SVB Financial Group (SIVB) 2011 Q4 法說會逐字稿

Good evening. My name is Aly and I will be your conference operator today. At this time I would like to welcome everyone to the SVB Financial Group Q4 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) I would now like to turn the conference over to your host, Miss Meghan O'Leary. Ma'am, you may begin your call.

Thank you, Aly and thank you all for joining us. Welcome you to our fourth-quarter 2011 earnings call. Our President and CEO, Greg Becker; and our CFO Mike Descheneaux are here today to talk about our fourth-quarter results and they'll be joined by other members of Management for the Q&A. I'd like to remind everyone that our fourth-quarter and year-end earnings release is available on the investor relations with section of our website at www.svb.com.

I'd also like to caution you that we'll be making forward-looking statements during this call, that actual results may differ materially. We encourage you to review the disclaimer in our earnings release giving the forward-looking information. This disclaimer applies equally to statements made on this call. In addition, some of our discussion today will include references to non-GAAP financial measures. Information about those measures including a reconciliation to GAAP measures can be found in our SEC filings and in our earnings release.

We'll limit the length of the call including Q&A to one hour. During the Q&A session, we'll ask you to limit yourself to one primary and one follow-up question before getting back in the queue to enable other participants to ask their questions. And with that, I'll turn the call over to Greg Becker.

Thank you, Meghan, and thank you everyone for joining us today. We had another great quarter, delivering net income of $35.6 million and earnings per share of $0.81 per share. These results were driven by substantial loan growth, healthy net interest income, continued high credit quality, and gains on equity warrants. It was not only a great quarter, it was a strong finish to an outstanding year in which we had record-high net income of $172 million, that's an increase of 81% over 2010. Record earnings per share of $3.94, that's a 76% increase over 2010, and double-digit return on equity of 11.9%. Underlying these bottom-line numbers in 2011, we had all-time highs in loans, deposits, net interest income, and gains from VC related investments, and warrant gains were the highest in more than a decade. This exceptional performance is a result of our consistent focus on keeping our clients as they grow into larger companies. Supporting their growth by expanding our global platform and introducing products and services to enable clients to conduct their business anywhere at anytime across global borders.

Let me highlight some of our 2011 accomplishments and our efforts to work with these larger clients. In our corporate finance group which represents our larger clients, we saw average loan growth of 42% over 2010. Our new corporate finance client count increased by 16% over 2010. And we delivered on our goal of dramatically reducing client turnover in this group.

With regard to our global expansion, we received approval to move forward with setting up our joint venture bank in China, and are in the process of preparing for a launch in 2012. We also received tremendous support and visibility in the UK for our efforts to obtain a branch license there. While I'm disappointed we didn't get the branch up and running in 2011, as we originally planned, we're very confident it will be up and running in the first half of 2012. In the meantime, we continue to build relationships, win new clients, and grow loan balances for our clients globally.

On the product and service side, we enhanced our global transaction capabilities in multiple currencies -- or countries and currencies. These new capabilities helped us increase international wire activity by 64%, and the dollar volume of FX trades by 40% over 2010. We also introduced enhanced card and merchant products including the first smartcard for US businesses, a secure credit card that is now the standard in Europe and Asia. These new products helped us grow business credit card revenue by 58% and merchant service volumes by 33% in 2011. These milestones were all part of our continued investment in helping clients succeed.

We're very pleased to have been recognized for several other accomplishments during the year. We were named Bank of the Year by the Export/Import Bank of the United States for our success in helping companies do business globally. We were in the top 10 of Forbes list of America's best banks for the third consecutive year and just last week we were named to Fortune's list of the 100 best companies to work for. This recognition is a testament to our employees, our clients, and the culture we've built at SVB.

We would be proud of these results in any environment but we delivered them in a year when the US and world economies frequently seemed on the verge of recession. When interest rates reached all-time lows and in which the average ROE for the 100 largest banks that have reported to date was less than 6%. These results validate three things we already know. One, we're focused on the right clients. Two, we have the right model. And three, we're making the right decisions to execute effectively.

