SVB Financial Group (SIVB) 2014 Q4 法說會逐字稿

Welcome to the SVB Financial Group fourth-quarter and full-year 2014 earnings call. My name is Bakiba and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Meghan O'Leary, Director of Investor Relations. Meghan, you may begin.

Thank you, Bakiba, and thank you, everyone, for joining us today. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux, are here to talk about our fourth-quarter and full-year 2014 financial results. They will be joined by other members of Management team for the Q&A. Our current earnings release is available on the Investor Relations section of our website at SVB.com.

We will be making forward-looking statements during the call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information. The disclaimer applies equally to statements made in this call. In addition, some of our discussion may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release.

We will limit the call, including Q&A, to an hour. With that, I will turn call over to Greg Becker.

Thank you, Meghan, and thanks, everyone, for joining us today. The fourth quarter of 2014 was a strong end to a very good year for SVB. We delivered earnings per share of $1.14 and net income of $58.8 million for the quarter. That includes the sale of our non-bank financial company in India, which impacted EPS by approximately $0.23.

For the full year 2014, we delivered earnings per share of $5.31 and net income of $264 million, versus EPS of $4.70 and net income of $216 million last year. We are very pleased with our financial results for 2014. We saw innovation and robust activity across all types and stages of [client] and we experienced broad-based growth across our business.

We grew average loans by 23%, or $2.1 billion, to $11.5 billion. As a reminder, this is the full-year average. We grew average total client funds, that is deposits plus off-balance-sheet client investments, by 32%, or $14.5 billion, to $58.4 billion, also a full-year average. We grew net interest income by 23% to $857 million. We maintained excellent credit quality, with net charge-offs of just 32 basis points for the year. We grew core fee income by 20% to $210 million and we delivered a healthy return on equity of 10.46%.

We delivered these outstanding results thanks to our continued focus on our strategy, which is to build deep relationships with fast-growth innovation companies and their investors and leverage our platforms and expertise to grow our market leadership. This focus enabled us to significantly expand our client relationships [on] our business in 2014. For example, we grew our net client count by 21%.

This growth came from strengthening our dominant position with early-stage companies that drive expansion in the innovation industry. At the same time, we added a number of larger, late [early] stage companies we work with. We maintained our market share of the best companies. 64% of the US venture-backed innovation companies that went public in 2014 and 2013 were SVB clients.

We significantly expanded our activities with private equity firms. We added more than 100 new private equity clients in 2014 who contributed significantly to our growth, increasing loans to private equity clients by more than 50% and fee income by approximately 45%.

We increased core fee income by 20%. This increase was driven primarily by higher foreign exchange and credit card fee income.

Foreign exchange volumes and revenues increased by 42% and 25%, respectively. Credit card transaction volumes increased by 46%.

We are working with this disruptive FinTech clients to be the backbone of their payment systems by leveraging our own systems here at SVB, along with those of our partners. We successfully leveraged our private bank and wealth advisory to expand our client relationships. We gained more than 350 new clients in the private bank in 2014 and grew average loans by 26% to just over $1 billion.

Finally, we increased our global client count by 60% year-over-year, adding more than 1,000 new clients, compared to 645 in 2013. Our global balance sheet grew strongly with 61% growth in average loans and a 100% increase in average deposits year-over-year. And in another significant milestone, we applied for our local currency license in China this month and hope to receive approval later this year.

As our 2014 results demonstrate, we are excluding effectively in delivering growth. In addition, our clients and their markets are performing well overall. While concerns over global economic growth continue to upset the markets, the US economy, at least, is showing gradual improvement and unemployment continues to decline as consumer confidence increases.

The NASDAQ rose by 15% in 2014 and the Dow closed the year at all-time highs. Although the markets are off to a somewhat rocky start in 2015, the long-term trend remains positive.

The venture capital industry just enjoyed one of its strongest years in a decade, investing $48 billion and raising an additional $30 billion for new investments. These sums are in addition to the capital infusions from corporates and angels and other sources of funding that we've been talking about for the past year. As result, new company formation is stronger than ever.

Exit activity was also strong. In 2014, there were 109 IPOs of US venture-backed innovation companies. Another 455 companies exited by merger or acquisition and the aggregate value of these deals was the highest in history. Valuations for the most promising companies and for companies overall continue to climb.

While some of these companies are priced for perfection, they are priced that way because of their strong performance and the potential value of the markets they are disrupting. Business models overall are better. Many of these companies are staying private longer, strengthening their business models and growing much bigger before turning to the public markets as mature companies. Their valuations reflect that.

In addition, the demand among public market investors, corporate investors, and institutional limited partners for investment in the innovation economy is growing. That, too, is contributing to higher valuations.

Against this backdrop of strong performance and improving economy and a positive environment for our clients, we are starting 2015 on strong footing. As you can see from the full-year outlook in our press release, we have increased our outlook for loans, deposits, and net interest income.

