SVB Financial Group (SIVB) 2010 Q4 法說會逐字稿

Good afternoon. My name is Sarah and I will be your conference Operator today. At this time, I would like to welcome everyone to the SVB Financial Group fourth-quarter 2010 earnings 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)

I would now like to turn the call over to Ms. Meghan O'Leary, Director of Investor Relations. Ms. O'Leary, you may begin.

Thank you. Today, Ken Wilcox, our President and CEO, and Mike Descheneaux, our Chief Financial Officer, will discuss SVB's fourth-quarter and full year 2010 performance and financial results. Greg Becker is also with us, and he and Ken will discuss our management announcement today. Following the presentation, they and members of the management team will be available to take your 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 full year 2011. 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 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.

And now, I would like to turn the call over to Ken Wilcox.

Thanks, Meghan. And thanks to all of you on the call today for joining us. I'd like to talk about three things today. First, a few words on our quarterly results. Second, I'd like to take this opportunity to reflect for a moment on the last 10 years, the direction that we've taken, where we are today, and what we are now poised to accomplish in the future. And third, I'd like to introduce you to the person who will be succeeding me in three months, as the next CEO of SVB Financial Group, our current President, Greg Becker.

So, first, the quarter, and a great quarter it was. Most important of all, we grew loans in the fourth quarter by about $500 million. One of the highest growth rates in our history. In fact, annualized that would come out at about 45%. This loan growth added about $9 million more in interest income to our P&L. Even better, our credit quality remained strong with net charge-offs and non-performing loans continuing their improving trend. Non-interest income, even adjusted for the rather large investment securities gains we posted in the third quarter, was 37% higher than in the prior year. We posted solid gains on warrants of $3.5 million, and gains on venture capital related investments of $6.5 million. And we continued to increase our market share with the addition of 428 new loan clients in the fourth quarter alone.

In short, it was a very good quarter from a fundamental operational point of view. Mike will, of course, dissect the numbers for you in just a few minutes.

However, and given that I am announcing that I will be stepping down as CEO at our shareholders meeting in April, I would like to spend a few minutes talking about the strategy that we have pursued in these past several years and the state of the Company that I am now leaving to my successor and to our team. Ten years ago, we made the bold decision to focus our attention entirely on entrepreneurs and the investors behind them. And for the sake of completeness, I will add wineries. Having made that big strategic decision, we made three corollary decisions, as well. One, to add products. Two, with the help of the products that we added. to keep companies with us longer. And three, to follow the entrepreneurial space as it spread across the globe.

Now, 10 years later, I can look back and legitimately claim that we have done pretty much just that. Today, our product set, relative to the kinds of companies that we work with, is almost as complete as that of any money center bank. Today, most companies still join us at the point of inception. And today, most companies stay with us until they are acquired, regardless of how large they grow to be. And today, we are actively involved in all of the most important centers of innovation across the United States, and now increasingly in the UK, in Israel, in India, and in China.

Even in these past couple of years, we have continued to invest in the future of SVB, and the results are becoming evident. First, we have almost completed the multi-year replacement of our entire IT backbone that we embarked on three years ago. I cannot emphasize enough how important this project is. A sophisticated integrated global IT platform will let us continue to deliver an exceptional experience for our clients in today's global environment. Second, in addition to our more than 10,000 clients in the US, we now have a substantial number of clients in the UK, Israel and India and in China. And we are making great progress on getting our full banking licenses in the UK, China, and we believe even in India, as well. I am particularly excited about the progress we are making in China, given its size and the growing importance of China in our world today.

Third, we are now, for the first time ever, investing in earnest in our private banking activities. With the expectation that we can show significant growth and profitability in the years to come. Fourth, we are investing in both our online and our mobile banking capability in a way that positions us for the changes that are taking place in banking and the constantly evolving needs and desires of our client base. And the list goes on. We are always alert both to the changing needs and desires of our client base and to the ever-evolving nature of the entrepreneurial ecosystem in which we operate.

Along the way, we have grown in size and value and built a tremendous franchise for our investors. Between 2000 and 2010, we grew loans by $3.4 billion, or 217%, to $5 billion. We grew total client funds by $14 billion, or 93% to $30 billion. We grew deposits by $8.7 billion, or 191%, to $13 billion. And we more than doubled our book value per share to $30.15.

Clearly, there are challenges ahead. Nevertheless, we are optimistic about the opportunities ahead of us, as well. We have an outstanding group of employees here at SVB. The best ever in our history, and the best anywhere in our market. I believe that we are as well-positioned as we could be, and I believe that we are well-positioned to support our clients in a way that contributes to the probability of their success while contributing to the success of our shareholders, as well.

