from interest rates and only minimal loan growth, that is a meaningful achievement, I think. It is also a sign of how seriously we've taken the potential offered by our excess liquidity. We grew our investment securities portfolio by almost 30% in the fourth quarter and more than doubled it in the last year.

Fourth, we strengthened our already strong capital and liquidity position through a successful $307 million equity raise in the fourth quarter. We used part of this money to redeem $235 million in preferred shares from the US Treasury, plus accrued dividends on top of that. That is to say, we repaid TARP. In doing, so we effectively improved the quality of our capital as well as our capital ratios. At this point, we are one of the best capitalized banks in the industry. As we said at the time of the capital raise, we expect capital standards for banks to rise in the near future. Our recent activities have prepared to us meet that requirement while giving us the resources to pursue growth opportunities, both in the near term and in the long term.

Fifth, thanks to the dedication of our employees, we continued to meet our clients' needs and gain market share among venture backed and mature companies. In the past year, we have added more than 400 new loan clients, who are responsible for nearly $1 billion in new borrowings. All told, we added nearly 1,000 new clients. These market share gains promised to significantly increase our earnings power once the economy and the demand for leverage recover.

Finally, we maintained our expense control discipline by putting off some hiring decisions for the time being and scaling back our incentive compensation when we failed to meet our targets. We accomplished all of this without taking our eye off of growth. Throughout this year we've continued to take the necessary steps and lay the groundwork for our future.

Looking forward, we believe we are well positioned for coming growth opportunities. Many of these opportunities will be organic -- that is, driven by the improving economy. We are focused on innovation driven technology markets, which are expected to benefit from the $122 billion of new technology spending expected in 2010, according to recent industry reports. We believe we are the bank of choice for emerging companies, and while we see many competitors for our clients, none can come close to duplicating our relationships and our platform.

Our market research supports this view. Client ratings of our effectiveness, expertise, and credibility went up in a year when many companies felt their financial institutions let them down. Our investments in market share gains will result in longer term growth as an improving economy drives the demand for more products and services. And many of the hundreds of early stage companies we added to our client roster in 2009 will grow and become larger consumers of our products. Our work, to expand our portfolio production and services for larger companies is attracting already established clients who want to benefit from our program. We expect a significant part of our long-term growth to come from these upstream initiatives.

We are also making progress in our efforts to capitalize on the expertise we've developed working with thousands of venture-backed companies over the years. We have valuation data and operational metrics from all of these companies. We are now working to leverage it on behalf of a whole new generation of growing companies. That, too, will ultimately lead to revenue opportunities.

In the longer term, there is potential for growth in the international markets in which we operate. We've established global offices and capabilities in China, India, Israel, and the UK to help our clients succeed globally. And these, too, offer potential for growth. We are continually expanding our ability to meet clients' needs worldwide, just as we do in the United States. The economy is undoubtedly still vulnerable. While our clients are seeing signs of improving demand, things are still far from normal. We expect continued headwinds to growth in the year ahead, but we are well prepared, we believe, to withstand them. We believe we have done all the right things to ensure our continued strength in the current economy, and we are optimistic about the future.

Now, before I turn the call over to Mike, I want to comment on two items unrelated to our results. One is that we received word from the SEC earlier this month that it was terminating its inquiry into possible insider trading in our securities and would not be recommending any enforcement actions. We released this news in an 8-K earlier this month, and for reasons having to do with timely disclosure, that was also the day we issued an 8-K about the departure of our Chief Operations Officer, Dave Webb. We received several questions about the matter, and I wanted to use this forum to say that there was absolutely no connection between the two announcements. Dave left us to take a job as CIO at Equifax in Atlanta, the publicly opened credit reporting agency.

And with that, I will turn the call over to our CFO, Mike Descheneaux.

Thanks, Ken, and thank you all for joining us today for what we believe was a good quarter. We delivered GAAP earnings per share of $0.16 and net income of $6 million, which reflects a noncash charge of $11.4 million from our repayment of TARP. Excluding the charge, our non-GAAP earnings were $0.47 per share, and net income was $17.5 million.

