SVB Financial Group (SIVB) 2012 Q4 法說會逐字稿

Good afternoon, my name is Chris, and I will be our conference operator today. At this time, I'd like to welcome everyone to the SVB Financial Group Q4 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions). Meghan O'Leary, Director of Investor Relations, you may begin your conference.

Thank you, Chris. And thank you all for joining us today, welcome to our fourth quarter 2012 earnings call. Our President and CEO, Greg Becker; and our CFO, Mike Descheneaux, are here today to talk about our fourth quarter and full-year results. They'll be joined by other members of management for the Q&A. I'd like to remind everyone that are fourth quarter earnings release is available on the investor relations section of our website at SVB.com. I will caution you that we will be making forward looking statements during the call and the actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward looking information. Disclaimer applies equally to statements made in this call.

In addition, some of our discussion today may include references to non-GAAP financial measures and information about those measures, including a reconciliation to get measures, may be found in our SEC filings and in our earnings release. We have a lot to cover today, what with the quarter and full year, and then our 2013 outlook, so we are going to try to power through it quickly and make sure we get to all your questions within the hour. But please do try to limit yourself to one primary and one follow-up question to enable other participants to ask theirs. So thank you, and I will turn it over to Greg Becker.

Great, thank you Meghan, and thank you all for joining us today. We had an excellent quarter, that exceeded our expectations. We delivered earnings per share of $1.12, net income of $50.4 million, and return on equity of 10.99%. We beat consensus by a generous margin, and for the full year, delivered exceptional performance in all of our primary business drivers. For the full year, EPS was $3.91, net income was $175 million, and our ROE was 10%. Mike will go into more detail in our financial results for the quarter and the year in just a few minutes.

What I'm going to talk about is our strategy, some of the non-financial accomplishments from 2012 that supports this strategy, and the year ahead. Our strategy is to be the best financial services partner, and thought leader, for high-growth innovation companies and their investors wherever they are in the world. Increasingly, through our private bank, this strategy includes the individuals who are part of this ecosystem as well. As we see it, this vision requires three things, the first is the ability to support our clients at all stages. This means establishing a lifelong relationship, working with these companies at their critical start-up stages, and supporting them as they grow to mature name brands. It also means growing our ranks of already established larger innovation clients.

The second element is the ability to support our clients wherever they are. Since we already are in every key domestic market, this primarily means extending our capabilities to key global markets. The third element is the operational infrastructure products and services to support the first two elements. This is about creating a simple, seamless and increasingly mobile client experience. It is also about building a platform that will allow us to grow efficiently. So let's look at what we achieved in each of these categories in 2012 and why we feel it was such a great year.

Starting with the first piece of the strategy, supporting our clients at all stages. SVB has been the dominant player among venture backed companies for years. And the pace of our new client wins in this area, suggests that our lead is becoming even more entrenched. In 2012, we added more than 1800 new venture backed and none venture backed early-stage clients. A record year. In addition to maintaining our market share of high-growth innovation companies, we saw a noticeable improvement among the highest-profile fastest-growth companies. We believe these companies are the most likely to go public, get acquired for substantial amounts of money, and be recognizable by all of you.

At the same time, we expanded our share of companies with annual revenues greater than $75 million. Our loan balances from these clients grew in more than 60% in 2012, surpassing $2 billion, and driving the majority of our loan growth. This growth included 39 buy-out financing deals, which allowed us to increase our market share position with virtually every one of our key private equity sponsors. Increasingly, we are becoming the go-to financing partner for middle-market technology buyouts in the innovation space. Our success in growing our larger company market share helped to drive 16% annual growth in core fee income, given that these clients tend to use more products and services.

In as good a year as we had, we are just getting started. There is still a tremendous amount of opportunity with these later stage clients. The second part of our strategy is supporting our clients wherever they are, and in particular, globally. To this end, in 2012, we accomplished two major milestones in our global strategy. Specifically, we obtained our [bite] banking license and opened up a branch in the UK, a task that included building a banking platform from the ground up. With the UK branch up and running, today we are adding new accounts at a healthy pace. As a December 31, we had 135 new accounts and are growing. These new accounts are coming from new clients in the UK market, and US clients doing business in the UK and in Europe.

While loan and deposit balances are still relatively small as a percentage of our overall base, roughly 3% of loans, we expect them to grow rapidly in the coming years. We also launched our new joint venture bank in China, which the Chinese regulators gave us approval to pursue at the end of 2011. Today, we are gradually opening up in-country accounts and building out our products and services to support local innovation companies, as well as foreign companies doing business in China. Of course, China is a much longer term play for us. Our JV bank can currently only open up onshore US dollar accounts, so we expect to be three to five years before we begin generating meaningful revenues there. There is still a lot to do in both the UK and China, but we are pleased with our progress.

The final piece of realizing our vision is the infrastructure products and services to support our growth. This includes simplifying and improving our clients experience; introducing relative products and services; and creating a platform to help us grow efficiently. As part of this effort in 2012, we implemented three new technology solutions for our clients that are transforming our product and service delivery. These included a mobile banking platform that had the fastest adoption rate of any product or service in our history. One client called the app a big leap forward for SVB with great usability. We also rolled out the industry's first tablet-based B2B payment plat solution, which has also been very well received.