With that, I am now ready to move on to the other announcement that we made today; namely, that at our shareholder meeting in April, I will step down as CEO and that Greg Becker, our President, will replace me in the role of Chief Executive Officer of SVB Financial Group. At that time, I will take on a new role, leading our efforts to expand in China and will spend most of my time there. I can't tell you how happy I am to see this happen. I picked Greg as my successor several years ago and have been grooming him ever since. Most of you know Greg, either through this call or from meeting with him over the years. He joined SVB in 1993 at a time when we were expanding rapidly into new geographies and new lines of business, just as we are doing today.

He started with SVB as a lender, heading the group responsible for serving what, at the time, was a small but growing number of clients outside of California. Later on, he headed our venture capital group for a number of years. And we can legitimately credit him with having spearheaded the development of our fund-to-funds and direct equity businesses. He became Chief Banking Officer in 2002, then Chief Operating Officer, and he has been President of the bank since 2008. He has touched almost every part of the business at one time or another, and has been instrumental in helping SVB grow to become the Company it is today. I believe, and the Board believes, that having contributed so significantly to our growth in the last 18 years, Greg is exactly the right person to lead SVB into its next period of expansion.

And with that, I'm going to ask Greg to say a few words before we turn the call over to our Chief Financial Officer, Mike Descheneaux.

Thanks, Ken. I'm going to keep this short so that we have time for all of the questions later in the call, but I do want to say a few things. The first is that I'm extremely excited to lead SVB in the next phase of its growth. It's such a privilege to be part of SVB. And from Ken's comments, you can obviously see that this is an amazing Company with an unbelievable franchise, and that a lot of that is due to Ken's leadership over the last 11 years. When he became CEO in 2000, the dot-com bubble was just bursting and SVB was facing some significant challenges.

Thanks to Ken's vision we not only got through those challenging years but we emerged with a new strategy for growth that was focused on staying with our clients longer, going global, and innovating our business model. That strategy led to new products and services designed to deepen our client relationships, and included the creation of our venture capital group, private banking, analytics, our global activities, and our upstream initiatives. And over the years, being part of our clients' ecosystems by working to offer them products and services customized for their specific needs, and by doing it better than anybody else, we have established SVB's brand as the bank for technology, life sciences, venture capital, private equity, and as Ken mentioned, premium wineries.

During my 18 years at SVB, I've been part of this growth, and because of this growth I've had opportunities at SVB that I could not have imagined. What excites me about the future for SVB is that we have an incredibly strong franchise to build from, a strategy that takes advantage of the global economic trends for innovation companies that we all are reading about, and an incredibly strong team to execute on this strategy. This confidence is reaffirmed when I reflect on our performance in 2010 and our outlook for 2011.

The last point I want to make, before Mike digs into the quarter and reviews our outlook, is this. Although there will be changes coming over the time in light of this transition, the one change you shouldn't expect to see is a shift in strategy. Since I've worked with Ken so closely over the last 10 years, and feel very fortunate to have done so, I've bought into and fully support the direction of the organization. We have an incredible opportunity to continue to build our franchise and grow by staying with our clients longer, continuing to go upstream as we talked about in the past, the global expansion and expanding our product set to support our clients and help them be successful. I'm truly thrilled to execute on this strategy and help lead SVB to its next phase of growth. And I also want to thank Ken for leaving us and all of the employees at SVB such a wonderful franchise, and for me personally being such a great mentor.

And with that, I'd like to turn it over to Mike.

Thank you, Greg, and thank you all for joining us today. We had a great fourth quarter and 2010 and are very pleased with the direction in which our business is moving. There are a few items I would like to highlight. First, is outstanding loan growth. Second is continued high credit quality. Third is net interest income, which declined only slightly even though we sold certain investment securities and issued senior debt in the third quarter. And fourth, our expenses, which came in slightly above target for the year but grew in the fourth quarter due to higher incentive compensation and investments in growth initiatives and front line personnel, as well as improvements in our infrastructure.

Let me start with loan growth. We are tremendously pleased with our strong loan growth in the fourth quarter. Average loan balances grew $509 million, or 11.3%, to $5 billion, while period end balances grew $663 million, or 13.6%, to $5.5 billion, the highest in our history. Once again, we saw demand across all client sectors with loans to our venture capital, private equity and software clients showing the strongest performance. With regard to period end loan balances, we expect to see a decline in the first quarter of 2011. This is because a significant amount of our fourth quarter growth came from venture capital call lines of credit which tend to be very short-term loans. However, we do expect average loan balances to continue their upward trend.