The right clients. Our clients our innovative companies. Technology, life sciences, and venture capital firms and the investors that support them. We focus on them and premium wine, and that's all we do. Our mission is to help them succeed. The thing that's so great about innovation companies is that they're driven by the market demand for ideas. For better, faster, and more efficient ways of doing things.

Technology and innovation underpin virtually every aspect of our lives, and demand for ideas continues to grow regardless of market cycles. Innovation companies attract sophisticated investors with extensive financial resources and the willingness to nurture their investments. Not just venture firms, but angel investors and corporate venture groups. Innovation companies grow faster. They go global earlier, and that translates into a steady stream of new, fast-growing, high-potential clients for us. Small clients the grow quickly into larger clients. We help them do that.

The right model. Many of our clients, especially at their early stages, don't want just a bank. They want a partner. And we have learned that after doing this for a long period of time that partnership is in fact the best model for working with innovation companies. Now, partnership is a word that gets used a lot in banking, so let me tell you what it means to us. It means building relationships that allow us to work through the hard times as well as the easy times. Solving problems with a broad set of services that support startups to billion dollar companies. Giving advice based on our knowledge and networks, and making it easy for our clients to do business with us so they can focus on their business. I frequently receive e-mails, letters, and phone calls from clients and their investors who reinforce the importance of our partnership with them, which is always a great feeling. We built and refined this partnership model over almost 30 years. We continually strive to be the most valuable partner possible to innovation companies and we never take our leadership position for granted.

The right execution. The right execution from my standpoint consists of balancing two things. First, we have to deliver growth and shareholder returns today. I believe our results show that we're succeeding at this. Second, we have to invest in our business to ensure sustainable growth in shareholder returns over the long term.

To that end, we continue to focus on three main areas. First, we are investing in people that can help drive our growth in client facing roles. We've done this in our private bank, in our corporate finance group, and in our global offices and in select high-growth markets, such as New York. Second, we're investing in our platform through new products, services, infrastructure, and the people that support our growth behind the scenes. And third, we're making investments in our global activities, which are starting to deliver results. We're excited about the initial positive impact of these investments and expect them to have an even bigger impact going forward. Overall, we're striking the right balance of near-term performance and long-term investment.

Now let's take a look at 2012. Although we believe the broader economy will continue to be challenging, the combination of our positive momentum from 2011 and the momentum of our clients makes us optimistic about 2012. Mike's going to get into the details in a minute, but I'll touch on a few of our high-level drivers, things that we think will be directly affected by the investments we've made.

Let me start with loan balances and net interest income. We expect 2012 average loan growth in the mid-20% range and net interest income growth in the high-teens percentage range, an expectation that is partly driven by the strength of our clients. We expect core fee income to grow in the mid-teens percentage range driven by new clients, new products, and increased product penetration. Finally, we expect our expense growth will be in the high-single digits. The main driver here will be the long-term investments I described earlier, but we're also making near-term investments that we believe will lower our long-term expense growth trajectory. A good example is our recently announced plan for an operations and IT center in Tempe, Arizona.

Let me close by saying we're extremely proud of our results in 2011. A year in which we thrived despite having little help from the economy or interest rates. We see significant opportunities in 2012 to grow revenue, add clients, and enhance our capabilities and our outlook reflects this view. And while doing that, we continue to cement our reputation as the bank for innovation companies of all sizes worldwide. I want to thank our clients for the confidence they put in us, and our employees for their dedication to our clients, and to the culture they are part of at SVB. Thank you. And now I'll turn it over to our CFO, Mike Descheneaux.

Thanks, Greg and thanks everyone for joining us today. We had an outstanding fourth quarter and 2011. We are extremely pleased with our results and our progress on expanding our Business, both domestically and globally. The key items I would like to highlight and discuss today are as follows. First, is outstanding loan growth. Second is continued high credit quality. Third is outstanding deposit growth. Forth is record-high net interest income. Fifth is solid warrant gains. Sixth is higher expenses, primarily due to our better than expected performance as well as growth and infrastructure initiatives. And finally seventh and last, is our solid capital levels.