And we launched the new streamlined client onboarding service. This is not only great for our clients, but for SVB, because it takes the multitude of forms it took to open an account and simplifies it to one process. Now clients enter their information online one time, and that populates everything. Clients have told us it is a great experience. It is a great tool and one of my favorites, super awesome, yes, that is a direct quote. On the efficiency front, we opened an operational hub in Tempe, Arizona which helps us by giving us access to a great pool of talent, particularly in banking operations and IT while lowering our long-term operational expense growth trajectory, and improving our business continuity framework.

Before I turn to the year ahead, I have two additional achievements that bear mentioning. First, we improved our scores on our annual clients satisfaction survey for the fifth consecutive year. While the trend line in client satisfaction levels are great overall, I'm most proud of our exceptional satisfaction ratings in our private bank, and private equity services, which are considered Best in Class. And, finally, last year we were recognized by Fortune magazine as one of the best places to work, something I'm particularly proud of. Looking at 2013 beyond, we believe the environment for our clients remains positive. A recent survey from the National Venture Capital Association suggests that VCs are reasonably optimistic about 2013, coming off a relatively strong 2012.

They see opportunities in business and Healthcare IT, which appear to be overtaking the consumer applications that dominated the last few years. Global activity is also expected to play a more meaningful role, with China and India and Latin America sited as important potential sources of startups. And, while fundraising challenges are expected to persist, the majority of the VCs and start-up CEOs surveyed, said they expected that the fundraising environment in 2013 to be the same as, or better than, 2012. Solid venture capital activity coupled with solid corporate venture, and angel investment, points to a good year of company formation in 2013. Our pipeline going into 2013 remains healthy and our clients, for the most part, feel positive about their opportunities this year.

In terms of the buyout and acquisition loans that have driven most of our growth, we see ample demand and continue to pursue the highest quality deals. This is, of course, assuming the economy continues its gradual improvement. Many of the initiatives we focused on in 2012 will remain priorities for 2013. We will continue our focus on engaging with the best startups early in their life cycles, and growing our ranks of larger companies. We will work hard to be the best possible partner to our innovation clients, and we use everything we've learned in the last 30 years to ensure our success. We will continue to build momentum in our global strategy. While we've completed a lot of the heavy lifting, and established the infrastructure in the UK and in China, we are actively building partnerships, winning new clients and expanding our global balance sheet in order to make the most of these opportunities and investments.

We will continue to refine and improve our infrastructure to signify things for clients; deliver innovative products and services; and scale our business, while effectively managing our base costs. So I'm optimistic, very optimistic about our prospects. But I'm also realistic about the challenges. We're still dealing with an unprecedented low interest-rate environment, as is every bank. Our dynamic client base, and our unique model, have allowed us to deliver strong performance regardless of these rates, but lower rates and competition have impacted our yields, and will continue to do so for the foreseeable future. These are challenges that we are well equipped to handle, as our performance has shown.

So while we may not win every deal, we are winning most of the deals that matter to us. Those of the highest quality companies, the best startups, the most influential VC and private equity partners, the ones we want. And our win rate has increased in the past year. In addition, there are significant barriers to entry for potential competitors. It is not easy to lend money to our clients, but it can be done. What's more difficult is providing the kinds of expertise and educational events that solve their problems, and make it easy for them to do business with us. Or the introductions and connections to the investors, and potential clients, that help them take their business to the next level. Or a government relations effort that gives startups a voice in policy matters affecting their success.

This kind of value, that has become our brand, over the last few decades. We know that the more successful we are, the harder we have to stay to work ahead. So whether it's simplifying the opening of client accounts, so it can be done in minutes rather than days, or delivering loan documents on Christmas Eve because a client needs them, our employees are constantly raising the bar on themselves to innovate and be the best partner to our clients. That attitude of doing whatever it takes to increase our clients chances of success, is one thing that will never change. And our clients are counting on it. Thank you, and now I'm going to turn the call over to our CFO, Mike Descheneaux.

Thank you, Greg, and thank you all for joining us today. We are extremely pleased with our fourth quarter results. As you can see from our loan growth, we saw no slowdown in client activity due to fiscal cliff concerns, and credit quality remained high. Core fee income grew solidly, and we had strong gains on launches, and investments securities related to our venture capital investments. We continue to deliver outstanding performance despite interest-rate pressures. Overall, it was a strong end to a great year, in which we performed very well against our initial outlook provided last January.

There are six areas I want to highlight today. First, is strong loan growth from normal client activity, and from some year end -- excuse me I will start over for them. First is a strong loan growth both from normal client activity, and from some year-end tax motivated activity. Second is the strength of our deposit franchise, which was reflected in growth in client funds, both on-balance sheet deposits and off-balance sheet funds. Third is higher net interest income and a stable net interest margin. Fourth is excellent credit quality. Fifth is strong gains on investment securities related to investments in venture capital funds, and VC backed companies, and on equity warrants. And of course, I will talk about our outlook for 2013.