While we are optimistic about 2015, we are facing several persistent challenges that we've discussed before. The current rate environment is extremely challenging, and although the Fed is expected to begin raising interest rates towards the end of 2015, we believe we are unlikely to see much benefit from such an increase this year.

Competition remains intense and shows no sign of letting up. As such, we will continue to focus on our differentiation and value-add, while remaining committed to maintaining our underwriting standards.

And the regulatory burden continues to grow, particularly as we approach $50 billion in assets. But as we have said before, we have been preparing for this eventuality and we expect to have some time before reaching that threshold. In the meantime, we continue to invest in people, systems, and processes to ensure we can support our continued growth.

Despite these challenges, we feel good about our strategy, our target market, and our people, and we remain focused on being the best partner as possible to our clients. The expertise we've built over 30 years of banking high-growth innovation companies enables us to guide our clients through every stage of their development, from scaling up from a bare-bones start-up to running complex global enterprises. Although we are larger than we've ever been, and we operate globally, we remain agile, client-focused, and able to move quickly to meet our clients' needs.

As we enter 2015, we are focused on delivering high-quality growth and expanding our client base, our capabilities, and our global reach. We see ample opportunities ahead, both near-term and long-term, provided that US and global economies will remain relatively on track. We believe our amazing employees and commitment to being the best at what we do are keys to our success and will continue to differentiate us.

Thank you and now I'll turn the call over to our Chief Financial Officer, Mike Descheneaux.

Thank you, Greg, and good afternoon, everyone. We had a strong quarter across the board, marked by significant growth in loans and deposits, as well as substantial private equity and venture capital-related investment and warrant gains. I would like to highlight a few items in my comments today, which I will cover in more detail shortly.

First significant loan growth. Second, growth in total client funds, which includes on-balance-sheet deposits and off-balance-sheet client investment funds. Third, higher net interest income, despite a lower net interest margin. Fourth, continued strong credit quality, with a higher provision for loan losses related to loan growth.

Fifth, higher non-interest income due to investment securities and warrant gains, offset partially by the sale of our Indian NBFC. And sixth, our capital ratios and the related impact of growth in the quarter.

In relation to this, I will comment later on the shelf registration for senior debt securities that we filed today. Additionally, I will provide an update on our outlook for 2015.

Let us start with loans, which grew substantially in the fourth quarter. Period-end loans grew by 20%, or $2.4 billion, to $14.4 billion. A significant portion of this growth was driven by higher utilization of existing capital call facilities by our private equity clients, but we also saw strength across the board. In fact, the utilization rate in the private equity portfolio increased by 10 percentage points to 38%.

Average loans grew by 11%, or $1.3 billion, to $12.7 billion, due to healthy activity across the loan portfolio, particularly in private equity. Given that we had substantial loan growth in the fourth quarter, I would like to provide some clarity on how we view this growth.

In the last three years, we have seen notably stronger period-end loan growth during the final quarter of the year, particularly the last month of the year. These period-end balances typically decline somewhat in the first quarter.

As of January 20, period-end loan balances have declined by approximately $600 million from year-end levels. With this in mind, we believe period-end loan growth could temper or even be flat in Q1. We would also expect a return to more typical pace of growth in 2015.

Notwithstanding that pattern, we are raising our 2015 outlook for average loan growth to the mid 20%s and believe there is still potential upside from private equity, software, and the private bank. Moreover, we would expect to meet our 2015 average loan growth targets, even if period-end balances were to temper.

Now let us move to total client funds. Again, this includes both on-balance-sheet deposits and off-balance-sheet client investment funds. In the fourth quarter, average total client funds grew by 6%, or $3.7 billion, to $64.5 billion, due to continued healthy funding and exit markets for our clients and strong client acquisition.

Deposit growth was particularly strong among our early-stage growth and private equity clients, who helped drive average deposit growth of 10%, or $2.9 billion, to $32.6 billion. Period-end deposit balances increased by 10%, or $3.2 billion, to $34.3 billion, primarily driven by our early-stage and growth clients.

Moving to net interest income and the net interest margin, net interest income increased by $14.2 million, or 6.4%, to $235.2 million in the fourth quarter. The increase was driven by significant loan growth and higher average balances of fixed income securities due to strong deposit growth.

Interest income from loans increased $8.5 million, driven by growth, but offset by yield compression of 27 basis points, primarily due to increasing private equity capital call lines of credit, which tend to have lower yields. Our ability to grow loans has historically driven higher overall net interest income, but we expect loan mix, particularly significant growth in capital call lines, as well as competition in the low rate environment to continue to pressure loan yields moving forward.

Investment interest income increased by $6.5 million. The increase was driven by higher average balances of fixed income securities, that is available for sale securities and held to maturity securities, which increased by $2.4 billion, or 13%, to $20.6 billion. The yield on the total fixed income portfolio decreased by 7 basis points to 1.56%.

Normal run-off of higher yielding mortgage securities and a slight increase in premium amortization expense contributed to the modest decline in yield. New purchases during the quarter averaged 1.63%. Portfolio duration remains stable and ended the year at 2.8 years compared to 3 years at the end of the third quarter.