Moving on to credit quality. It remained very high with continued improvement in almost all credit metrics. As a result of our extremely strong loan growth, our provision for loan losses was higher in the fourth quarter. The provision increased $4.5 million to $15.5 million. We have seen consistent improvements in our credit quality over the past four quarters and conditions for our clients are improving noticeably. But we continue to reserve with a moderately cautious view of the overall economy.

Net charge-offs remained below $10 million for the third quarter in a row at $7.2 million or 57 basis points of gross loans versus $8.4 million or 73 basis points in the prior quarter. As in recent quarters, much of that came from our early stage portfolio. Non-performing loans also declined, falling $5.5 million to $39.5 million, or 71 basis points of total gross loans, compared to 92 basis points in the third quarter. We increased our allowance for loan losses to $82.6 million from $74.4 million in the prior quarter. As a percentage of total gross loans, our allowance for loan losses decreased slightly to 1.48% from 1.52%. Our credit quality is strong and it continues to trend in the right direction with continued improvements in criticized and classified loans.

Moving to net interest income, and net interest margin. Net interest income remained strong, although slightly lower in the fourth quarter at $104.5 million compared to $106.3 million in the third quarter. There are three items to point out. First was an increase of $8.6 million in loan interest income due to strong loan growth. The other two items relate to sound economic decisions we made regarding our investment securities portfolio and our debt. One was a decline in interest income of $6.5 million from our investment portfolio, primarily a result of the sale of certain investment securities in September which resulted in a $23.6 million gain in the third quarter, and paydowns. The other was an increase in interest expense primarily from our debt issuance of $350 million in September which will be used to repay $250 million of our convertible senior notes due in April 2011. These decisions played out even better than we thought given the increases in interest rates since the third quarter.

Our net interest margin was lower at 2.74% compared to 3.14% in the third quarter due to changes in the composition of our securities portfolio and continued deposit inflows, as well as the overall low interest rate environment. Average yields on loans remained relatively stable at 7.08% in the fourth quarter versus 7.12% in the third quarter. For the full year, average loan yields were actually somewhat higher at 7.20% versus 7.15% in 2009. Average yields on our securities portfolio in the fourth quarter were 158 basis points compared to 254 basis points in the third quarter as proceeds from our sale of investment securities in the third quarter, and normal pay downs in the portfolio, were reinvested at current lower market rates. We continued to invest excess liquidity from deposit flows into our securities portfolio growing average portfolio balances by $1.6 billion to $6.9 billion in the fourth quarter.

These purchases were primarily agency debentures and variable rate CMOs, and in aggregate had a positive impact on interest income. However, the increase was offset by the sale of securities and paydowns previously noted. The proceeds of these sales and pay downs were reinvested at currently available yields and in line with our strategy of managing our liquid resources and mitigating portfolio duration.

Average deposits rose by $1.4 billion during the quarter to $13.3 billion, with the bulk of that increase going into non-interest bearing deposits. We believe these higher deposits reflect the continued lack of compelling yield opportunities in the market. And while sometimes they give us a headache in terms of forecasting our net interest margin, we also believe they are a sign of our clients' strength and liquidity. Overall, a good performance for net interest income considering the recent sale of investment securities and the debt issuance.

Moving on to non-interest income, on a non-GAAP basis, non-interest income, net of non-controlling interest, and net of sales of investment securities, increased by $7 million to $52.1 million. Overall, our fee income reflects an improving environment for our clients. Of particular note were foreign exchange fees of $9.9 million which represented a 10% increase. We also recorded $6.5 million in gains on investment securities net of non-controlling interest and $3.5 million in gains from equity warrants. In addition, as our deposit levels have grown, we changed our accounting for certain fees from a cash basis to an accrual basis to conform with GAAP. This change resulted in an increase of $2.3 million of deposit service charges and $1.4 million of unfunded commitment fees.

Moving to non-interest expense. Non-interest expense increased by 11.3% in the fourth quarter to $115.9 million. Approximately 4% of that increase was related to our decision to continue investing aggressively and select growth initiatives where we felt the opportunity was very timely. In particular, these included our proposed China JV bank, the UK bank branch project, our private banking enhancements, and some aspects of our IT backbone. This decision generated higher professional services fees in the fourth quarter which are part of that 4% growth.