Let me start with loan growth. We had an outstanding quarter. Average loans grew 4.6% or $367 million to $8.3 billion while period-end balances increased by 9.2% or $755 million to $8.9 billion. Those increases stem from strong growth in sponsor-led buyout loans in our software portfolio, as well as venture capital and private equity capital call lines of credit. In addition, as I alluded to earlier, a portion of our fourth quarter growth was due to clients working to get certain deals completed by the end of the year in anticipation of tax changes. Given the huge run [up] we had in the fourth quarter, we would expect the pace of average loan growth to moderate in the first quarter, with Q1 period end loans remaining flat to down.

For the full-year 2012, we grew average loans by $1.7 billion, or 30%, exceeding our 2012 growth outlook of percentage growth in the high 20%s. Which we increased from the mid-20%s in July. We grew period end loans by $2 billion, or 28%, in 2012 to reach an all-time high of $8.9 billion. Growth throughout the year was primarily driven by sponsor led buyouts and capital call lines of credit. Now, let me turn to our deposit franchise which showed extremely strong growth. Average total client funds grew by $1 billion in Q4 to $40.2 billion. This reflects on-balance sheet deposits of $19 billion, and off-balance sheet funds of $21.2 billion.

Period end balances grew by 7% to $41.7 billion reflecting deposits of $19.2 billion, an all-time high, and off-balance sheet funds up $22.5 billion. Average deposits grew by 4%, or $731 million, as a result of strong acquisition; and accelerator and growth clients; and strong activity buyer private equity clients. On a period end basis, deposits grew by 8% or $1.45 billion, further reflecting elevated year-end activity levels. For the full-year 2012, we grew average deposits by $2.3 billion or 15% which slightly exceeded our outlook of low teens growth. Period deposits also grew by 15% or $2.5 billion. This growth was driven by our clients continued health, and by our solid pace of client acquisition.

Off-balance sheet client investment funds grew at a healthy pace during the fourth quarter, driven by, primarily by active client adoption of our suite product. Period and suite balances crossed the $4 billion threshold, growing $681 million during the quarter, and $3 billion since the fourth quarter of 2011. Average client investment funds grew in Q4 by $247 million or 1%, and period end balances grew by $1.45 billion or 7%. For the full-year 2012, average client investment funds grew by $2.5 billion or 14%, and period end balances grew by a staggering $3.8 billion or 20%.

Moving on to net interest income and net interest margin. Net interest income grew by $6 million, or 4%, in the fourth quarter to $161 million as result of growth and loan balances, and lower premium amortization expense on our investment securities portfolio. For the full-year 2012, that interest income grew by an impressive $92 million or 17%. This growth was within our outlook range of high teens growth. Higher net interest income during the quarter was primarily driven by stellar loan growth, although loan yields were lower. Average loan yield during the quarter was 5.98% compared to 6.11% in the third quarter, and 6.51% in the fourth quarter of 2011.

The decrease in loan yield during the fourth quarter was driven, in part, by the increasing proportion of our loans that are tied to the national prime rate of 3.25% versus existing loans tied to the SVB prime rate of 4%. Additionally, decreasing loan yields during 2012 were due to changes in the mix of our loans, including significant growth in loans to larger companies which typically have higher credit quality than loans in other segments. For the full-year 2012, average loan yield was 6.21% versus 6.7% in 2011. Lower amortization expense in our available-for-sale securities portfolio also contributed to higher interest income in the fourth quarter.

The yield on the investment portfolio in the fourth quarter was 1.6%, an increase of 10 basis points compared to the third quarter, and a decrease of 15 basis points from the same quarter in 2011. For the full-year 2012, the yield on average investment securities was 1.66% versus 1.83% in 2011, due to lower reinvestment rates and higher premium amortization expense. Amortization expense in the fourth quarter was $13.1 million, a decrease of $4.2 million compared to the third quarter. The decrease was a result of a slight decline in actual prepayments on premium mortgage securities, and a decline in estimates of future prepayments. Because prepayments on mortgage securities tend to track changes in interest rates, premium amortization expense will continue to be a factor impacting our interest income in 2013.

As result of these factors, our net interest margin remained relatively stable during the fourth quarter at 3.13% versus 3.12% in the third quarter. Net interest margin for the full-year 2012 was 3.19%, well within our revised outlook range. You may recall, when we started 2012, our net interest margin outlook was higher, between 3.2% and 3.3%, and we adjusted it downward as a result of significant deposit growth, declining loan yields, and increased premium amortization on investment securities. Despite these three things, we grew net interest margin by 11 basis points from 2011.

Moving on to credit quality. It remains excellent, reflecting our continued strong underwriting and credit management, as well as the strength of the innovation sector. We had a provision for loan losses of $15 million, compared to $6.8 million in the third quarter. The majority of that was tied to our strong period-end loan growth of $755 million, and the rest reflected low net charge-offs of $5.9 million, or 28 basis points annualized. Gross loan charge-offs were $7.6 million, primarily from our hardware and life science portfolios. This compares to $4.6 million in the third quarter.