There are five things I want to talk about today. The first is continued improvement in credit quality trends. Classified and impaired loans trended downward for the second quarter in a row, and our loan portfolio performed well overall. The second item is increasing net interest income due to our continued investment and deposits. A third item is the decline in loans. Loan balances continued to trend downward in the fourth quarter as clients de-leveraged or simply borrowed less. In spite of this trend, we continue to gain market share. The fourth item is average deposits, which grew by an astonishing 11% during the quarter. Fifth and finally is capital and liquidity. Our capital raise and repayment of TARP in the fourth quarter have further strengthened our capital ratios and we are well positioned to take advantage of potential growth opportunities when they come.

Let me start with our credit quality. Credit quality is playing out more or less as we expected and the trends have continued to improve. As a result of our ongoing focus on portfolio management, we reduced our total impaired loans balance in the fourth quarter by $21 million to $15 million. Gross charge-offs were lower in the fourth quarter at $33.1 million compared to $46.6 million in the third quarter. There were no surprises in our portfolio, and we continued to resolve the problems we identified in prior quarters. Despite lower gross charge-offs in the fourth quarter, net charge-offs were essentially the same as in the third quarter at $32 million, due primarily to a significant recovery of $11.4 million that in quarter. Our fourth quarter provision of $17.3 million was in line with our expectations, compared to an $8 million provision in the third quarter. That increase was not as significant as it may seem if you consider that the third quarter provision reflected the $11.4 million recovery. If you exclude that item, the fourth quarter provision was actually down somewhat. Overall, Q4 credit quality was representative of our expectations for credit moving forward. Our portfolio is in good shape, particularly considering the economic landscape. While the improvements we are seeing are related in part to our efforts to actively resolve the few larger problem loans we have, they are also a testament to the strong underwriting standards we have always had.

Now I would like to move on to net interest income and net interest margin. We increased net interest income by $5.3 million to $102.1 million in the fourth quarter. This increase related to our continued success in capturing and investing deposits, which resulted in a $1 billion increase in our investment securities portfolio in the fourth quarter. Our average investments increased by $800 million. Net interest income increased despite a lower net interest margin of 3.57% versus 3.7% in the third quarter. In fact, for the full year 2009, a year of exceedingly low interest rates and declining loan balances, we used our liquidity to increase net interest income by almost 4% to $382 million. In addition, the maturation of previously purchased securities that had higher yields also affected our net interest margin in the fourth quarter.

Let's move on to loans. Average loan balances decreased by $176.5 million or 3.9% in the fourth quarter to $4.4 billion, owing to continued de-leveraging by our clients. Nevertheless, average loans for the full year 2009 were 1.4% higher than at the end of 2008. Although this trend puts pressure on our earnings in the short term, I want to put it into proper perspective, which is that loan balances are lower because of pay-down rather than the alternative, which is write-downs. Our portfolio is performing well, relative to the economy and to other banks. In the meantime, we continue to gain market share in the fourth quarter with 165 new loan clients resulting in approximately $381 million in new funded loans. I am pleased to say that we also saw an increase of $544 million in our unfunded commitments during the fourth quarter to $5.3 billion. As loan utilization returns to more normalized levels, this increase could set the stage for additional loan growth.

Moving on to deposits, deposit growth continued to exceed our expectations in the fourth quarter. Average deposits rose by $1 billion to $9.9 billion. $625 million of this increase was in noninterest-bearing demand deposits. We believe our clients' strong preference for the balance sheet reflect their continued desire to preserve liquidity as well as the low interest rate environment. As a result of this environment, the deposits we have gained throughout the year have proven to be relatively sticky. This stickiness will be affected by expected or actual interest rate changes in the coming year and our deposit pricing. Noninterest income was also higher, rising $6.4 million to $40.7 million. This increase related primarily to $6.7 million in net gains on investment securities related to our SVB capital family of funds. Net of non controlling interest, gain were $800,000. This compares to a loss of $975,000 net of non controlling interest in the third quarter. It appears that [VC] valuations are stabilizing, and we see these incremental improvements as continued signs of that stabilization.

We also realized $1.4 million in gains on derivatives compared to a loss of $1.1 million in Q3. These gains related primarily to the exercise of a single warrant position. On a positive note, we saw an increase on foreign exchange fees as well as deposit service charges and credit card fees. However, it was offset by decreases in letters of credit and client investment fees for an overall decrease of $600,000 in the fourth quarter. As the economy improves and client usage of fee-based services increases, we would expect income from these items to increase as well. Noninterest expense increased by $8.1 million to $87.9 million, primarily due to a $2.8 million increase in compensation and benefits related to incentive compensation, and a $1.9 million increase in our provision for unfunded commitments, which stem from a significant rise of $544 million in the balance of our total unfunded credit commitments.