As you may remember, we started 2011 with questions about the economy. As a result, our outlook reflected our caution going into 2011 after two difficult years for the economy. But two things happened. Our clients did better than we expected, and we executed on our strategy really well. Accordingly, we increased our outlook several times during 2011 for most business drivers and met or surpassed almost all of our targets.

Now let us look at our results for the quarter. I will also comment on our 2012 outlook for each item as we walk through our results. First up is loan growth. We continue to see exceptional loan growth related to our ongoing activities. In the fourth quarter, we grew average loans by $388 million, or 6.5% to an all-time high of $6.4 billion. We also grew period-end loans by $642 million or 10% to $7 billion, another all-time high. This growth came from across all of our client industry segments with continued strong activity in corporate finance and buyout loans, which includes our larger clients. Year-over-year, we grew average loans by 31%. We also grew period-end loans in 2011 by $1.4 billion, or 26%, and those balances appear to be holding up well as we begin 2012.

In light of our clients continued strength and our strategy for keeping them longer and supporting them globally, we expect average loans in 2012 to grow at a percentage rate in the mid-20%s. So to clarify, average loans for 2011 were $0.4 billion, and we expect to grow approximately 25% on this space. As for all of the guidance ranges we will be giving, unless otherwise specified, this outlook reflects our expectations for the full year 2012 relative to the full year 2011.

Moving on to credit quality. It remains sound. We had a provision for loan losses of $8.2 million, compared to $800,000 in the third quarter. This was due primarily to an increase in period-end loans. For the full year 2011, our provision was just $6.1 million, or 9 basis points of average total gross loans, compared to $44.6 million or 80 basis points in 2010. Net charge-offs remain low at $3.5 million, compared to net recoveries of $2.3 million in the third quarter. This reflects gross charge-offs in line with our expectations of $7 million, compared to $8.2 million in the third quarter. We also had recoveries of $3.5 million in the fourth quarter, compared to $10.6 million in the third quarter.

Nonperforming loans remain very low at $36.6 million, or 52 basis points of total gross loans for the fourth quarter, compared to $40.5 million or 63 basis points in the third quarter. Credits increased by $70 million in the third quarter to $372 million, which is well within our target range. You may recall that in the third quarter, classified credits decreased by $75 million. Finally, we reduced our allowance for loan losses as a percent of total gross loans to 1.28%, compared to 1.34% in the third quarter, due primarily to the effect of decreased risk in our nonperforming portfolio.

We expect credit quality to remain stable in 2012 as a result of generally improving conditions for our clients, but still recognizing the challenges the general economy faces. We expect our allowance for performing loans as a percent of total performing loans to be comparable to 2011 levels of 1.23%. We expect net loan charge-offs of between 40 and 70 basis points of gross loans. And we expect nonperforming loans to be lower than 2011 levels of 52 basis points of gross loans.

Moving onto deposits, we saw significant growth in the fourth quarter of $708 million, or 4.4% in average deposits, and reached a high of $16.5 billion. Clearly our strong-deposit franchise is a tremendous asset. Our clients continued to perform well and generate surplus cash, and we continue to work with them to ensure they're on the right product, either off or on the balance sheet. As an example, since we reintroduced our off-balance sheet sweep product just eight months ago we have accumulate $1.1 billion in balances that otherwise would likely have gone to the balance sheet. In 2012, we expect average deposits to increase at a percentage rate in the low teens. This outlook reflects our expectation that deposit inflows will begin to temper somewhat compared to 2011, and that we will have continued success with our off-balance sheet initiatives.

Moving onto net interest income and net interest margin. Net interest income reached another all-time high rising $4.6 million to $140.6 million in the fourth quarter. For the year, net interest income increased by $108 million to $528 million, a growth rate of 26%. In 2012, we expect net interest income to increase at a percentage rate in the high teens, primarily driven by expected loan growth.