For the full-year 2012, net charge-offs were 31 basis points of average total gross loans, which was at the low end of our outlook. Our allowance for loan losses, as a percentage of total gross loans, remained stable at 1.23% for the quarter, and for the year. Consistent with our outlook. Impaired loan balances decreased slightly to $38.3 million in the fourth quarter, compared to $39.4 million at the end of the third quarter, and $36.6 million at the end of 2011. For the full year, nonperforming loans were 42 basis points of total gross loans, well within our outlook.

Moving onto non-interest income. It increased significantly in the fourth quarter to $127 million from $69.1 million in the prior quarter, primarily as result of higher gains on investment securities and warrants. Net of noncontrolling interest, non-interest income was $75.6 million. We recognize net gains on investment securities of $68.2 million. Net of noncontrolling interest, the gains were $17.2 million compared to $7.5 million in Q3. The big item there was exceptional significant unrealized gain on investment securities from our venture capital related investments.

The primary driver for this gain was a valuation increase in one of our managed direct venture funds, which resulted from a new funding round for one of the companies in that fund. The impact for us was greater than normal, because in this particular fund, we received a significant amount of carried interest, in addition to the valuation gains. It is important to note that this was an unusually large gain for us, and a relatively infrequent occurrence in our experience. It is important to note also, that valuation gains are unrealized gains so it is possible we could see some fluctuation in the fair value of this investment, and others, in the coming quarters.

Overall, it was an outstanding quarter for our funds business, with additional gains in our debt funds and certain strategic investments. Moving on to warrants. We recorded net gains on warrants of $7 million in the fourth quarter, compared to $500,000 in Q3. This increase was driven primarily by net valuation increases of $4.7 million, and $2.4 million from warrant exercises. Looking at the rest of non-interest income, our core fee income increased by 7%, or $2.5 million, to $37 million, primarily due to letter of credit and foreign exchange fees. In addition to letters of credit and foreign exchange, core fee income includes fees from deposit services, client investments and credit cards. Our outlook on core fee income for 2012 was growth in the mid teens, and we met that with growth of 16% or $18 million.

To wrap up on our results, I will just touch on some of the items I did not highlight. Namely expenses and capital ratios. Expenses remain within our expectations, although we saw bit of an uptick in the fourth quarter, due primarily to performance related increases in incentive compensation tied to our overall performance. Non-interest expense was $143 million in the fourth quarter, compared to $135 million in the third quarter. For the full year, our non-interest expense, excluding noncontrolling interests, increased by 9%, or $43 million, to $535 million. This increase was within the high single digit range we indicated in our outlook.

Our non-GAAP operating efficiency ratio, which excludes noncontrolling interest in certain other items, fell to 59.7% in the fourth quarter, compared to 63% in the third quarter. For the full year, our non-GAAP efficiency ratio improved to 62.2% compared to 65.6% in 2011. Our capital ratios remain strong, with some risk-based capital ratios dipping down slightly due to our exceptional loan growth in the fourth quarter. Bank Tier 1 leverage increased by five basis points for the quarter to 7.05% future earnings growth. Now I'll move onto the full-year 2013 outlook starting with our assumptions.

We assume that our clients healthy pace of activity continues, and that VC activity grows modestly. We further assume that we continue to execute effectively on our efforts to win new clients, domestically and around the globe. In terms of credit quality, we assume no significant deterioration of the economy. And finally, as well as unfortunately, we expect no changes in the (inaudible) funds target rates. Please remember that these growth estimates are for the full-year 2013 compared to the full-year 2012. We expect average loans to grow at a percentage rate in the low 20%s, driven by our clients continued healthy activity.

We believe the strongest loan growth will come from our corporate finance clients, and in particularly, from buyout lending. We expect average deposits to grow at a percentage rate in the mid-single digits, due to continued client acquisition. We expect non-interest income to increase at a percentage rate in the mid-single digits through continued loan growth. But offset by downward pressured on loan yields related to our loan mix; use of the national prime rate versus SVB prime; continued competition; as well as downward pressure on investment yields. And we expect our net interest margin to be between 3.1% and 3. 2%. This outlook is based on our outlook for interest rates; our changing mix of loans, including the gradual trend toward national prime as a benchmark; and our expectations for yields on mortgage securities.

Turning to our credit quality outlook. The key drivers here will be the continued health of our clients and gradual improvement of the economy. We expect our allowance for loan losses for performing loans to be comparable to 2012 levels of 1.16%. We expect net loan charge-offs to be between 30 and 50 basis points of average total gross loans, or comparable to 2012 levels. And we expect nonperforming loans, as a percent of total gross loans, to be similar to 2012 levels of 42 basis points. Our core fee income, as I defined it a few minutes ago, is expected to increase at a percentage rate in the mid teens. One of the key drivers is expected to be credit card income, which will benefit from improved penetration among our clients and enhance card solutions.

Another driver will be foreign exchange, which will benefit from our UK expansion. And we expect non-interest expense, excluding expenses related to noncontrolling interest, to increase at a percentage rate in the mid-single digits. We expect this growth to stem from higher compensation costs related to an increase in our number of employees, and higher operational costs related to ongoing IT and global operations infrastructure enhancements. We would also expect to see a seasonal increase in Q1, as has been evident over the last few years.