Moving to the net interest margin, our net interest margin declined by 7 basis points in the fourth quarter to 2.66% compared to 2.73% in the third quarter. The decline was driven by increases in our investment securities portfolio due to deposit growth and to lower yield on loans due to loan mix, given the significant growth in capital call lines of credit.

Now turning to credit quality. It remained strong overall during the fourth quarter. We recorded a provision for loan losses of $40.4 million versus $16.6 million in the third quarter. The majority of our provision was due to loan growth, which accounted for approximately $24 million of the total provision.

Net charge-off added $4 million and the rest was due to an increase in specific reserves related to a single loan. Net charge-offs were exceptionally low, at $4.1 million, or 13 basis points of total gross loans, reflecting low gross charge-offs of $5 million primarily related to early-stage loans.

Our allowance per loan losses for performing loans remained relatively consistent at 1.04% versus 1.05% in the third quarter. Non-performing loans increased to $38.1 million compared to $11.7 million in the third quarter, primarily due to one loan in our software niche. At 27 basis points of total gross loans, our non-performing loans remained very low and the credit performance of our overall portfolio remains strong.

Now let us move on to non-interest income. On a GAAP basis, non-interest income was $167.6 million in the fourth quarter compared to $80.2 million for the third quarter. Non-GAAP non-interest income, which is net of non-controlling interests, was $90.3 million compared to $75.3 million in the third quarter. We encourage you to refer to the non-GAAP reconciliations in our press release for further details.

The major components of non-GAAP non-interest income were $36.8 million of gains from investment securities and warrants and $55.3 million of core fee income, offset by a $13.9 million loss related to the sale of our non-bank financial company in India. I encourage you to refer to our 8-K filed on January 16 for more information on the India sale.

Now I will go into the details of our non-interest income. We had private equity and venture capital-related investment gains of $16.6 million, net of non-controlling interest. These gains were due to strong distributions and increases in valuations, stemming from positive investment and exit trends for our clients.

Our fourth-quarter gain compares to losses of $1.1 million in the third quarter. Those losses were primarily related to our FireEye holdings, and you will see in our press release, that we have reduced our position significantly since the end of the third quarter. We had equity warrant gains of $20.2 million, compared to gains of $13.2 million in the third quarter, primarily due to valuation increases.

Turning to core fee income, core fee income remained healthy, increasing 3.6%, or $2 million, to $55.3 million. Core fee income includes foreign exchange, credit cards, letters of credit, deposit service charges, lending-related fees, and client investment fees, and is a non-GAAP measure. Again, please refer to the non-GAAP disclosures in our press release for more information.

The increase in the fourth quarter was due primarily to an increase in lending-related fees due to higher unused commitment fees. An increase in foreign exchange fees related to higher transaction and trade volumes, and an increase in credit card interchange fee income partially offset by higher credit card rewards expenses.

Moving on to capital. Our capital position remains strong overall, although deposit growth has increased our average asset base and continues to pressure our Tier 1 leverage ratio. Despite the offsetting impact of our strong earnings growth in the fourth quarter, our bank-level Tier 1 leverage ratio decreased by 40 basis points to 6.65%. Our risk-based capital ratios, total risk-based capital, and Tier 1 risk-based capital decreased by approximately 100 basis points at both the holding company and the bank level due to our significant period-end loan growth.

We continue to closely monitor the trend in our capital ratios, the bank level Tier 1 leverage ratio, in particular for which our general target range is between 7% and 8%. We filed a shelf registration statement this morning that provides us with the flexibility to issue senior debt from time to time. Depending on market conditions, we expect to access the debt market in the near-term in order to raise additional capital at the holding company level.

Now moving on to our 2015 outlook. Please note this outlook is for the full year 2015 versus the full year 2014 and the balance sheet numbers are based on full-year averages.

Starting with loans, we expect average loan balances to grow at a percentage rate in the mid-20%s, a significant increase over our preliminary outlook of the low double-digits that we provided in October. This increase is driven by better-than-expected loan growth in the fourth quarter. As you may recall, we said we could have upside to loan growth from private equity, and that is indeed what happened in the fourth quarter.

We expect average deposits to grow at a percentage rate in the low 30%s, also an increase from our preliminary outlook of the high 20%s. We expect net interest income to grow at a percentage rate in the high teens, again, an improvement on our preliminary outlook of the low double-digits. As Greg pointed out, we are not expecting any meaningful help from interest rates in 2015.

We expect our net interest margin to range between 2.4% and 2.6%. We expect credit quality to remain comparable to 2014 levels. Specifically, we expect our allowance for loan losses for performing loans, net loan charge-offs, and non-performing loans to be comparable to 2014 levels.

We expect core fee income to increase at a percentage rate in the mid-teens, which is consistent with our preliminary outlook. And finally, we expect non-interest expense to increase at a percentage rate in the mid-single-digits, again consistent with our preliminary outlook.