Approximately 2% of the increase was due to higher incentive compensation expense related to our continued strong performance for the full year 2010. Our decision to intensify our efforts around key growth initiatives was driven by our conviction that these areas of potential growth offer a significant advantage if we move now. Our efforts are already beginning to pay off in many areas such as growing international loans and deposits, higher FX fee revenues, increased fees from card services, improved client's experience, and greater credibility as a bank that can serve larger global companies. While we expect to see even more returns in the future, we are working to strike a balance between cost consciousness and making investments to continue developing these opportunities.

Now I will move on to our outlook. All of my comments refer to our outlook for the full year 2011 as compared to the full year 2010, unless otherwise specified. Starting with loans. We have significantly improved the preliminary outlook we provided last quarter of 10% to 20% growth. For 2011, we expect average loan balances to increase at a percentage rate in the mid 20%, driven by improvements in our clients markets and the loan momentum we have coming into 2011.

Moving to deposits. We expect average balances to increase at a percentage rate in the high single digits in 2011. We expect deposit growth to be influenced by continued economic improvements and in improving long-term rate environment for investors that we believe will motivate our clients to put more of their funds into off balance sheet investments. Please note that this outlook implies lower period end deposit balances. That said, we don't expect our deposit picture to change much in 2011 unless rates start to go up.

We expect net interest income to increase at a percentage rate in the high teens due to higher loan balances and growth in our securities portfolio, although the low interest rate environment will put pressure on loan yields. Our approach in our securities portfolio will be to continue investing in securities with predictable cash flows and limited potential for duration extension, primarily fixed coupon agencies and fixed and variable coupon mortgage securities. We expect our net interest margin to be between 3.3% and 3.4% for 2011. This outlook is based on a concurrent deposit level and assumes no increases in the Fed funds rate during the year. We expect higher loan balances will help the margin, but a low interest rate environment will limit upside growth.

We expect credit quality to remain stable in 2011 as a result of improving conditions for our client base overall. Our allowance for loan losses for performing loans should be between 1.3% and 1.4% of total gross performing loans. If credit quality and the economic outlook continues to improve, we could come in at the bottom of that range. We expect net loan charge-offs in non-performing loans to be comparable to 2010 levels.

Fees for deposit services, letters of credit, business credit card, client investment and foreign exchange, in aggregate, are expected to increase at a percentage rate in the high single digits, driven by continued improvements in the business environment for our clients, as well as new products and services we've introduced in the last 18 months and expect to continue to introduce in 2011. We believe that net gains on equity warrant assets will be comparable to 2010 levels of $6.6 million. Net gains on investment securities, net of non-controlling interest and excluding any gains from sales of securities from our Treasury investment portfolio, are expected to be between $4 million and $8 million. In 2010, we saw strong pick up in valuations from the deep declines in 2009. We believe 2010 levels reflect fair valuations but we don't expect the same dramatic increases in 2011.

Finally, we expect a growth rate for non-interest expense, net of non-controlling interest, in the low double digits, with a target goal of 10%. Our expense growth in 2011 is reflective of, and consistent with, the strategic initiatives we have discussed before, namely investments in global, private banking, IT, and operational infrastructure, and continued focus on growing and winning in our US markets. Our targeted 10% growth in operating expenses for 2011 consists of three broad components. One, approximately one-third is global and private banking initiatives. Two, approximately 15% to 20% relates to our continued investment in our universal banking system and global payment systems, as we establish a long term platform to support and deliver our services over the next 10 to 15 years. And, three, finally, the remaining 50% or so of expense growth is related to normal operating expenses including our continued investment in our sales and support employees to maintain and increase our competitive position in our US markets, the full effect of FTEs added in 2010, and finally the related cost to support our continued growth.

Overall, we are very pleased with our results in the fourth quarter and the year. We are seeing a return to solid loan growth, our clients are outperforming the broader economy, and we believe we are in the right markets at the right time. We will certainly be glad to get help from interest rates and a stronger economy over time, but for now we will continue to do everything in our power to remain competitive, gain market share and leverage the power of our platform to differentiate ourselves in the market. We think the opportunities we are pursuing are some of the best we have ever seen and we are excited about their possibilities.

Thank you and now I'll ask the Operator to open the call for questions.

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

Thanks. Good afternoon, everyone, and congratulations to you, Greg. First question, maybe for Mike, on the margin. I just wanted to understand a little better about how we get from the current level 2.74% to this average of 3.30% to 3.40% for the year. So, if you could talk a bit more about some of the assumptions embedded in that. You said there were no rate hikes but do you have a target loan of deposit ratio? And what kind of progression or pace of improvement are we likely to see?