Moving on to capital and liquidity, we had an eventful Q4 on the capital front. We raised $309 million in equity in November, or $292 million of net proceeds. We used a portion of those proceeds to repay the $235 million we received from the US Treasury under the TARP capital purchase program in December 2008. This makes us one of only 67 banks out of approximately 700 that have repaid TARP. As you are probably aware, the Fed wants to make certain that banks are healthy enough to operate without TARP prior to repaying it. So in our eyes, approval to repay TARP is a testament to our capital and liquidity strength as well as our future credit prospects. On that point, I believe the fact that we have almost no commercial real estate helped our case to repay TARP.

Our capital ratios also support that view. They were solid before the equity raise and are even stronger now. At December 31st, 2009, our ratio of tangible common equity to tangible assets was 8.78%, and our ratio of tangible common equity to risk weighted assets was in excess of 15%. In this challenging and rapidly changing environment, it makes sense to ensure our capital and liquidity are strong. Our capital and liquidity position enables us to have the flexibility to operate effectively and opportunistically in these economic conditions. Because we completed our equity offering before December 31st, we were able to reduce the associated warrant issued to the Treasury by 50%. It is our intent to settle the warrant as soon as possible, but as you may know, that process requires a price negotiation with the Treasury, and it could take some time. When we do settle the warrants, it will have no impact on EPS. Unfortunately, because we had TARP until December 23rd, along with new shares outstanding from the equity offering, it impacted EPS by $0.03 in the fourth quarter.

Now I would like to turn to our outlook for 2010. For the purposes of this outlook, we are assuming the following. One, that the economy will make a very gradual multiyear recovery, with technology being a bright spot. Two, that the IPO and M&A markets for our clients will remain sluggish, although we would expect to see activity related to an increase in the number of filings in the fourth quarter of 2009 as we saw, and that VC investment will increase, but will remain constrained by limited exit potential. Our outlook also takes into account our continued efforts to increase our opportunities and grow our business through our work with larger companies as well as our global initiatives. Given the uncertain economy, we will provide directional guidance on our expectations for gains and losses related to investments in private equity and venture capital, as well as gains and losses from equity warrants.

For 2010, we expect that average loans will remain comparable to 2009 levels, owing to limited new company formation and lower demand for capital call lines of credit because of lower levels of VC investment. However, this outlook implies a fair amount of period end growth. We expect average deposits to increase at a percentage rate in the low double digits due to the continuation of expanded FDIC insurance into June and the low interest rate environment. We expect our net interest margin to be between 3.6% to 4%. We base this outlook on the expectation that interest rates will begin to rise in 2010. However, we would not expect the first 75 basis points of increase to have a positive impact on NIM, owing to our decision to maintain our prime rate at 4% after the last Fed decrease in December 2008. Regardless of net interest margin compression, we will continue to use our investment program to bolster net interest income.

We expect our allowance for loan losses as a percentage of [purity] in gross loan to remain consistent with 2009 levels, assuming continued acceptable credit performance. We expect our ratio of nonperforming loans to total loans will be lower than in the fourth quarter of 2009. We expect aggregate fees from deposit service charges, letters of credit, business credit cards, client investments, and foreign exchange will increase at a percentage rate in the mid single digits owing to an improving economy. We expect net gains and losses on equity warrant assets to be comparable to 2009, which was break-even. We expect to see an improvement in net gains and losses on investments related to private equity and venture capital net of non controlling interest, owing to stabilizing valuations and modest increases in VC activity.

And finally, we expect noninterest expense, excluding expense related to goodwill impairment and non controlling interest, will increase at a percentage rate ranging between the high teens and the low 20s. As Ken reminded you, we made a conscious decision earlier in the year to scale back selectively on hiring and to keep incentive compensation expenses at below target levels during 2009. In 2010, we expect to renew certain staffing initiatives for ongoing and special projects and would expect to see a meaningful increase in headcount in some of our growth areas. We also expect that incentive compensation in 2010 may approach more normalized levels, assuming that we meet our performance targets. Although we remain sensitive to effective expense control, retention of our employees is essential to our ability to succeed. We are also aware of the fact that improving economy brings improved opportunities.