Our net interest margin was 3.10% in the fourth quarter, which is a decline of 3 basis points compared to 3.13% in the third quarter. The decrease was primarily due to significant deposit inflows and involving loan mix. Net interest margin for the full year 2011 was 3.08%. During the fourth quarter, we reinvested portfolio cash flows from variable rate securities into higher-yielding fixed rate securities, which increased the average yield on that portfolio from 1.68% to 1.74%. This was a factor in helping to partially offset the effect of deposit growth on our net interest margin. While reinvestment risk and its impact on our net interest margin will remain a challenge, we will continue to take advantage of short-term rate increases when possible. In addition, if we achieve the loan growth we're expecting in 2012, we believe we will not be as impacted by lower rates on reinvestment as we will use proceeds for maturing securities to fund loan growth.

Investment balances held relatively steady during the fourth quarter, as we used cash from deposit growth to fund loan growth. The average duration of the portfolio was 1.8 years at December 31, versus 1.6 years at September 30. In 2012, we expect our net interest margin to be between 3.2% and 3.3%, driven by higher loan balances and continued execution of our investment strategy. Unfortunately and confirmed by the Federal Reserve yesterday we're not expecting any increase in the Fed funds rate in 2012 or for a while, for that matter.

Now I will move to noninterest income. Overall, noninterest income decreased in the fourth quarter to $73.1 million, compared to $95.6 million in the third quarter. This decrease was due to lower gains on investment securities in the fourth quarter which were partially offset by higher gains on warrants. Now, as you know, that number includes noncontrolling interest associated with investment securities gains. If you exclude a noncontrolling interest, you actually have a non-GAAP noninterest income of $62.1 million which was an increase of $7.7 million over the third quarter.

The breakdown is as follows. We had net gains on equity warrants of $14.1 million in the fourth quarter, compared to net gains of $5.5 million in the third quarter. These gains reflect continued strong M&A activity amongst our clients. Approximately 60% of these gains were from increases in valuations and the remaining 40% were from the exercise of warrants. For 2011, our warrant gains were $37.4 million, which as Greg mentioned was the highest number in over a decade.

In the fourth quarter, we also had gains on investment securities, net of noncontrolling interest of $7.5 million, which was lower than in the third quarter, when we had $9.3 million in gains. $3.4 million of our fourth-quarter gains were primarily related to increases in valuation of our venture capital related debt bond investments. The remaining $4.1 million was due to the sale of private company shares we originally acquired through the exercise of warrants. For the full year 2011, net gains on investment securities net of noncontrolling interest totaled $33 million.

Income from core fee items during the fourth quarter of $32 million was consistent with the third quarter, which was one of our best quarters ever. For the full year 2011, core fee income increased by $9.5 million or $8.7% primarily driven by higher income from foreign exchange fees and credit cards. In 2012, we expect core fees for deposit services, letters of credit, credit cards, client investment and foreign exchange in aggregate to increase at a percentage rate in the mid-teens.

Now let us turn to expenses. Noninterest expense was higher in the fourth quarter at $135 million, compared to $127 million in the third quarter. This increase was almost evenly split among three items. Incentive compensation costs related to our strong performance; second, compensation and benefits expense for key new hires to support the continued development of our global platform and our product offerings; and third, professional services expense related to the maintenance and enhancement of our IT infrastructure as well as the continued development of our global platform and our product offerings.

The latter two items are examples of the growth in infrastructure investments Greg mentioned that we are making to drive future growth. As Greg pointed out, our investments in people, our platform and our global expansion are paying off for us through new capabilities that drive client revenues. We believe we are doing the right things now to position ourselves for significant future growth.

In terms of the investment in growth and infrastructure that Greg referred to, our full year 2011 expense growth breaks out along the following lines. Approximately 50% of the expense growth is to be tied to revenue generation and supporting infrastructure in the US. 10% was related to hiring an expansion into our global geographies. And the remaining 40% was for investments in new system support and enhance our backbone infrastructure. For the full year 2011, noninterest expense net of noncontrolling interest was $492 million, reflecting a 19% growth rate over 2010, which exceeded our outlook. But as we indicated in prior quarters, if you back out the additional compensation expense related to our outperformance in 2011, our growth rate is 12%, which was in line with our outlook. In 2012, we expect to limit noninterest expense growth rate to the high-single digits.