In 2012, we continue to lay the groundwork for our growth strategy of winning and supporting clients at their critical early stages, and keeping them as they grow. We have made tremendous gains in expanding our ranks of larger innovation companies, and extending our platform globally. We are well positioned to continue that work in 2013, and we believe that we are off to an excellent start in 2013 given our 2012 finish. And if we get help from interest rates, that will certainly help things even more. The innovation sector is alive and well. Our pipeline looks good, our client relationships have never been better and our people are the best in the business. For all these reasons we are very positive about our prospects for 2013. Thank you, and now I will ask the Operator to open the call for questions.

(Operator Instructions). We will pause for just a moment to compile the Q&A roster. Steven Alexopoulos, JPMorgan.

I will start, if I look at the change in interest income in the securities portfolio and make an adjustment for the change in premium amortization, it looks like, from a rate view, interest income on securities went down by only $1 million or so this quarter. Does that tell us that the headwind from the securities book is basically behind you, and in 2013 you should be able to invest cash somewhere close to the portfolio yield?

You know, it is not too far off. The premium amortization expense that we experienced in Q4 was obviously lower than Q3, as we pointed out, and our expectations going into 2013 is, more or less, at that similar level for each quarter as we experienced in Q4. But to answer your point more specifically, the reinvestment rates that we are kind of getting with the new investments, are around 140 to 150 basis points. So, as you know, we finished the quarter at around 160 basis points of yield, so you are not out of the woods yet. A lot of it depends on the prepayment speeds as well, too. But it feels like a lot of the downward drag is out. But again, it all comes back to that premium amortization expense, so how those repayments or prepayments, that's really going to dictate the 2013 year.

Okay. And maybe for my one follow-up, City National discussed on their earnings call tonight that they are expanding more in technology and life sciences. Can you talk about the competitive environment, and what do more banks expanding into your niche mean to you from a growth, and particularly pricing perspective, looking at where your loan yields are? Thanks.

So Steve, this is Greg, I'll start and maybe Dave will want to add to it. Yes, we see more people entering the market, and I guess it is not surprising mainly because it is one market, and we've said this for years and we should expect to see this, that it is a high-growth market, it is performed well through multiple cycles, and again, it is one of the only fast growth areas in the market. So that's not surprising. From our standpoint, knowing that this was the -- would be the case for years to come, for the foreseeable future, our focus is on making sure that we have the most diversified product set; can cover pretty much anything any of our clients need where ever they want, in any geography, product, service, et cetera.

And then you work on the client service side, in the value add. So it is not just one thing, it is multiple things. That being said, is it going to be competitive? Absolutely. Again, all the things that we are doing to make sure that we are positioned well in the market, to continue to win, add clients, that's what we do. We've been doing this longer than anybody else, and we are definitely not complacent. That's probably the short story.

And Steve, this is Dave. So, yes, we have acknowledged that City National has been hiring in the marketplace. And they will compete with us. It isn't clear exactly at what level. Are they going to be competing at the, particularly, early stage, or are they going to be middle or later stage? I would guess more likely middle or later stage, but that's strictly a guess. And I also will point out that an important part for us is to look at the value of the entire client relationship. And, while it may be that competition forces us to think hard about the interest rate and the loan fee that we may charge, the important part is keeping the entire relationship, the benefit of existing and growing opportunities for noncredit revenue.

Okay, appreciate all that color. Thanks.

John Pancari, Evercore Partners.

On the margin, I just want to get a little more color on your margin outlook, more specifically your loan yields appear to holding up now, certainly better than we had expected. And I guess, if you could just give us a little bit of color around how you are supporting the yields there, and how we should think about that going forward?

Hey, John, I want to make sure, so the question is about loan margin specifically, right?

Specifically the loan yields, that's part of the margin story. I'm just asking about the loan yields, they certainly seem to be holding up better.

So, John, this is Dave. And, a big part of where we saw the growth in the fourth quarter was indicated to be in the sponsor led buyout portfolio, and the yields that that particular product delivers is better than would be the case for a typical larger corporate transaction. So the compression that we would experience by growing with that particular product is less than probably you were expecting.

Okay. All right, and I guess on that point, could you give us a little more color on where are the yields that you are getting, the new money yields by loan type? So, for that product, and then for your -- update us on your capital call lines, et cetera?

So let me keep the response at a high level, some of the major categories. On the sponsor led buyout, a typical transaction, these days, would be a LIBOR plus a spread of 450 to 475. That LIBOR would have a floor of 1% to maybe 1.25%. The capital call for venture capital private equity probably is going to be pretty close, on average, to the Wall Street prime of 3.25%. The later stage corporate borrower probably is going to be close, maybe even slightly less, than the Wall Street prime because it is probably going to be a LIBOR plus a spread. But that rate is going to be reflective of the larger better credit-quality that the client delivers. Otherwise, the early-stage business would be in the high single digits as a typical yield. (multiple speakers)

Probably the only thing I would add onto that, John, just to be cognizant of the fact it all depends on when their growth is going to come from, right. Because, obviously, if you have a heavier amount of growth in the buyout that's, obviously, going to help it. But if your growth is heavier on the private equity venture capital call (inaudible), which are down around the prime level that's obviously going to be a little bit of a drag on the loan yield itself, albeit accretive to net interest income. So just be cognizant of the fact that the mix does heavily affect the overall loan yield.