In closing, we delivered very strong financial performance in Q4 and for the full year 2014, meeting or exceeding all of our balance sheet growth and credit quality metrics and exceeding our initial outlook for net interest income and core fee income. Moving into 2015, we remain optimistic, due to our healthy and growing client base and our continued success in implementing our growth strategy. While low rates and intense competition will remain challenges in the near-term, we believe we are well-positioned for 2015.

Thank you and now I would like to ask the operator to open the line for Q&A.

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

Hello, everyone.

Hey, Steve.

Maybe I will start -- so period-end assets grew almost 50% in 2014, and at this pace, you will become a CCAR bank, it looks like in 2016. So my question is, is there a plan B to slow the deposit growth beyond the off-balance sheet product, which is having a relatively limited effect, or are you bearing the cost and just fully anticipating that you're going to become a CCAR bank over the next one to two years?

Hey, Steve, this is Greg. I will start and Mike might want to add, as well.

The growth we saw in the fourth quarter was exceptional and we do believe that is a little bit faster than what we would ordinarily see. Just a couple things. One is, as we've said in the past, and we are not waiting for this to happen, but it is -- it will eventually happen, and it will be a catalyst for moving some of those deposits off the balance sheet and that's when rates start to increase. We hope, and I know a lot of other banks are hoping the same thing, that sometime in 2015 that will happen, and that will have an impact on being able to move some of those deposits off balance sheet.

Second part is, we talked about this in past, but we have a strategy to move more of the money off-balance sheet through incentives, being more focused on ensuring we get the right return of the overall relationship. So there's a variety of different ways that will slow down the growth in overall assets as we approach $50 billion.

That being said, we do expect we will be hitting $50 billion at some point, whether it is 15 months out or 24 months out, we could see that happening. As we talked about, we have been preparing for that for a while, both from a systems perspective and processes, hiring the right people that will help us get there.

That's how I would answer it. I don't know, Mike, if you would add anything?

No, that's fair.

Okay. That's fair. Then a question on this capital call growth. Can you talk about what were the largest loans booked? I'm trying to get a sense if this was a couple of very large credits or how granular it was? And can you talk about how the duration of the capital call portfolio changed through the year? Maybe it ended, because I know the PE lines tend to be longer duration? Thanks.

Steve, this is Mike. I will start and then Marc Cadieux can jump in here.

But when you get a chance to go through fully the press release, you will note in there that we do have the concentrations of loans greater than $20 million, and so you will certainly see a large rise in the balances related to private equity that are greater than $20 million. We have some disclosures in there that talk about the number of loans increasing there, as well. But the main point to say is that, yes, there were a fair number that were over $20 million, certainly during the quarter.

Yes, I would add to that -- this is Marc Cadieux -- would add to that, that it was driven primarily, as Mike had mentioned before, by utilization versus having added a lot of new borrowers in the quarter. Net/net there was maybe 20 to 25 new meaningful credit facilities added in the quarter for new clients and the rest of it really all came from utilization.

Okay. I know this business has been a focus, but when you look at this growth, Greg, you said that you tend to see a jump at period-end, but we've never seen a jump to this magnitude. Is this quarter a game-changer for that business the way you view it?

I will start, Marc, this is Greg. Marc may want to add to it. The growth was, we've seen the spike as we have in prior Q4s, but this was a more significant jump than we've seen in the past, again, thinking about the utilization rates going from a 28% to 38%. That's substantial across the portfolio like that. We just believe it was a confluence of events, where we've added new clients over the years and the activity levels at the end of year was just very strong.

As Mike pointed out, though, we did see a -- we've already seen a decline in balances so far in the first part of year and we can even see period-end at the end of Q1. Period-end balances will be lower, as we've had in some prior years, than we did at the end of year. It is somewhat of anomaly, but it is also has been an area of focus for us, as you pointed out.

The only thing I would add to that is I certainly don't expect that utilization will stay at 38%. It's probably going to shake out somewhere between the 28% and 38%.

Going back to, I'm realizing belatedly, we didn't answer your question about duration. The private equity funds do tend to borrow a bit longer, but that difference in duration tends to be 180 to 270 days versus the typical capital call borrowings of 30 to 90 days, and just looking at the portfolio and where the borrowings came from, it is more the shorter-term variety than the occasional longer-term borrowings we get from certain of our fund clients.

Okay. I appreciate that color. Thank you.

Casey Haire, Jefferies.

Good afternoon, guys.

Hey, Casey.

Mike, a question for you on the debt raise. Number one, can you just give us a reminder of how much cash is currently available at the hold co and what that opportunity might be to downstream to the bank? And then secondly, last spring's equity raise, I believe you guys solved for about an 8.3% Tier 1 leverage ratio. Should we expect something similar this time around?

First off, related to the class question, we've been maintaining roughly between $280 million and $300 million or so of cash at the holding company for the last couple of quarters. In our prepared remarks, as you said, we did file that shelf registration this morning, we did say that we expect to raise debt in the near-term, but we haven't commented any specifics of that if we do indeed go.