So Joe, the pace for the 3.30% to 3.40% outlook we gave on net interest margin, of course, all driven by these drivers we just discussed. The biggest driver that will help us get to those higher levels will certainly be the loan growth. You saw what just came on in this past quarter, and plus our outlook of you're looking at the average loan growth in the mid 20% for 2011. So that's going to be the biggest key driver. The other thing we talked about is that we do expect some of the deposit balances to move off balance sheet by the end of the year, as well. So that will help the margins, as well, too, because again you're taking some cash that perhaps during the lower investment rate securities environment and moving off balance sheet, so that will help the yield, as well. So those are really the two key components.

And then what's driving that move or shift of deposits to the off balance sheet? Is it some move in rates that you're projecting? And just more broadly speaking, what, in general, is your view on the stickiness of deposits or how the mix may change when rates move up?

So Greg can take the first part of those questions and then if anything is still left open I'll jump on.

So Joe, the deposits are the main driver of moving deposits off balance sheet, as Mike had commented earlier, is really going to be higher yields that they could pick up off balance sheet. And that's really not going to change dramatically until rates pick up. But, as Mike said, we don't expect rates to move in 2011, so that's not going to be a big driver. Really what it is, is that we had such a huge run up in deposits at the end of the year. And that money, some of that money, is going to move up even though the rates, the investment rates, are small off balance sheet. So some of that will roll off, which is really what we're talking about. And you aren't going to see a fundamental change with the balance sheet related to deposits until you see rates pick up which, again, is probably going to be a 2012 event.

Okay. Thanks very much.

Your next question comes from the line of Steven Alexopolous from JPMorgan Chase. Your line is open.

Hi, everyone. Congratulations, Greg, too. Maybe I'll start, Mike, it looks like only a quarter or so of the loan growth came from clients with loans over $20 million, what you break out here on page 5. Could you give us more color on where the loan growth came from this quarter, maybe looking at industry type and segment and stuff like that?

This is Dave Jones and I will at least start to provide a response to that. So, two niches that contributed significantly to the fourth quarter growth would be the venture capital, capital call lines of credit, and also to the software group. Within the software group, a significant experience that we had in the fourth quarter as we had had in the third quarter, was the volume of opportunity to support clients in private equity firms making acquisitions. So, that business tends to be $15 million to $25 million. And in addition to being good business, it's nice sticky business. It tends to stay on our books for a matter of years.

Okay. Maybe to change gears for a second. Now that you have officially announced the joint venture formation in China, at least the initial stage, and Ken, we know you'll be even more focused on that, should we expect more investment in China in 2011 versus other markets, say UK or others? And when should we expect to see this up and running and providing a return for you guys?

As you saw, we basically just filed our application for the Chinese joint venture bank. So that still requires it to go through regulatory approval and it takes time. So I think perhaps it's a bit premature to actually come to a conclusion on when we'll start to see any real big returns out of that. Again, we're very hopeful that we can get it moving pretty quick but it's still going to take some time so I wouldn't say you'd start to see anything this year. That's with respect to China. You mentioned about in comparison to the UK and perhaps Greg will comment a little bit on the UK.

Yes, let me just add on to China. As we talked about in the past, we've said China is a longer term play. And although we disclosed in the fourth quarter the joint venture moving forward, it's still, I'd say, it's probably phase one in a 10-phase process, so it's still very early. We have money built into the forecast from an expense perspective in 2011 to support that, but it's still going to be really starting the building blocks, not really the big investment that I'd say you'd expect to see in 2012 and 2013. So that's the one point.

In comparison to the UK, the UK, we're already building pretty significant momentum there and our goal, our plan is to be able to introduce our branch in the second half of the year. So a lot of the expenses that Mike talked about are building out that infrastructure. And it really is not just the systems side but it's also the people. And as I've said before on this call, the UK is a little bit different than other markets. I'll call it a little bit of a model of build it and they will come. So you've got to spend the money up front before you can really launch the branch so that does create some of the expense growth that we had in the second half of 2010 and the first part of 2011.

Okay, thanks.

Your next question comes from the line of Mike Zaremski from Credit Suisse. Your line is open.

Hi, gentlemen. In terms of deposit growth, it feels impressive this quarter, especially given what's happening, it's happening the same time as pretty robust loan growth, so can you flush out what drove such a large increase in non-interest bearing deposits this quarter?