Right. Okay, thanks Mike. And then lastly on the premium amortization, what is the amount of your unamortized premium in the bond portfolio as of the end of the year?

It is approximate $115 million.

Okay. Thanks.

Josh Levin, Citibank.

My question is about the gains from non marketable fund investments. Now you mentioned they are driven by valuation changes,and I assume those investments are fairly liquid. So what's the process for valuing them and what are the inputs you use?

It is a host of metrics. Obviously, it is probably nothing surprising to you. You're looking at comparables of other companies. You're looking at multiples of revenues and things. And so, again, it is probably nothing surprising, any rocket -- rocket science I would say. I don't know if you want me to going down to specifics, right, or an area that might help you more.

That's good enough, now I can follow-up with Megan later. Just a second question, how much of your loan growth guidance incorporates your international efforts?

Josh, this is Greg. It still, on a percentage basis, it is growing faster than the overall percentage growth rates. But again, as I described, and I described specifically just for the UK, roughly 3%. It's still a small absolute dollar amount. So over time, as I said in my comments, you've got this smaller base, but growing at a faster rate than you do the overall average, so over time it will become an increasingly larger percentage of the overall portfolio. But what's interesting about the UK and other markets, because we have this early stage to late stage segmentation, we are winning clients in the early stage, we are winning clients in the mid stage, and we're also winning corporate finance and buyout clients, as well. And so our strategy to stay with clients longer, and work with larger companies, still plays out in markets like the UK. Which is, what I think we're going to see over time, a decent amount of growth from.

Thank you very much.

Aaron Deer, Sandler O'Neill.

I guess the first question kind of gets back to the competition in price and subjects. I guess this would affect mostly with your early-stage clients, but when pricing those sorts of credits, have you looked at all at whether or not using warrants as part of your pricing structure? Have you given up warrants on any deals recently or is that still a key part of your pricing?

Aaron, this is Dave. We have seen competition give up on warrants, and we have elected not to do that. Don't specifically, I don't specifically understand that strategy.

Aaron, the only thing I would add on to that, is part of it depends on structure. So some of the loans structured at the earlier stage, depending upon the flexibility of the structure, that's where warrants become a critical component of the overall return. There are certain circumstances where clients are willing to take a more conservative structure, with loan covenants and things like that, where maybe we wouldn't be willing to take warrants or require warrants in that scenario. So it does depend upon the structure. But if your point is, has we seen much change in how we underwrite, in how we structure, the answer would be no.

Okay. That's helpful. And then, with respect to pricing on your existing portfolio, the SVB prime versus the Wall Street prime, what percentage of loans currently in the book are still at the SVB prime that haven't reverted, are likely to when they renew our whatever happens there?

So Aaron, this is Mike. We are just going off of memory here, but it is somewhere around that 20% number.

Okay. Very good, thanks.

Joe Morford, RBC.

I guess, a question on loan concentrations probably for Dave. I was just curious where did the sponsor-led buyout in capital call line portfolios end up as far as outstandings? And how big are you willing to let them get as a percentage of total loans? And similarly, the large loans over $20 million rose 20% sequentially, and now 35% of the portfolio, and how large are you comfortable with that getting as well?

All right, so the concentration of software. Software ended the quarter at roughly $3.3 billion. And venture capital ended the quarter close to $1.7 billion. In terms of the buyout portfolio, did you say that you thought it was 30% of the portfolio?

No, I was just, I was curious how big (inaudible) buyout was, but large loans over $20 million.

I'm sorry, yes, thanks. So the sponsor led buyout portfolio, end of the year, a little bit over $1 billion. And in evaluating that, considering the type of structure that we've put, the underwriting effort that we put, the niche that the individual loans would be situated in. We have plenty of growth opportunity still in the sponsor led buyout space. In terms of the large loans, the loans over $20 million, looking at that, yes, it is at the 30% level and up quite a bit over the year. I look at the composition of it, and I see that the software space and the venture capital private equity cap-call lending space were the two larger components. What I am seeing in the software, particularly, is the contribution of the sponsor led buyout.

What we have said over the years is that a target hold, positioned for us in a buyout would be $20 million to $25 million. So as we are growing that book of business, de facto, each one of the new opportunities would than fall into this disclosure. And I am okay with that. What I saw with the venture capital for the fourth quarter was an unusually large amount of activity, very late in the quarter. And my sense of it is, because it was large, because of the nature of those loans and frankly, what we have seen in the three weeks or so of the quarter, is that the typical pattern of a capital call funding being funded for 10 to 20 days is played out. And we've seen about as much erosion or decline in venture-capital capital-call in the first quarter as we saw in the last 10 days, 2 weeks of the fourth quarter.

So I don't think that the level of venture capital activity, for the fourth quarter, is necessarily indicative of what I expect in the first quarter. And Mike made the comment, in his presentation, that first quarter loans could be flat or even slightly down. So the $250 million to $300 million growth in venture capital could not repeat for the first quarter. We will have growth in other areas, but it will be hard, if at all, capable of making up for what could be decline in venture capital. And, as we are saying, could be flat to slightly down in the first quarter. Little more information than you asked.