Let me close by saying that despite our cautious outlook, we expect the economy to be better in 2010, and we are ready to take advantage of any signs of recovery. Our clients are doing better. They appear to have absorbed the full effects of the downturn, and they are starting to recover. We know there are challenges ahead, but we are ideally positioned to handle them and to come out ahead. We serve the right industries -- those that will likely play a key role in an economic recovery. We have invested in enhancing our array of products and services for larger companies and establishing ourselves globally at a time when global presence and capabilities have have never been more important to our clients. We are poised to benefit from a rising rate environment, which may begin by 2010 as well as rising GDP and increased technology spending. Although we may experience some additional margin pressure in the near future, our potential earnings power in a more normalized interest rate and economic environment is compelling. We have strong capital levels and ample liquidity, which we will continue using to set the stage for growth as the economy recovers. It is our hope that 2010 will be remembered at the beginning of the recovery.

Thank you, and now I will ask the operator to open the call for Q& A.

(Operator Instructions). Your first question comes from the line of Joe Morford. Your line is open.

Thanks so much. Good afternoon, everyone.

Hi, Joe.

I would like to -- I wanted to just dig in a little more to your expectations for loan growth over the coming year. Obviously the guidance was for average loans to hold flat, and as you say, because balances declined throughout 2009 that still suggests a fair amount of growth this year. So maybe could you talk a bit more about what the drivers to that growth will be, specifically what niches or products? And also, when you expect to see that growth start to come, given that you are seeing clients still de-leveraging in the marketplace?

Joe, this is Greg. I will start, then Dave or Mike, Ken, may want to add on to it. The loan growth that we expect to see in 2010 is really -- we expect to come from three different areas. First, I would say is, what I will call organic, or just the general improving in the economy. And that's due to a couple things. One is utilization rates are down, and in the fourth quarter we actually had a nice pop in the overall unfunded commitments. And as Dave said in past calls, you have to first start with commitments before you can get any borrowings on it. So if the numbers get back to what I would say is a more normal utilization level, I think you can see a few hundred, $200 million to $300 million of loan growth just from that getting back to normal utilization levels. Then you have two other key initiatives that we talked about before. One is our upstream initiative, which we have continued to emphasize, add resources to that we expect to see loan growth from, and the third one is even though on a absolute number, it's not significant percentage-wise, it's growing, we expect to grow nicely, and that's on the global side. Mainly we'll see in that the UK and Israel, but that's starting to play a piece of the growth area. So those are the three loan growth areas that we expect to see in 2010.

And then your second question was when do we expect that to happen? I think Mike in either his comments or in the release talked about it being more driven toward the second half of the year. We don't know. It's hard to predict exactly when that's going to happen. What I would say is that the pipeline that we have continues to grow, and we're optimistic that that's going to translate into loan growth. Exactly when that happens, we don't know for sure.

Go ahead, Joe.

Just to follow one that, where are utilization rates now relative to normal, or what is normal? And also, Greg, do you have much in the way of balances outstanding in the UK and Israel at the moment? If the year plays out as you would hope, how much would we maybe expect to see a year from now?

I would -- two questions. One on utilization rate. There's the actual percentage, and I would say it's declined somewhere in the neighborhood of low single digits on a percentage basis. But there's an art to it as well, because there's certainly levels of the commitments that we have consciously pulled down. So you can look at the raw numbers as one indication, but you really have to use our own interpretation of where the commitments are and how we have managed them down from the higher levels. So the numbers I've talked about are really driven from that analysis. So is again, a few hundred million dollars from the utilization rates getting back to normal levels. Then regarding the global side, it's a small number. We finished the year, I'll call ballpark at $100 million, rough number. And if we added an extra $75 million to maybe as much as $100 million, that would feel very good to us.

Okay, thanks so much.

Your next question comes from the line of Steven Alexopoulos. Your line is open.

Hi, everyone. My first question actually was on the 2010 outlook, too. If the average loan balances are flat in 2010, what's expected to drive the NIM expansion? Is it only rising rates? Then second, what's expected to drive the mid-teen increase in net interest income?

So, this is Mike. What you're going to have is the full-year effect of the investments. As you recall, we started investing quite a fair amount in 2009, where we were taking out of an asset that was only 25 basis point and putting it more into assets, probably around that 2.5% to 3% range, if you will, going to [vested] security. So that's going to be very helpful when you have the full year effect of that. So that's really where you are going to see at least stabilization or steadiness of that. Now, of course, if deposits continue to go up, that does tend to drive the overall net interest margin down. But again, we step back and we still are very, very focused on that net interest income number, which as you saw in this quarter continued to go up by over $5 million. So we were quite pleased with that.