Okay. Then just as a follow-up on the expense guide holding steady, pretty impressive leverage. I know in the past when you guys have upped your revenue guide, that has brought along the expenses with it. Just curious as to what -- how you are able to keep the expenses flat, and if we were to get further, a better story as the year develops on revenues, would that leverage still hold or would you, in fact, up the expense guide?

Casey, this is Greg. You remember, obviously, historically, how this works, which is we set out certain target, we reset our incentive comp towards those targets, and then if we exceed those targets, the incentive compensation would grow, which is typically where we have seen higher expense levels than our original forecast. The same holds true this year, which means we've set out our guidelines and if we were to see a performance over and above that, you could see incentive comp increase, which would take us to potentially beyond the ranges that we've talked about already.

Okay, thanks a lot.

Joe Morford, RBC Capital Markets.

Thanks. Afternoon, everyone. Good strong quarter.

Hey, Joe. Thanks.

The release highlighted new clients accounting for about 27% of the period-end deposit growth. How is that contribution ranked or ranged historically, and is it outsized now because of the larger financings these companies are getting?

Joe, we hadn't really commented that often on that number the last couple of quarters, but I would characterize that as a bit higher than usual. What comes to my mind is somewhere between 15% and 20% is what it had been out of the quarters that we had disclosed, so I would characterize this one as a bit higher.

Okay. Do you think that's partly a function of these larger financings, or what do you think is driving that?

Joe, this is Greg. Clearly, these substantial rounds have contributed to that. You go back in history, I can't ever recall rounds of financing that are -- on a private basis that are $300 million, $400 million, $500 million, maybe even $1 billion in a single round, and so clearly that contributes to both the number that you described and with the overall deposit growth.

Okay and then any sense of the timing on when you might hear back on your application for a local currency license in China? And could you just talk about how you see that helping the growth of your business over there?

Yes, this is Greg again. As I said in my comments, we just filed for it in early January, so a few weeks ago, and clearly when you're dealing with regulators, you don't know exactly when you're going to hear back. Our hope is that in late summer, later half of year, we would hear back and hopefully be moving forward with that.

Right now, we continue to develop our systems and processes to be able to have the [RMB] capabilities, assuming the approval goes through. And how it helps is really this, we have been operating in the JV with a little bit of our two arms tied behind our back, meaning we have to operate in foreign currency, meaning onshore US dollars. There just really aren't that many onshore US dollars or foreign currency there, although we have grown that business.

So really, being able to do RMB in local currency really provides us upside for really the long-term. That's really a key fundamental part of our strategic plan, so that's why we highlighted it as an important milestone in our development.

Joe, one item to remember is that it is a joint venture, and so if there is any growth in there, let's in terms of loans, you're not going to see those loans consolidate on the balance sheet. You're just going to see it as an equity pick-up in the line item on gains on investment securities, so gains or losses.

Okay. That's helpful. Thanks, Mike.

Jared Shaw, Wells Fargo Securities.

Good afternoon. Just following up a little bit on the growth on the VC/PE side, were you seeing -- was most of that on early stage or late stage or where in the scale would you say a lot of that growth was coming from, in terms of what they were funding?

Jared, this is Greg, and because this is a private equity, these would be more mature companies. These are cash flow positive companies, typically. We break down -- we have venture capital/private equity services all under one bucket, you have venture capital and private equity. Again, most of this came from private equity, which is later-stage mature companies, EBITDA-positive, is really where those are being funded in a variety of different industries. So that's where the majority of that came from.

Okay. All right, thanks. Then on the asset quality, the impaired relationship of $27.5 million, was that multiple loans or was that in one loan? And then what bucket of categories would that be in?

Jared, this is Marc. The uptick in non-performing loans was related to a single loan that falls under our software niche and is not indicative of any systemic trend or anything else that we think would cause there to be additional challenges in our loan portfolio.

Okay, great. Thank you very much.

John Pancari, Evercore ISI.

Good afternoon.

Hi, John.

Wanted to see if I can get just your thoughts on the concentration of the PE/VC portfolio. It is now about 31% of loans, and obviously, it is impacting the margin here, so wanted to get an idea how to think about that concentration. Could it move up from here or do you expect that this is probably the peak level where you will let it be?

John, this is Greg. I will start and then Marc Cadieux will add some commentary to it. We obviously, we have concentration limits that we look at on a regular basis and private equity services is approaching that level, which makes sense. When you start looking at any loans segment that would be one-third of your loan portfolio, you have got to pay attention to it.

That being said, it is our, by far, our lowest risk part of the loan portfolio, historically. Again, across our capital call, we have approximately zero losses over the 20 years we've been doing it, so we feel very good about that. That being said, you are still watching it. What's important to note, and Marc commented on this and so did Mike, is that the growth was in the fourth quarter was mainly about utilization.