No, that's super helpful, Dave, thank you. The other question for Mike, is was curious if you seen any impact from the new money market reformed rules being talked about? Is there a chance you could see some of that money repatriate on the balance sheet?

You know, Joe, at this point we really haven't seen them. You look at our numbers here, in the deposit and deposit franchises, everything is still the same. So, no, no real significant issues to report at the moment.

Okay. Thank you.

Brett Rabatin, Sterne, Agee.

Wanted to ask a similar question that I asked last quarter around just the early guidance for spread revenues, essentially the same as your formal guidance for '13, now the mid-single digit growth number. And I'm still thinking about the dynamic or the dichotomy between balance sheet growth, the loan portfolio growing, loan yields coming down. But the margin now, full guidance is kind of stable for the year. So I'm just struggling with why that number wouldn't be a little more -- a little higher given what you are seeing in the loan growth side, and probably some growth in the balance sheet with deposit flows coming in still, this year?

Yes, but. Obviously there's two main drivers to this, it is the loan yields and investment securities yield, I think that's clear to you as well. When you look at what's been happening to the loan yields over the last several quarters, obviously, they've been coming down. And there's a variety of reasons why they are coming down. We did mention the fact that moving from the -- our prime rate to the national prime rate. So you have 75 basis points of change on a certain segment of our loan population there that's under those headwinds as well. So that's one aspect of it.

The other aspect is, when we are growing our loan portfolio, as Dave mentioned, some of the yields on some of these larger corporate finance clients, they are much less than, let's say a typical historical average of 6%, 6.5%, 7%. So Dave was mentioning loans coming on at -- in the area of prime, around that area. So that's obviously going to be a drag on loan yields. So the effect of what you have, essentially, is you're growing your volumes, but the net interest income is not going to be growing at the same steep path as it has been in the previous quarters, because again, the yields on these loans are much lower.

So obviously that's a big challenge, but nonetheless, it is part of our strategy. It is not unexpected because, again, we've always talked about our strategy going to dealing with some of the larger corporate finance clients. And the positive aspect of that is you end up with better credit quality, right, which is helpful, and no doubt that they tend to be larger consumers of fees and services. So all in it, we feel very comfortable as far as the holistic relationship. I will stop there for a second on that -- the loan side, and than we're just going to shift to the investment securities and Greg can jump on here in a moment, or Dave.

So, for the investments securities portfolio again, you've been seeing the pressures in the rates. During Q2 or so, you saw the 10-year getting down to say 130, 135 basis points as well too. So that's been all over the map, and naturally we've been impacted pretty heavily by the premium amortization expense. And while it got better this quarter, again, there's still elevated levels than they were, say, a year ago. So there's continued to be that pressure on yields, and as you see your opportunities to reinvest, reinvestment rates of securities that are maturing, you are looking at 140 basis points of when you reinvesting.

Again, it continued to be a bit of downward pressure on that. Maybe not as much as it was, say, 18 months ago, but still quite a bit of pressure. And when you're looking at, it may not sound that big, 10 basis points in investment securities coming down, but you've got to remember the fact that our investment securities portfolio is huge. It is $11 billion or so. When you're, just a few basis points can have quite a lot of downward pressure on that interest income coming from investment securities. I will stop there, and maybe Dave or Greg has anything to add we will do that, but I will let you digest that, and [maybe] respond to that.

Okay. Thanks for the color.

Julianna Balicka, KBW.

I have actually, my question is related to the topic that was just being discussed. When I look at your guidance and outlook for average deposit and loan growth, it looks like you are assuming twice as much in dollar amounts of loan growth as deposit growth. So A, is that stemming from your expectations that the pace of investments by the VCs will slow, and therefore the amount of deposits overall in your industry will be lower? Or is that because you are expecting a more robust growth of total client funds? So maybe you can talk a little bit about that particular aspect of it?

Yes, Julianna, this is Greg. Just to pile on what Mike said. The part about the deposits, obviously, that's a driver of it. In deposits we don't expect to see a lot of growth. More of the client funds will grow, which implies it will be more off our balance sheet in our off-balance sheet vehicles. As we've seen in prior years, that's our expectation, but it is also something that's very difficult to predict. So, to the extent that it happens the other way, meaning more of it comes on the balance sheet, obviously that puts more money into the investment securities portfolio, assuming loans are consistent with where we are predicting.

That, obviously, would drive a higher level of interest income. Again, we are forecasting more of it to go off off-balance sheet, but it is just one of the more difficult things to predict because what we're trying to do is, obviously, put our clients in the right product, but obviously our clients are going to decide what they want to do. Bottom line is we do expect VC activity to still be good this coming year. So total client funds growth, we expect to see at a good pace. But again, to my point, more of that would be directed off-balance sheet.

Okay. (multiple speakers)

Maybe just add one, just one other quick thing. So, as Greg said, look net interest income, if that happens where deposits are greater than we expected, net interest income will go up, but as you know, net interest margin would be negatively affected. Which is okay, right, because at least in these low interest rates environments really the key is just to try to continue to grow your net interest income, all things being equal. So just to make sure you could have that color.