This is Ken. Let me add one thing to that. I think everybody knows that our portfolio, loan portfolio is fairly short in duration and that a significant portion of our loans need to be renewed every year. And I would also anticipate there will be some pricing up in the course of the year as loans are renewed.

Great. I also had had a question on liquidity. The securities book ended about same size as the loan book. And even if I take out $2 billion of sweep deposits, you still have a ton of excess liquidity. Are you considering any new strategies to utilize this, looking at distressed asset portfolios or new lending niches or anything?

At this point, we're following -- we're continuing to follow the investment policy that has served us very well over the last couple of years, which has certainly kept us out of trouble. If you have noticed, our portfolio has been very strong. What we're always trying to do is what's the highest and best use of this cash. We certainly know that for us, it is actually lending. So we're very much focused on trying to make sure we're able to put that excess liquidity to work with the loans when the economy starts to turn around. So we're very hopeful, at least in the second half of the year, that it will turn around. As far as the thought to start going out longer on duration, that's a bit challenging, because you have to go out so far to get any real yield out there in the investment securities portfolio.

Final question. It seemed the president's comments today to curtail prop trading could have some implications for the investment the bank has made in the SVB capital business. I know it's very early, but any initial thoughts on this?

Well, I would just underscore that it is very early. And I am a little bit hesitant to try to interpret exactly what was meant by the announcement, so I don't think that we can say conclusively this will impact us, for a variety of different reasons. Having said that, I would be going far too far if I were to boldly assert that it won't impact us, either. So we're going to have to wait and see.

Fair enough. Thanks, guys.

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

Good evening, guys.

Hello, John.

On the loan growth outlook, in terms of outside of pure demand, and I believe Steve was getting to this on this last question, but in terms of the opportunity to buy some loan portfolios from some of your struggling competitors in the mez debt side, or the venture debt funds -- I know you alluded to this opportunity back when you raised capital. Can you talk about where that stands? Are you seeing some of these portfolios start to come to market or an opportunity to buy some of these things at a good bid?

Let me try and address that. This is Ken. I think that you might well have heard that comment from me a few months ago, although I'm sure that either Mike or Greg could have said it as well. And the answer to it is obviously, we would be reluctant to be too specific, and I'm not entirely sure. To the best of my knowledge, I don't know that we know of anything that's in the market for sale. Having said that, we certainly are as conversant with other people's portfolios, I believe, as they are themselves. It wouldn't surprise me at all if there were some that ended up being available for purchase at some point during the course of the year. On the other hand, I don't think I can conclusively predict the future.

So, John, this is Greg. Maybe just add on to it. We did say, when we were on the equity raise that we were going to be looking, but if you recall, it was very narrow target that we had. We've had some investment banks probe us and talk about some essential aspect purchases, but honestly there hasn't been anything that I think we looked at and spent a lot of time on, mainly because of the fit. Most importantly, it has to be a good fit, and that just hasn't happened yet. But, that being said, we're still open.

Okay. And then secondly, on your outlook for the margin, what exactly are you assuming by way of rate hikes? I know that you imply that you expect rates to head higher in 2010, but do you have a number in terms of basis points and hikes that you expect to see?

We actually just follow the forward curve. So if you look at that, that's basically how we bake into our forward-looking models. The one thing just to remember for us, as I alluded to, for the first 75 basis points of a Fed move, we're not going to necessarily benefit from that, because we had already kept our prime -- our own internal prime rate steady when the Fed moved the last 75 basis points. Really what you need is you need a 100 basis-point move before you can really start taking some of that benefit in. I think if you look at the curve, it's probably not going to happen until March 2011 when we get a total of 100 basis points moved.

Great, thank you.

Your next question comes from the line of Ken Zerbe. Your line is open.

I guess the first question I had just in terms of the loan utilization, if I heard correctly -- if utilization rates return to normal, you would have a couple hundred million dollars of benefit on the loan side. But I guess probably trying to get back to more of a normalized environment, when your ultimate loan balances, I think, period end, somewhere around the $5.5 billion, obviously we're down quite a bit from that level, what else do you need? Is it just the venture capital call lines come to back, which is not included in the utilization number that you just threw out?