Yes, Mike, I'll start and then Mike or Dave or somebody else may want to join in. The deposit growth was obviously substantial in the fourth quarter, and we were thrilled to see it. We look at the total client funds, and that was a really significant growth in the quarter. The main drivers of that were really a few things. One is we've had, as we've said before, tremendous new client acquisition during the course of the year. So that's obviously one of the drivers. The second driver is, from our standpoint, our strategy has been to make sure we're going after the highest profile, strong and high profile companies in the market. And many people have read about some of these very high profile companies raising substantial rounds of financing, and it's not just from venture capital firms or private equity firms. It's actually including corporate and strategic partners. So in the fourth quarter we saw all those things happening at the same time, and it really created the strong growth. As I've said earlier about the deposits, the outlook for deposits, is that, really, what's going to change the mix on and off balance sheet will really be driven by interest rates, will be the biggest thing. And until that happens, you're going to see really just more of it stick on the balance sheet.

So then if I think about that, intertwine it with your NIM guidance, so is part of the NIM guidance, are you guys assuming that you can take -- I think a large part of the portfolio is extremely short in duration -- that you can take some of those and take some duration risk, especially since it maybe seems like Fed funds isn't implying much of a move, maybe some of the stuff is sticky?

I think as you're very very familiar with the yield curve, there's just not a whole lot of yield out there. When you look at the three-year Treasury, some were around 90 basis points. And when you're talking about extending your duration, you have to go pretty far out to get any real compelling yield. So the risk-reward of going out that far is just not there so I don't think you would see us taking any unnecessary duration risk in which you're going to tend to keep it on the short side.

Okay, that makes sense. Thanks for your time and congratulations, Greg.

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

Good afternoon. And congrats, Greg. Thanks, John. Mike, can you just talk about, I know you're indicating the trajectory into your full year margin guidance of 3.30% to 3.40% and you indicated part of that could be coming from the new loan growth you're going to be putting on and how that would help. Can you talk about the yields at which you're bringing on the new loans, particularly by type? So the capital call lines, what do they come in on, what yields? Same thing with the corporate tax stuff?

John, this is Dave Jones and I will touch on that. So, what we would typically see with a capital call line of credit would be interest rate at approximately prime. There would be fees that would be accounted for over the life of the commitment but think about it as prime. In terms of the buyout business, which is significant in our growth, the competition's increasing and the yields are reflecting that. But we tend to still receive LIBOR plus 450 basis points on the interest rate level. There, again, are some very good fees to be realized on that. And then most of the other business will depend. We do quite a bit better than prime for our asset-based lending which is a significant part of our business and our opportunity for growth. And then for other larger later stage companies, we find our way closer to prime given the quality of that business.

Okay. And then secondly, it seems like your outlook factors in a modest degree of some of the deposit roll off that could happen. Just give me an idea, does your outlook also factor in a pick up in the client investment fees as those deposits move off to the third party money markets, et cetera?

Yes, John, this is Greg. It's a little bit, but not much, honestly. And a lot of it has to do with the fact that when rates are so low, the majority of the margin goes to the client, as you would expect. And so the fees that we are earning are on the lower side and you really won't see a real big pick up until you see the combination of both volume, as well as an increase in rates, and you tend to share a little bit, the split becomes still more to the client but a little bit more to us, as well.

Okay, great. Thank you.

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

Good afternoon. Thanks for taking my questions and congratulations to both Greg and Ken on your new roles. The question I have is a little bit more detail on the loan growth, understanding there was a variety of sources that contributed to loan growth. But I think that for the second quarter in a row that the venture capital, private equity call lines contributed to a great deal of that. I'm wondering, can you speak to this and what does it mean in terms of trends in the overall venture capital market? And is there some persistency there that would suggest that you have some good visibility to ongoing demand through 2011?

Let me start the answer to that and I'm sure that others around the table here will add to it. One of the things that I'm sure you are all aware of is that, when these clients borrow from us, they give us their financials. And we're in possession of more financials of venture-backed companies than, I'm quite, certain anybody else in the world. And those are all ultimately digitized. So we're in a position to look for trends. And one of the interesting trends is that revenues year-over-year in most sectors of technology, among venture-backed companies, have grown by about 50%. And, as you know, a lot of our lending is dependent on the rate at which companies are growing. A lot of it's actually working capital oriented. And to the extent that revenues are up, receivables are up, and borrowing capacity is up, and the need for working capital is increased. So what it really says, in the first instance anyway, is that the technology sector is doing quite a bit better than it was a year ago, and that it's using debt appropriately in order to support that growth. With that though, I'd pass it to Dave to add to it.