Yes, right. So than the follow-up to that then is, since it is not a macro call on the VC activity but more of a balance sheet management approach, than the funding of your loans is going to come from the decline of your securities portfolio, so can you refresh us how much of your securities portfolio cash flows each month? And therefore how you -- how are you thinking of that in terms of your yields, meaning the maturing securities you'll just reinvest into loans, and therefore you'll, all things being equal, retain maybe higher price securities than what you would otherwise be reinvesting in? Or --

I think in general you have it right. We have roughly, about each quarter, about $600 million or so that's maturing. And to your point that that is going to be used to support the loan growth as well, too. Obviously, you are going to get a bit pick up in the net interest income, it is also healthy for the net interest margin as well. Because if you take investment securities yielding 160 basis points, and you put it into loans that are hopefully earning more than 3% or so and above, its obviously going to be accretive to both net interest income and net interest margin.

Okay, great. Thank you very much.

Herman Chan, Wells Fargo.

Thanks. Just another question on deposits and the off-balance sheet product. In terms of growing that off-balance sheet product more in 2013, is that mostly going to be coming from new clients or will you be transitioning existing clients into that product?

You know, Herman, this is Greg. And, it is both. It is not one, we really with both existing clients, we could have a client that ends up raising a large round of equity, and the client, between our discussions with them, they may move more of that money off-balance sheet. But obviously, as we approach a new larger corporate tech client, maybe a public company, that maybe much more of that would be directed off-balance sheet. So it depends upon what segment the client is in. It depends upon what's most important for that client and we sit down with them, and advise them what their options are based on what they are looking for.

Great. And Greg, you mentioned Latin America as a potential source for start ups, going forward. Keeping in mind the banks growing international presence, what is your appetite to expand in those Latin American markets?

We are looking at other markets, but just to be clear here, our view into Latin America, let's say Brazil specifically, is much like some of the other foreign markets outside the UK and China. It is more exploratory. If we were to look to do anything there it would be truly over the long term. Right now, what's happening with a lot of these countries are start-up venture-backed companies get formed, and their holding companies, outside of the local country, so let's take Brazil for an example. It gets formed outside of Brazil in the US, or Caymans another entity, we can still bank that entity legally, and then they downstream money on an add as-needed basis to their local, relationship local bank in those countries. So that's actually still a small piece.

My point was just more that its something we are paying attention to, because over the long run, we believe that Brazil, and other markets, are markets that we need to pay attention to. But the short answer is don't expect us to be opening up there anytime soon.

Great, thank you very much.

Gaston Ceron.

Great, think for taking my question. I realize this topic has been around for a little bit, but I've seen some press, I'm sure you have too, relatively recently talking about the future of tax law in this country, and whatnot, and specifically what the future of the carried interest regime. I'm curious what your most recent thoughts are on what kind of impact on the (inaudible) industry and your related business you might see, if that tax regime really does come to an and, or it gets altered significantly?

Gaston, this is Greg. I guess the short answer for this one is, I don't think it is going to have a big impact. The reason I say that is, if you look at the overall venture capital activity, it is still a relative small number in the overall scheme of capital, so $20 billion, $25 billion a year, which sounds like a lot of money, but if you're looking at the overall capital flows, it is not that significant. If carried interest taxes were to increase, so to short-term tax rates, do I think it would have an impact? I think modest at best. I'd say right now clearly people are describing it as a pain, they don't want it, the venture capitalists, and that's the fight you are hearing about.

But clearly, even if it happens, people are still going to want to be in this business, they are going to want to continue to invest in these companies because they are still upside that to be had, even if the tax rates are higher. Bottom line, I don't expect to be see a big impact.

Okay, and one last thing very quickly. The global expansion, you just said how some of these markets are more of a long-term approach. I'm curious, as you roll out, again over the long-term in some of these markets, do you think JVs would be your preferred way of expanding into those, so you can manage the local risks better in markets where you may not have as much familiarity?

Two things there Gaston. One is, it is too early to tell. As you know we have the joint venture in China, and it is too early to forecast how that plays out. And the bottom line is any country we would go into is going to be specific to what are the risks and profiles and opportunities with that specific country. So it is too difficult to make a general comment about what our approach would be in any given country.

Good to know. Thank you.

There are no further questions at this time. I will turn the call back over to Greg Becker.

Great, thanks. In closing, I just want to iterate how good we feel about the quarter and the year, not just from a numbers perspective but we accomplished a lot of really key milestones we think are very important to our long-term growth. We remain excited about the prospects, you heard that from my comments, Mike's comments and Dave's comments, assuming the economy and the markets remain stable. We are just in a market, in this innovation economy, that we really couldn't be more excited about, and really are hanging our hats on. So we want to thank our clients for their trust in us and their support.

We are going to be there to continue to support them. We want to thank our employees for really doing the heavy lifting to accomplish the things that we described. We get to describe it to all of you, but at the end of the day they are the ones that are really driving it. And I think it is really important for everyone to acknowledge. With that, looking forward to a great 2013 and thanks, everybody.

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