Ken, this is Greg. I'm sure Dave will have something to add as well. So the utilization percentage I was talking about -- that does include the capital call lines. But remember, one point I made is, there are other things to take into consideration. One is that we pulled down unfunded commitments during the course of the year, and it was mainly related to capital call facilities. So there is some -- an analysis we have to look at and say what is a normal utilization rate. So as that plays out, I would say I feel comfortable saying it's at least $200 million, and there's definitely more upside to that. Other things that would have have to happen is, basically, I think it's mainly the economy needs to improve. And if you see that, the new clients we're adding, they're going to start to borrow more.

And the other thing I would say is, last year, the teams, our sales teams, were mainly focused, not exclusively, but mainly focused on making sure that our credit quality remained strong. As the year progressed, they became much more externally focused. And that's what our pipeline and backlog is starting to pick back up, and it's coming back nicely. So the combination of really all those things gives us comfort of where loan growth will be headed in 2010.

This is Dave. Let me just add a little bit to that. So I would see just the normal working capital requirement, with growth affecting that utilization factor. I'd also say we have seen, in a number of credit opportunities for the last several months, some increased activity on the M&A front. So over and above just the normal growth and working capital requirement, when a client of ours sees an acquisition opportunity, maybe using the cash on their balance sheet, but may want and need to replenish part of that cash. That will be a good opportunity for us to start the loan growth trend up again.

The other question I just had on the asset sensitivity -- I get that you don't get the first 75 basis points benefit when the Fed starts rising. But with the increase in your securities portfolio, are you buying floating rate securities? Would that also benefit your asset sensitivity, or am I thinking about that wrong?

So historically we've bought fixed income securities. Not to say that going forward that we wouldn't consider some of the agency floaters going forward. So that is something that we could entertain, but at this point it's been all fixed.

Perfect. Thank you.

Your next question comes from the line of Aaron Deer. Your line is open.

Good afternoon. Actually most of my questions also surrounded the deployment of capital and liquidity. I think you guys have covered that pretty well. Maybe just a question on the funding side. It looks like off-balance sheet client funds were down. How much of that do you attribute to flows coming onto balance sheets? Obviously had some pretty good deposit growth in the quarter, versus clients' burn-down of their own capital funding?

Aaron, this is Greg again. I think when you look at -- as I look at the funds, I look at that total on and off balance sheet to try to get a determination of where the true flows are going. And it's still roughly -- I'm using round numbers, around the $26 billion number. And it's pretty close where the off-balance-sheet decline is similar to the number that's come onto the balance sheet. And to the comments that Mike has made earlier, there really just isn't attractive investment alternatives off the balance sheet. So as money gets pulled from the off balance sheet and gets spent and new collections are coming in, it's -- quite honestly, there isn't a lot of reason to push it off balance sheet, because there's no yield there. So I think that's probably the biggest driver that we're seeing.

In your conversations with clients, are they -- has there been some improvement in terms of generating second and third rounds of funding and such? Is that process opened back up again? Are they feeling better about their outlook and getting the investments that they need to continue to grow operations?

Better, but it's all relative. Compared to last year, it couldn't have gotten much worse. So we're definitely seeing an optimism. And I think Mike talked about this early, in regard to seeing a bunch of IPO filings at the end of the year. So I think the general sentiment the venture capitalists are having is positive. And it's trending in the right direction. So I think there's a good positive momentum in that regard.

Okay, thanks very much.

Thank you.

Your next question comes from the line of John Hecht. Your line is open.

Good afternoon. Thanks for taking my questions. Most of them have been asked as well. You've had a large increase in the investment securities portfolio. Mike, did you refer to them being fixed income. I'm wondering if you can characterize the duration of the assets that you have recently added to this portfolio and what that might do to interest rate sensitivity over the next three, six months, or maybe for the first couple rounds of rate hikes from the Fed?

John, more or less we've been following consistent policy and philosophy that we've had in the past, so that duration typically ranges from two to three years or so. So it's really not going move too much from where our average duration was anyway. As far as interest rate sensitivity, whenever you add the fixed rate securities, it's going to reduce your asset sensitivity.

Okay. And then the one follow-up question from that, unrelated to that, would be that there was a reasonable -- actually, excuse me, there's one loan greater than $20 million on non accrual status, it looks like, based on some of the exhibits in your announcement. Can you characterize that loan and talk about what business it's in and any specific reserves you might have against it?