So, not that much really, that I can't add to it. But important in the loan volume for the venture capital, capital call lines of credit, is a distinction between venture capital and private equity. So, on the venture capital side, we tend to find that there are three or four different venture capitalists investing $3 million, $4 million, $5 million each for a round of debt or a round of equity going into a company. And we may fund a part of that. On the other side, private equity, and particularly now with what, in my sense, is a vote of confidence in the market, there is more acquisition activity by private equity. We're seeing that they're making acquisitions in the tens of millions of dollars, and that is an opportunity for us to support that, both for the private equity side of the investment through a capital call draw. And then secondly, as indicated earlier, for us to augment that with a little bit of term debt. So again, what we will see there is draws that typically be for a matter of a few days at a time. And we saw good average loan volume in the third quarter, and in the fourth quarter we saw a lot of that volume happen to carryover on the 12-31 date which reflects the end of period growth.

Okay. And last question is, I believe your loan utilization rates were, I want to say, 50% last quarter. Was there any material change in that during the quarter?

This is Dave. I wish they were at 50%. 50% would be a normalized level for utilization. In the third quarter, I would say it was about 45%, and in the fourth quarter it was 46%, 47%. So, a pick up but not back to the normal level of 50%.

Thanks very much.

Your next question comes from the line of Aaron Deer from Sandler O'Neill & Partners. Your line is open.

Good afternoon, everyone. Just following up on Ken's comments with regard to the health of technology and the growth that you all are seeing. Taking that back to the guidance that you gave with respect to the expected gains on warrants and net investments in 2011, it just seems that your guidance there seems particularly low, given the growth that you've had in the portfolio, and the expectations that I would expect the volume of warrants and the profitability, or potential profitability of those warrants, would be increasing markedly this year relative to last.

Aaron, this is Greg. A couple things. One is I'll start with the investments in the securities side. A couple things. One is, as Mike said in his comments, we did have a fantastic run up, I think, in 2010. We were very pleased with it, which is great to see. The one thing to remember is that 2009 was such a huge write-down in the overall portfolio that 2010 was almost getting it back to what I'd say is a more normal level. So the gains that we saw in 2010 we don't believe will repeat unless, obviously, something truly positive happened, even above our expectations.

The second part is that, and I think some people look at our overall investments that we've made in debenture capital firms and our fund-to-funds business. We have some of that money that is on a cost basis just because of how it's structured. And so, even though we expect to see gains in that portfolio, it's going to be at cost, so it won't run through our P&L. So those are a couple things. I would say that, obviously, we're hopeful that things improve but it's pretty difficult to predict what it will be.

Regarding the warrants, you also have to remember that this past year was a good year so our outlook of being consistent is still a positive outlook. That's one point. The second thing is, unlike what we had done five, six, seven years ago, where all of the gains and warrants would flow through the balance sheet, we amortize a fair amount of warrants in the P&L each year. So we have to replace that to get back to even a zero number. So the combination of those two things is why we ended up with the number. And Mike may have a few things to add to it, as well.

The only thing I would add is just what would it take to really grow it. Again, if we start to see a pick up in IPOs for the tech sector, or the M&A activity for the tech sector, I think you can see that number improve or go beyond what we're actually predicting. But as Greg said, it was a great year as far as movements and increases in evaluations and so until we see some other catalysts to really drive that forward again, it's going to be pretty much comparable to the prior year with respect to the warrants.

A follow-up on that. Certainly the accounting changes have helped smooth those gains relative to what they were previously. But as they do get out-sized periodically, I would expect that there could be an inclination among analysts and investors to want to break out your earnings again into what's core versus -- non-core isn't the right term, but volatile earnings. And so, is there anything that you can do to help us in the investment community better understand what the potential gains could be, be it listing your top 10 companies where you have investments where potential gains could be there. So if there's a group on or something hanging out there, that we would know that it's there and could try to model for that.

Yes, I think that it's an interesting observation and I think one we will certainly take into consideration to see what we can do. Because, as you know, we're always trying to give you as much transparency as we can. So let us tinker with that and think about it and see how we can perhaps help you guys.

Great. Thanks very much for taking the call.

Your last question comes from the line of Jason O' Donnell from Boenning & Scattergood. Your line is open.

Good afternoon and congratulations, Greg. Mike, with respect to the decline in interest income on securities, can you just quantify, or give us a better sense of how much of that was a function of the securities sale in the third quarter versus accelerated pre-payments in mortgage-backed assets?

Yes, sure. It was approximately around $5 million pre-tax, is what that number was. Does that help you? And as you know, we recorded a gain of $23.6, million which is essentially, in a sense, a pre-payment of interest income ahead of it.

Okay, that's helpful. And then in terms of -- I apologize if I missed it -- but what trend can we expect in terms of compensation and benefits expense for the first quarter, given the comp items you highlighted, Mike, for the fourth quarter?