We expect expense growth will be allocated as follows. Approximate 60% of the expense growth will go to revenue-generating activities in the US and supporting infrastructure. Approximate 20% of the expense growth will come from global initiatives predominantly from launching our UK branch and our China JV Bank initiative. And approximately 20% of the expense growth will go to our backbone infrastructure to support continued growth.

Turning to capital, our capital ratios remain solid overall. Tier 1 leverage for both the bank and the holding company was slightly lower in the fourth quarter, primarily as a result of strong deposit inflows, but it remained within our comfort zone. At this time, we believe our organic earnings will be sufficient to support a deposit growth and our tier 1 leverage ratio. However, it is important to realize that we also have certain alternatives for maintaining the ratios if deposits continue to grow significantly. Over the longer term, we are targeting a tier 1 leverage ratio between 7% and 8% at the bank level.

To wrap up, we are extremely pleased with our performance during the quarter and for the year. We continue to execute strongly, to win new clients, and to keep existing ones. Our clients and the innovations sector are performing well. We see opportunities for growth ahead, and we are positioning ourselves to continue to deliver solid performance in 2012 and growth in the long term. With that, I would like to give a special thank you to all of our employees at SVB for an incredible 2011. And thanks for everyone for joining our call. And now I'll turn it over to the operator to open it up for Q&A.

(Operator Instructions) Brett Rabatin, Sterne Agee.

Wanted to ask for my question just the difference in pricing between obviously we talked about this in the past, but the pricing differential between some of the newer, larger loans that you're putting on versus what you have currently on the books, kind of the difference between the two?

So this is Dave Jones. Let me at least start in terms of a response. Some of the larger, newer loans that we're booking would be in the buyout portfolio. And a rather common pricing there would be LIBOR with a floor of 150, and a rate of 500, 550 basis points on top of that. And that would be relatively consistent with what we saw all through the year. So there's really no price compression going on there.

When it is that we are financing some corporate-on-corporate, so we have a solidly performing later-stage technology company that may be looking to expand its product profile by acquiring another company, then that rate is going to be dependent upon the combined operating performance of the legacy company together with the acquired company. And the rate can vary. I would say that often we're talking about something that's going to be in the Wall Street prime area of 3.25 to Wall Street prime plus 25 basis points, with a modest fee on top of that. And as that business grows, then that is creating a shift in terms of some of our blended pricing. Not a lot of decrease there, but it just provides more of the later-stage larger credit with lower rates commensurate with lower risk.

Okay. Great. Thanks for the color.

Steven Alexopoulos, JPMorgan Chase & Co.

Maybe I'll start -- I'm curious, what are you guys seeing from your customers that at this relatively early stage you're already taking up the loan-growth guidance for 2012?

Steve, this is Greg. I'll start and then turn it over to Dave. There's a few things. First of all our clients overall are doing very well, and so what happens when your clients are doing well, the acquisition level is picking up, so we're seeing acquisition levels picking up and we're doing the financing. You're seeing some buyout financing picking up. And then I would just say the broad category of working capital growth, utilization rates -- so it's again, it's not just one thing, it's several things that are driving it. And so the main part -- so that's a key part. The main part also which helps is that we had a nice run-up in the fourth quarter, and so as you take out the period-end numbers, obviously it helps your average as long as those loans are sticky, which we believe they are. So that's really the biggest reason for the driver of the increased outlook for loan growth.

All right. And for my follow-up question, did you say you expect the UK office to open the second half of this year? And is any of that growth needed to get to the guidance or would that just be in addition to?

I described it as being the first half of the year, which we expect to happen. But as far as the growth, the main part of what's happening in the UK is that that's the approval of the branch. We're already able to do loans. We saw a nice loan growth in the end of 2011. We expect nice loan growth in 2012. It may be partially dependent on the branch, but we realistically we have a strong pipeline in the UK already. So there won't be a dramatic impact, even if that were to get extended a little bit.