When you think about that, and Marc said it is going to go back to, we believe, a more normalized level, somewhere between a 28% and 38%, that's a big drop. So that combined with the fact our portfolio -- the rest of the portfolio, we expect to continue to grow, will keep that in balance. We still have room to grow, but we are watching what the utilization rate will settle in at.

Greg covered the highlights. It is Marc. The only thing I would add goes to your comment about yields. Continued growth in that segment of the portfolio would be expected to have continued pressure on our net.

Okay. Then also on the -- back to the leverage ratio, the fact that you mentioned the debt shelf and that there's potential near-term raise to address it, can you talk about the mix, is it primarily -- are you implying here that's it's primarily going to be debt or could there be an equity component?

John, what we filed this morning was the shelf registration specifically for senior debt securities.

Got it. All right.

Then Greg, you commented that you don't expect much of a benefit in 2015 from fed hikes. Is that only because you are expecting the hikes to materialize mid- to late 2015, and accordingly the full-year benefit really wouldn't materialize till 2016? Or is there something about the balance sheet positioning that you think could mitigate the near-term impact?

John, this is Greg. It is almost exclusively related to the fact that we expect it to happen towards the end of the year. What we've -- if you go back a few years, we had what we would be clarified as SVB prime, which was at a higher level. We've been converting almost exclusively to regular prime, which means that when rates do start to pick up, that will actually be almost across the portfolio. We are roughly -- more than two-thirds of the portfolio is variable rate, floating rate, which means that, that would be impacted when short-term rates finally do impact or go up.

Okay. All right. Thank you.

Ebrahim Poonawalla, Bank of America Merrill Lynch.

Hello. Good afternoon.

A quick question, Greg, just outside of the PE and the first-quarter impact on the loans. If you can talk about what you are seeing in terms of client activity that could drive growth in line with your guidance or better, just in terms of what are the dynamics there in terms of increased liquidity coming from all of these companies vis-a-vis the borrower demand or the growth that you are seeing when you talk to your lenders in these businesses?

Yes, this is Greg, Ebrahim.

There's really two things when I think about the growth. There's the new client additions and the loan growth from that and liquidity deposit growth. We've already talked about the deposit growth or total client funds. We still see it being robust. Our goal is to just continue to direct more of that off balance sheet.

Just to comment about that a little bit. I do believe it will temper a little bit, because the growth, when you think about total client funds growth last year, on an average basis, $14.5 billion, 2014 over 2013, that is just such an incredible number, I don't expect it to grow at that level. But new client activity, we expect to continue to be robust.

On the lending side, again, what is important to note is, although private equity services gets a lot of attention because that has been such an outsized component of the loan growth, even if you take that away and look at the average loan growth of the rest of the industries that we serve, meaning buy-out loans, private equity -- or global private banking, corporate finance, we sell growth across the whole area, consistent with what trend lines we have talked about before, which is in absolute numbers of $1.5 billion of growth per year. So we expect that mix of growth to be consistent with what we have seen in the past. Our teams are seeing that. We see those opportunities and it continues to go back to being in this innovation market.

Understood. I'm sorry if I missed it, did you provide an update in terms of the international -- the Europe portfolio, where we were at the end of the quarter, in order of growth of the fourth quarter?

We didn't specifically in the fourth quarter. Here's what I would say. We finished the year with more than $1 billion of total global loans, meaning, and it is mainly concentrated in three markets obviously, which would be the UK, Asia non-joint venture, and third, it would be Israel. Those are the three buckets.

The cumulation of those three was over $1 billion, so we saw very nice growth this past year. And as I've said in other earnings calls, looking at a year-over-year growth, what gets us excited is that, that's a market -- those markets, collectively, you could see 30%, 40% maybe even 50% growth on the annualized basis, which is one of the reasons we are in those markets.

Got it. Thanks for taking my questions.

Aaron Deer, Sandler O'Neill.

Good afternoon, everyone.

Most of my big questions have been addressed. I just have a couple quick follow-ons. One is, following on to the global strategy questioning, because you have had such good success on that front, and given that India seems to be such a strong innovation market, I was hoping you could give a little bit more color behind your decision to sell the India finance subsidiary?

This is Greg. Let me start.

We've had -- we've been successful, to your point, and especially in the UK and in Asia. But I will tell you, it is hard, it is hard work. You have to deal with additional regulatory constituents in those markets, the operational complexities, and also we want to make sure we are not spreading ourselves too thin.

So what we continually do is look at opportunities to say, does this still provide a long-term growth objective for us? So we really sat back in the last 12 months and looked at India and said that our long-term strategy was to set up a branch there at some point of banking operations. When you looked at the regulatory environment and the challenges that we had, we actually were turned down for a branch license a couple years ago, we just said, it is better for us right now to double-down on what we are doing in Asia, double-down on what we are doing in the UK, longer-term maybe look at Europe, and just be even more focused.