This is Dave, and I will address that. I don't want to be too specific. I don't want to risk client confidentiality issues. Let me offer that this loan is ever so marginally above that $20 million. We believe that we have a very conservative FAS 114 reserve for it. And we're very confident that while the transaction does not have a profile supporting a return to accrual, that we are -- the client is trending in a direction that at an appropriate time be able to do that, and ultimately collect out of the credit.

Is this a collateralized loan to a large degree?

It's well secured, yes.

Great, thank you guys very much.

Thanks, John.

Your final question comes from the line of Fred Cannon. Your line is open.

Thanks. One follow-up on credit. In the press release, you said that a 25% decrease in classified loans from the second quarter 2009 to the fourth quarter 2009. Do you guys release the level of classified loans?

No, Fred, we do not. It is just an indication to us that our belief that the credit quality is improving and that our forecast for the future is supportable that we would offer an indicative trend of classified credit.

And regarding that, Dave, the reserve was down 32% during that time period, I believe, so the actual coverage of reserve to classified loans would have actually fallen during that period. Is there any color on why would you feel comfortable with that?

Yes. So what would you look at in the disclosures that we provided incrementally over the year is that the decline that we've had in the reserve would tie to the very significant decline that we've had in nonperforming impaired credit. We look at the classified level and the part that is justifiably impaired and the part that is not. And we believe -- I believe, I'm very confident in the fact that the reserves that we have for the performing portfolio, which have been consistent throughout the year, remain appropriate, and because we have reduced the level of nonperforming loans over $50 million this year, that we continue to have an appropriate reserve for the remaining impaired portfolio.

Okay, thanks. If you ever do, it would be great to have that disclosed. And just one general comment, I think more for Ken. You guys have really strengthened the balance sheet tremendously, with capital raising. But when I worked through your guidance for 2010, and again, this is very rough, but I come up with an ROE of roughly 8% or so, what would be significantly below your cost of capital. I think the question, Ken, is when do you see a point where Silicon Valley Bank would -- getting that ROE back above your cost of capital and what has to happen?

So let me -- actually, I think yours is the last question, Fred, so let me just use that as a segue to rounding out the hour. And I would like to say really two things. One is that, you know, I'm not going to agree or disagree, necessarily with your calculation, but you're always, in my estimation, pretty insightful, and there can be absolutely no doubt that we've got a lot of capital on our balance sheet. I don't think we're the only bank in the country with a lot of capital on our balance sheet. I also think that we, meaning management and board, think an awful lot about performance measures, and ROE clearly has been a significant performance measure that we have used as a benchmark for several years now, and we're mindful of the cost of capital and the importance of ROE to our investors.

Having said that, I think you can reasonably expect that all banks, not just Silicon Valley Bank, are likely to have more capital than you may think we need, or for that matter, than we may think we need for a period of time. We are very definitely looking forward to a day when we'll feel a little bit more comfortable rationalizing the capital base, and I have no doubt that in the fullness of time, we will move in that direction. But I can't say specifically, and I don't think anybody else can, either, because, as you all know, there are a lot of constituencies out there, including the US government and the regulators that seek to apply whatever rules and regulations and laws the US government comes up with. So we'll just to have see how that works out. But I hope it's comforting to you at least to know that we care about ROE, and that we think about it in the same way that you do.

Thanks, Ken.

That's an attempt to answer your question. And with that I'd just like to round off by saying, I don't know if it comes through, because it's late in the day. We always have this immediately in the wake of our board meeting, and anybody who has ever been to a board meeting knows that they're exhausting. So sometimes I fear that our enthusiasm is muted relative to the way we really feel, just because we're worn out. But I am hoping that you will see in the call, or have heard in the call that we're feeling, I think, about as good as anybody else in the country right now about our future. We're seeing some improvements in the economy, the part of the economy in which we operate. We're feeling that in general we have probably done better than most people in this last year, and above all, we feel that we are pretty well positioned to take advantage of any improvements that develop in the economy, and we're anticipating improvements. So that's probably about as specific as I can be. But I am definitely hoping that you at least hear some enthusiasm in our tone.

And with that, I would like to thank you all for participating in the call, and we look forward to talking with you about our results again in three months.

This concludes today's conference call. You may now disconnect.