Okay. Thanks for taking my questions.

Aaron Deer, Sandler O'Neill & Partners.

Mike, you mentioned the fed guidance on rate expectations that came out yesterday. I'm curious if that has in any way changed your strategy or positioning with the investment securities portfolio and if you're looking to push that out a little longer on the curve?

Aaron, that's exactly some of the thinking. You feel a little bit more comfortable when you have a little bit more clarity on the rates there. So that's something we've already begun to talk about. And even slightly before that because our views were that it seems that the interest-rate environment was going to be extended to a little bit longer, so yes, that's fair thinking.

Okay. And then, Dave, on the net charge-offs guidance, I'm curious, obviously next year you're probably going to see less in the way of recoveries. But the higher guidance on charge-offs, I guess given the improved outlook for the economy, sounds like your customers are all doing well. It seems like a bit of a higher range, 40 bips to 70 bips, that's higher than I guess what we saw at anytime during the 2002 to 2007 period. Is that partly because of the changes you've had and the types of lending you do on the bigger customers or what's kind of driving that?

So yes, I'd say that that's part of it. And, I'd like very much later, in the year to come back and move that guidance lower. But at this early stage, thinking about the portfolio, thinking about what reasonably is a normalized range for us, thinking about the fact that it's been three years since we've had problems with a large loan, and they will deliver one, one of these days, it could be this year and the consequences of it, just would be prudent to build in to this stage of our forecast.

Okay. Great. Thanks for taking my question.

Joe Morford, RBC Capital Markets.

Congratulations on the good year. First question is if you could just talk a bit more about the margin guidance and how you get to that 3.20%, 3.30%? Sounds like part of it has gone out in the -- a little longer on the investments, but just in general is it improved earning asset mix? I saw along those lines, the overnight cash balance has built up quite a bit, what pace do you see bringing that down to?

Joe, I think it's all the things you actually mentioned. Clearly loan growth is going to be the largest drivers of that and clearly when you're bringing on loans at an average around 6.5% or so, at least that was our average loan margins in the fourth quarter, that's going to be a big help to the net interest margin. The other thing of course is the investment securities, with tweaking up some of the rates a little there so we're going to pick up some there as well too. And to your point as well too one thing we've been focusing on is bringing those cash balances down as well too because we've been having a large inflow of deposits and the franchise continues to be really, really strong in that area. So all three of those things are factors that are going to help us to get up to that guidance we talked about.

Okay. And then the other question was following up on the loan growth comments, and the expectation for mid-20% growth this year, how do you see that breaking out by a mix of companies, stage of business, and do you see it being pretty consistent through the year?

Joe, this is Dave. So I think it's reasonable to think that early stage we'll have a hard time growing much of any rate. I think that our long established strategy of staying with clients longer, growing up with them will probably contribute more of the growth. We will continue to see -- we're continuing to see a good pipeline on the buyout and acquisition side. So I think it will tend to be technology, perhaps predominantly software and of a later-stage variety. Maybe some opportunity for us as we continue to grow out our private equity services group, and capital call risk for those firms.

And, Joe, the only thing I would add on top of what Dave said, probably a little bit -- definitely a little bit from global as well. So kind of -- we've said it over the last several quarters is that it's just not one thing that we're looking at. We have a lot of different areas that we expect to see growth from, and that's what our forecast is driving towards.

In some years, you've had it be more backend loaded. Do you see it being pretty consistent through the year then?

I think what happened right now is that we had again, such a nice run-up towards the end of the year, so if you can look at those balances, it'll probably be nice, steady growth throughout the year.

Thanks so much.

Herman Chan, Wells Fargo Securities.

Given the strength that you're expecting in loan growth, and in particular some of the acquisition financing, are you expecting similar trajectory in terms of stability on the warrants side as well?