We believe that's the right thing for our clients, it is the right thing for our long-term strategies. That being said, we still have, as we've talked about the past, a group called Global Gateway, which means we still have a team of people that still goes to certain markets such as Brazil, Australia, and as companies are looking to come to the US or come to our other markets, we want to capture the best companies that are coming to those markets and India will remain in that category. So this isn't something like we are giving up on India. It is just, we are taking a different approach for now, because we have revised what our view is of the long-term outlook for our business.

That's great. Thanks, Greg. And then Mike, just to make sure, it is safe to assume that the outlook that you provided includes whatever volume of sub-debt you might be taking on?

No.

Okay. Thank you.

Julianna Balicka.

Good afternoon.

Good afternoon.

I have a couple of follow-on questions. One, in terms of thinking about your reserve coverage, you said that you wanted to keep the reserves to performing loans comparable 2014 levels, which at the end of the quarter, had that tremendous growth in PE, which is one of your lower loss ratio portfolio. So as that flows off, should we be thinking about a lower overall dollars of reserves or will the existing dollars of reserves just get reallocated so we may see an increase in coverage ratio?

Julianna, this is Greg. I will start in looking at it. I would say going back and being very focused on what we said, when we think about the non-performing coverage ratio being consistent, we look at that for our performing loans exactly the way it says that -- we looked it would be consistent generally with this past year. Clearly, there is changes that could happen the portfolio, but you have continued improvement in charge-offs, assuming that trend continues, meaning looking at the reserves, what we look at reserves relative to our charge-off ratio, so you have that factor happening, combined with the mix of the portfolio, which leads us to believe that the, again, coverage ratio for performing loans would be consistent.

The only thing I might -- it is Marc -- would add to that, is that non-performing loans, while they went up in the quarter, are still very, very low, at only 0.27% of total loans, and so any movement upwards to, I'll say, a more normalized level of non-performing loans could offset whatever benefit we get in the performing loans segment from higher capital call lending.

I see. That make sense. And then in terms of the capital call lending pulling back during next year, and you had referenced flat to potentially down loan growth, would it snap back to 3Q levels or would it just trend down from where it is here? There is some segment that it's going to stay in there, in terms of the overall dollar growth?

Julianna, this is Greg. Let me start. When I talked about a potential decline era flattening in period-end or consistent levels, I'm talking about Q1, so meaning we could see a Q1 period-end decline. That being said, we still believe, I certainly believe, we will still end up seeing growth overall in private equity services.

What we wanted to highlight, though, is we don't expect, didn't expect, and will not expected the tremendous growth we saw in the fourth quarter continue and that was because the utilization rates will come back down. Do we believe we will continue to add new clients in a similar, maybe a little bit slower pace that we did to 2014? Yes, we do. We expect to add new clients in the private equity services arena. The slight decline of utilization would actually just slow down the overall growth, but it would still see growth.

I see, okay, that make sense. Then final question. If your loan growth or if your balance sheet growth, rather, exceeds your current expectations, what is the risk that we may see higher expense growth related to getting ready for CCAR, crossing $50 billion market, et cetera, or is that fairly well phased-in so we may actually not be shocked by a spike in expenses, so to speak?

As Greg was mentioning, we've been preparing this for quite some time, so we actually have certain level of expense run rate that's in there related to preparing for that. You will continue seeing us prepare and invest in people, resources, and systems, but at this juncture, we don't necessarily anticipate a big massive spike in a new elevated higher level anytime soon. Really that can change, but at this point, we have a good run rate in our expense growth.

Very good. So we should expect any higher expense surprises to come basically from positive growth and therefore incentive comp?

Compliance costs and things like that in preparing to get to $50 billion is one thing, and then, but when you're talking about incentive compensation, so in other words, if we continue to grow and exceed our targets, as Greg was mentioning, you're certainly going to see an increase in incentive compensation if people exceed their targets. So again, it's fairly similar to what we have seen in the prior years when we exceed our targets. Hopefully that makes some sense to you.

Yes, that make sense. Thank you very much.

Jennifer Demba, SunTrust.

Thank you. Good evening. Just curious if you have any borrowers that have outsized exposure to the energy industry at this point?

This is Marc Cadieux. The answer is no, we do not.

Thank you very much.

Brett Rabatin, Sterne, Agee.

Hi. Good afternoon.

Wanted to just ask, and I remember last quarter, you had mentioned that you had seen a rationing of price competition in several of the business lines. I was just curious, thinking about the fourth quarter and what you are seeing today, how that played out through the quarter and how that is looking so far in 2015 in terms of what transpired the past maybe six months?

Brett, this is Greg. Our comments about the competitive landscape have been a consistent beat we've talked about for the last few years. It hasn't changed. It is very competitive out there. As we said in the past, we continue to really sharpen our pencil and looking at deals and saying, is this the right deal based on both a risk and a return metric?

The good news is, we've said in the past, and again, we talked about this for years, is we are in a really enviable target market. There's two benefits to it. One is the market is growing, so that's a really good thing, you have the wind at your back.