You go into the new year, it should be, more or less, I would say, the same going into the new year, maybe slightly down, all things given equal. But you actually just triggered my mind to raise something that's probably fairly important to some of you who have been following our bank for quite some time may recall. But there are these seasonal adjustments as you go into the first quarter. Historically that has ranged from around $4 million to $6 million. An example of that would be the various payroll taxes that you began to start anew fresh each year, because again, as you go through the year, certain people max out in paying certain taxes. You have 401(k) matching that may come about in relation to payment of some of the incentive compensation. So you have some of these seasonal factors that do play out. And like I said, historically it's been right around the $4 million to $6 million, that increases our compensation going into the first quarter. And then, of course, it more normalizes as you go through the rest of the year.

Great. Thanks a lot.

And we've reached our allotted time for today.

So, I apologize, Operator. I think we have two more questions in the queue, so we are open if the callers are open to answering those last two questions in the queue.

Of course. And your next question comes from the line of Bobby Bolin from KBW. Your line is open.

Hi, yes. Thanks for taking my late question. I was just wondering if you can give any update on where thoughts may be going on SVB Capital as it relates to the Volcker potential rules.

I'm going to ask our General Counsel, Mary Dent, to speak to that.

As you probably remember, we've always said that this is something that will play out over time and that's still our view. But there was a big step forward just earlier this week. The Financial Stability Oversight Council issued its report and recommendations, and that was the first big step in the implementation process. The report validated our position that venture capital is fundamentally different from private equity and hedge funds, and has encouraged the regulatory agencies to take that into consideration when they implement the Volcker rule. Now, the next step, as it goes over to the regulatory agency, is to propose and then adopt final rules. So this is just one step forward in a long process. But as we've always said, we continue to believe in SVB Capital.

And let me just underscore that. We do continue to believe in SVB Capital. And watching all of the developments, and Mary, of course, is intensely involved and sees a lot more of the detail than I do, but given my understanding based on Mary's activities, and watching these developments over time, we're more convinced than ever that we still have a viable business there, and we intend to support it.

Okay, thank you. I hope for the best on that.

Your next question comes from the line of Christopher Nolan from CRT Capital Group. Your line is open.

Hi guys. Congratulations to Ken and Greg. Mike, what's an appropriate tax rate to use for 2011?

Chris, it should be fairly comparable to what it was in 2010.

Great. And is the interest rate sensitivity still 400 basis point increase in Fed funds around $0.53 a share accretive?

We'll provide the latest update based on the latest balance sheet. We'll provide it in our 10-K which, as you know, is scheduled here fairly shortly. So we'll give you the update on that. But for now you could probably just refer to the 10-Q from the third quarter.

Okay, finally, for Dave. Given that we're going to see a lower end of period loan balance because of the capital call, should we see also a slightly lower loan loss provision in the first quarter?

So, if we see a lower end of period gross loan number, then what I'd think you could expect is that we would, as indicated in our guidance, have a reserve for performing assets in a range of 130 to 140. And, depending upon how much lower gross loans were relative to the end of year number, then even at the 140, it's possible that the allowance would be slightly smaller. But it obviously is depending upon what values you put into the variables of that equation whether it's a smaller allowance or not.

Great. Okay, thank you for taking my questions.

Operator, I believe we have time for one more call and then we'll have closing comments from our CEO, Ken Wilcox.

Your last question comes from the line of Casey Haire from Jefferies. Your line is open.

Thanks. Thanks for squeezing me in, guys. I appreciate it. So real quick, just one last follow-up on the margin. As we try and get to understand the framework how you get to the 3.30% to 3.40% on the year. Can you give us a sense as to where margin exited the quarter, that is to say, what was margin in December?

I don't have that in front of me here.

Okay, would you say it was higher than the 2.74%?

Casey, I apologize. I just don't have that data in front of me right now. Yes, I apologize for that.

No problem, thank you.

Let me just wind up here then, with a couple of closing comments. I want to express my appreciation to all of you analysts out there for the excellent coverage that you've provided to us over the years. And I appreciate all of the support that you've shown our organization during my tenure here. We have a very strong team at the top of this organization, people with a lot of experience who have been together for a long period of time. We have a very strong group of 1,400 employees who are very experienced. The turnover rate at SVB is very small. We have, I am absolutely convinced, the best people in our space. And every day we attract additional people in our space because they want to be part of the best. Greg will be an excellent CEO, I am absolutely positive of that. You'll find that we will move forward without a hitch. Our progress and our growth will continue in the same, I think, positive trend line that we have brought to bear over time. So thank you very much, and that's it.

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