Herman, that's a challenging question. Certainly we had a phenomenal year in 2011 on the warrants side. I think we all realize that that's pretty much a function of what's going on in the M&A and IPO markets. So if that -- those metrics continue to hold up well, you could have a good year. How good, that's still to be seen. And like I said, to repeat 2011 is going to be a big, big challenge. If you look back at some of our historical performance levels, I think you'll see kind of a floor around $6 million or so on the warrants in the last couple of years. So it's somewhere in between that range, but again let's wait and see how well the M&A and IPO market continues to go.

Herman, this is Greg. The only thing again I would add on to what Mike said is you also had last year, there's two aspects. One is the liquidity that comes out of M&A and IPOs, and the other aspect of it is warrant values could increase based on private rounds that are ticking up the value of companies. And clearly last year, we benefited from both. And so we already have -- there's an inherent buildup in value in some of the warrants, you see that on our balance sheet. So based on that it will be even more difficult to replicate what we did in 2011.

Great. And as a follow-up question, can you get some more color on the decline in average interest-bearing deposits in the quarter? And how much of that decline was driven by increases in your off-balance sheet products?

I'll go ahead and take it as a start on that. In general you just pretty much answered the question for you. It's moving to the off-balance sheet. We've reintroduced this off-balance sheet sweep product, and those balances at least I think the averages at the end of the year were around $600 million, a little bit over $600 million but the actual period-end number was somewhere in the neighborhood of over $1 billion by year-end. So it's an element of that and that's why you're seeing some of that movement from the on-balance sheet to the off-balance sheet.

Great. Thanks for taking my call.

Julianna Balicka, KBW.

I wanted to follow up on a couple topics that have already been raised in the Q&A session. In terms of the -- great quarter, by the way. In terms of the warrants slowing next year, since the difficulty in replicating that, should we expect that noticing that you have a lot of gains in your AOCI, would we expect some more securities gains or maybe a more proactive selling approach to maybe counterbalance that outflow?

Certainly we have a sizable number in that number you're referring to, the other comprehensive income the accumulation of that, but when we sold the securities in 2011, that was more from repositioning on the duration and the volatility related to the duration. So at this point, Julianna, we don't really anticipate selling any of the securities yet at this time but if our portfolio requires that we reposition, you could see us do that if that's the need. But again at this point in time, I don't see that happening yet.

Okay. That makes sense. And then in terms of that securities repositioning that was going to be my follow-up question. Could you give us a little bit more metrics in terms of the duration, what it's changed from to, or maybe what kind of yields are you purchasing your secured in as in terms of the repositioning you did this quarter? And in terms of going forward, are you expecting to proactively reposition or just simply purchase maybe higher yields of stuff that just naturally matures your cash flows?

Wow, that's quite a loaded question, quite a lot of ones. Let me try my best here. I'll start with some of the easier ones. On the duration of the side, it actually retrieves increased from 1.6 to 1.8 years. And now with the rates that are forecasted to hold steady for a little bit longer, we can certainly entertain and look into extending the duration up a bit, but again keeping very sensible because liquidity is very, very important in this environment.

As far as the securities, what we're buying is pretty much being driven by the deposit growth because for the securities that are maturing, currently they're basically those proceeds are going to fund our loan growth. Any new investment that we're buying is typically averaging around 180 basis points around that particular area. Again, our overall -- let's say profile of what we're purchasing has not been changing at all over the last couple of quarters, and we intend to pretty much continue that trend.

Very good. Thank you very much.

Dana King, Evercore Partners.

Just to follow-up on the securities question, given your expectations for the loan growth, and deposits are to moderate, assuming that securities growth will likely be moderating also?

Yes, sorry, what's the question? The answer is yes the --

In the fourth quarter level because it was a $1 billion period-end growth.

Yes. Again, that largely reflects again the deposits coming on, currently we have about $500 million a quarter that's kind of maturing investment securities portfolio. And again, which I said is going into funding the loan growth and to the extent our loan growth doesn't keep pace with those maturing portfolios certainly we'll continue to build on the investments securities portfolio.