Second part is, we really spent a lot of time looking at how we can add value to our clients. I know that's an overused term, but when you think about it, because one of our teams, they have concentrations of you're a software lender or a hardware lender or a clean tech or something, your expertise and your ability to add value is much greater than other institutions. You combine that with the information that we are sharing and the other connections and relationship building exercises that we go through, that's really valuable.

Our clients value that relationship and they value what we bring to them. So that's what we are doing. And then you combine that with the broad product set. So we have a broad product set, which delivers the majority, if not all their needs. We've got value-add that delivers it in a very unique way that we believe is no one else can do. That's a big differentiator. Doesn't mean we cannot -- we don't have to sharpen our pencils. We do, but we have an advantage over our competitors and our goal is to make sure that advantage remains.

Okay. That's great color. The other thing I was curious about was, Greg, you talked about, in maybe the past quarter or two, a little bit of frothiness in some of the things you were seeing, but it sounds like you're pretty comfortable with a lot of the valuations that you are seeing in some of these companies today, and maybe more certainty about the prospects for cash flow and what have you, would that be a fair characterization of how you view the market?

There's two aspects when you think about valuations. There's the credit aspect of it, and sometimes people think about that valuations -- if a valuation -- company goes from $100 million to $250 million or $300 million and it goes back from $300 million back to $100 million, that all of a sudden, there is a risk to the credit. For the most part, that's actually not true. So we look at credit, and as Marc has articulated, we feel very good about where we are from a credit perspective, of keeping with our underwriting standards, et cetera.

And this other part of just valuations and what do we look at and how do we feel about valuations, as I said, valuations have absolutely increased and some of the valuations are, I will use the words very specifically, priced for perfection. That being said, we have, in my history, have never seen the revenue growth rates of these companies and the market opportunities they are going after. I'm not the expert to tell you whether the valuation at $5 billion or $1 billion or $10 billion is the right level, but I will tell you that the companies are performing exceptionally well and when you look at the public market, you say, yes, they do in some cases make sense, but it is at the higher end, clearly.

Okay. Thanks for the color.

Gary Tenner, D.A. Davidson.

Thanks. My questions have been answered.

(Operator Instructions)

Ken Zerbe, Morgan Stanley.

Great, thanks. Just in terms of you loan growth this quarter, how much of the loan growth came from acquisition-related financing and how has that changed over the last couple of quarters?

If we go back to private equity, by extension that would have been acquisition financing done by our private equity clients, where they borrow on the capital call lines. Separate and apart from that, sponsor-led buy-out was up in the quarter, but not dramatic, as I believe it is about 10% growth for the quarter -- 11% growth for the quarter.

Yes, it was approximately about 6%. And what we noticed in Q4, Ken, was you may recall in Q2, Q3, was some headwinds on the loan growth in these areas. And then we did -- it was nice to see actually Q4 it rebounded and starting to show growth and this the sponsored buyout area of our portfolio.

Got it. Understood. Sorry, just going back to that first part, that you said it was based on the private equity you were doing on the capital call lines. I assume that's very temporary financing? I was thinking more of the longer-term financing.

The longer-term financing would the sponsor-led buyout that was on 6% growth.

Got it. Okay. All right, thank you.

Tyler Stafford, Stephens Inc.

Hey, good afternoon. Just to follow-up on the global portfolio. I know you gave the global loan balance at year-end, but I was hoping you could give the global deposit balance at year-end. I think it was $4 billion last quarter? And then just any thoughts of crossing that $10 billion of foreign exposure threshold?

Yes, Tyler, this is Greg.

If you would have asked that question a quarter ago, I would have said $10 billion is really far away, but we actually approached $7 billion, in fact we were a little over $7 billion in deposits on a global basis. Now, there is a couple things that are in there I think it's important to note.

We have focused less on creating an off-balance-sheet opportunity the way we have in the US. And if you would take the same mix on and off in the US and apply it to global, you would end up with about $3.5 billion on, $3.5 billion off. So that's a big area of focus for us, coming up with products that can move more of that money off balance sheet, which we are planning to do. So I believe we've got the right focus on moving more of that money off balance sheet right now, but we did see a very nice tick up in foreign deposits or global deposits.

Okay. Thanks, guys.

Sure.

At this time, we have no additional questions. I'd like to turn the call back over back to Greg Becker, CEO, for closing comments. Thank you.

Great, thank you. I just want to thank everyone for joining us today. 2014 was a great year. When you look at the numbers, we were just thrilled with the growth that we've had. It really is -- the growth was great, the credit quality was strong, great client acquisition, and we are just really fortunate to have the clients that we have, which we certainly believe are the most interesting and vibrant companies in the world and really a key to our success. Want to thank all of them and thank the SVB employees for making this such great year.

As we move into 2015, we're going to continue to invest in being the best partner and delivering value to our clients. As I said, that's really the key differentiator for us. It goes beyond just being a simple banking relationship. We're really all committed to ensuring that we're really building a strong franchise for the long-term. With that, I want to thank all of you. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.