And then just on the end of period loan balance, is that a good indicator to go off of for us in 2012 or is there some volatility in that number since there was such a big increase?

So on our outlook, the way we've done it, we're basing it off the full-year average over 2011. So that number was $6.4 billion for the average for the full year and yes, period end number was $7 billion. But when we say we expect to grow loans in the mid-20%s, let's say hypothetically 25%, you would take the $6.4 billion on averaged loan and multiply it by obviously 1.25%, to try to come out with the full-year average for 2012. So that's how that mechanism works.

Okay. So period-end could vary.

Exactly.

Okay. And then if I could have one more question, regarding the capital, you had said -- can you elaborate on the levers that you have on capital, given that the deposit growth comes out to be more than what the current capital generation is? What levers do you have to use?

Well, there's a few things. One, is just as Julianna mentioned, if we had to sell some securities, and we have a gain in that position on some of the securities but again we look to do we need to reposition our investment portfolio first, and I think that's one opportunity. The other opportunity is again just organic earnings as we said if continues can support some $2 billion in deposit growth for the year, so which that's quite, quite strong. Of the other thing is we do have cash at the holding company as well too that we could downstream if we need to. Obviously we can also go out and raise debt if we need to, and one of the last things we would consider would be raising equity.

Okay.

So I just want to clarify on the previous question, so when we're saying we're growing off the base of average loans, I meant to say for the full year, the average loan balance will be $5.8 billion, the number I gave for $6.4 billion was actually just for the fourth-quarter average, just to clarify that previous question. So you would take $5.8 billion, multiply by the 1.25% to kind of get the full year expected average for 2012.

Okay. Great. Thank you.

Sorry for that clarification.

No problem.

(Operator Instructions) Casey Haire, Piper Jaffray.

Just a question on the deposit guidance, was wondering if you could give us a little color here, obviously it's been very strong. You do have it moderating here. I was just wondering are you being conservative here? Is it just a reflection of the low-rate environment? Or is it more client acquisition? Just a little more color on how you came to a mid-teens deposit growth number.

Maybe if you could clarify what you mean by conservative. You can interpret that two ways here. Nevertheless, let me just try to give a little bit of color what's happening there. As we mentioned, our clients are continuing to do very, very well. And our acquisitions of clients has been very, very strong in 2011. To keep that pace going to 2012 will no doubt be difficult or challenging but again we'll still be adding things but really the key drivers certainly the low interest rates which is still keeping the deposit growth healthy, but as I mentioned, we did introduce that one deposit product for the off-balance sheet which has been so successful, this year. And so that's kind of maybe helping to temper the deposit growth with but deposit growth may not be as large as it was in 2011.

Okay. Okay. And just lastly on some of the warrant gains that were actually not realized, just unrealized, how is that -- how conservative are those marks? Is it third-party appraised? Just a little bit of color behind some of the unrealized gains.

Yes. I think probably one of the best reference sources is go to our 10-K and our critical accounting policies on how we actually value the warrants. But a long story short it's actually based off of a Black-Scholes model which considers a few things. It considers the risk free rate, it considers volatility, it also considers the last round of funding update. Last round of funding that the Company may have had as well. So when you factor these type of things, you get a fair value. As far as any third-party specific valuations and individual warrants, the answer is no, that doesn't happen. Again, when you look historically at the valuations of that portfolio as well as the gains we've been getting out of that, it's been a fair approximation.

Got it. Thank you.

And there are no further questions at this time, sir.

So operator, what we'll do is our CEO, Greg Becker will give a quick wrap before we close the call.

Yes. In closing obviously, we feel great about 2011 and our results for the year from an EPS perspective, from an ROE perspective and just all the things that we accomplished. I think what we try to describe is not just the great results from 2011 but also that we really believe that the outlook for 2012, the momentum from 2011 will continue into 2012, so again we want to thank all of our employees for all the support they give our clients, we want to thank our clients and we want to thank everyone for joining us today. So with that, we're going to wrap. Thanks a lot.

Thanks, everyone.

Thank you for participating in today's conference call. You may now disconnect.