SVB Financial Group (SIVB) 2015 Q1 法說會逐字稿

Welcome to the SVB Financial Group first quarter 2015 earnings call. My name is Bekebah 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 Bekebah. Thank you everyone for joining us today. Our President and CEO, Greg Becker and our CFO, Mike Descheneaux are here to talk about our first quarter 2015 financial results. As usual they will be joined by other members of management for the Q&A.

Our current earnings release is available on the Investor Relations section of our website at SVB.com. We'll be making forward-looking statements during this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information which 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 reconciliations 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 the call over to Greg Becker.

Thank you Meghan and thanks everyone for joining us today. The first quarter was a very strong start to the year. We delivered quarterly earnings per share of $1.71 and net income of $88.5 million, significantly beating street expectations.

These results reflect continued healthy conditions for our clients and strong execution which enabled us to deliver 10.6 % average loan growth, 4.7% average total client funds growth, and 5.2% core fee income growth.

We also saw substantial gains on equity warrants and investment securities. Our strong performance is due to three primary factors.

First, our focus on the innovation markets and their investors. Second, our commitment to adding value to our clients. Third, our effective execution on our growth initiatives.

The innovation markets, which have helped provide outstanding growth for us, continue to thrive. VCs raised $7 billion in the first quarter compared to $5.8 billion in the fourth quarter. This continued momentum in fundraising combined with resources from angels, incubators, and corporates has provided an ongoing supply of ample capital for good companies.

USVC investment remained healthy in the first quarter with $13.4 billion invested in 1,020 deals. This is a strong number. Nevertheless, we're paying attention to investments at early stages which have declined in the past four quarters to see whether that decrease may impact our new client acquisition. So far, it has not.

At just over 1,000 new clients in Q1, we were on par with the pace of the last four quarters. The VC-backed exit markets remain healthy, although Q1 numbers were down, following an exceptionally active Q4 and 2014. The innovation economy continues to outperform the broader economy and our annual innovation economy outlook offers evidence that many companies are delivering strong performances and are generally optimistic about the environment.

76% of the 1,100 executives and entrepreneurs we surveyed this year said their companies met or beat revenue targets in 2014. And 71% expect even better conditions in 2015. This is the second-highest level of optimism among our survey respondents in the six years we've been doing this research.

These factors are all contributing to momentum in our business. Momentum we are reinforcing through our unique ability to add value to our clients. We do this through our deep connections and long experience with innovation companies and their investors. Our ability to move and adapt quickly to client needs. And our ability to partner and connect clients with resources and people.

Let me give you just a few examples of how we do this. In just the past week, we introduced 12 of our most promising client CEOs to corporate development, business development, and product leads of a NASDAQ 100 company interested in potential opportunities for partnership and acquisition.

We also hosted a conversation with one of the most accomplished, successful, and best-known venture capitalists and a small number of client entrepreneurs so that they could ask questions and hear this VC's views on the state of the industry.

We also recently partnered with one of the leading accelerators to bring together 20 of their hot portfolio companies, many of them our clients, with 20 corporates interested in investing, partnering and acquiring. We brought a group of Oregon entrepreneurs to Silicon Valley to meet, where they had the opportunity to talk and make connections with VCs. We heard, just this week, that one of these entrepreneurs is expected to get funding as a result of this meeting.

These are just a few examples of what we do every day in our markets. Making hundreds of touch points on every front, advising, helping, and connecting our clients with the people, expertise, and resources to help them move forward.

This approach, our passion about making a difference for our clients, is what creates that strong bond and sets us apart from every other bank. Our strong client relationships have enabled us to maintain our leadership among startups and increase our market share in key client segments such as private equity, and the private bank. Our focus on private equity in particular has enabled us to win nearly 300 new clients in the last year and has contributed significantly to grow loans, total client funds, and fee income.

Likewise, our private bank initiative, although still relatively small, is growing rapidly with more than 500 new families added in the last year. These efforts have dovetailed with our global growth initiative, contributing non-US loan balances that reached $1.2 billion during the first quarter, a 36% growth year-over-year.

We continue to make progress in our global initiatives and expect to see strong annualized growth in that area. Our successful efforts to attract clients have also been helped by continued advancement or enhancement of our global product offering. Some recent examples of this were our move to a 24 x 7 foreign exchange desk in Q4 and the launch of our business debit card in the UK in the first quarter.

And finally, we are optimistic our China joint venture will receive its license to lend and take deposits in R& B sometime this summer.

So we have a positive outlook because we have a variety of growth initiatives, but our success at winning and keeping clients is also about working with the best companies. We have devoted significant resources to identifying high performance companies using metrics other than valuations such as margins revenue growth rates, as well as our unique access and insights into our target markets. We are succeeding at this and our focus in working with and cross-selling to the best client's group is driving high-quality results.

While our vibrant client markets had driven strong growth they come with some challenges. Which we discussed on past calls. Increasing valuations are something we are paying attention to. While many companies are achieving client and revenue traction that appears to justify their evaluations, some will not live up to expectations. We believe building deeper relationships with the best companies is the right strategy in this environment.

In addition, our deep engagement and long experience in innovation markets are significant advantages in managing our business. We continue to see heated competition. With some lenders taking risk on loan size and structure that we believe are unjustified. We are choosing every day to be disciplined about growth even when it means walking away from a deal. We have said that $1.5 billion to $2 billion is an optimal annual range for smart loan growth over the coming years. Assuming the markets hold, and we remain comfortable with those levels.

Finally, we're keeping an eye on our asset growth given the higher regulatory bar for banks with more than $50 billion in assets. Because we're a commercial bank with a holding company structure, we have been investing in a robust regulatory and compliance infrastructure for years. With that in mind, we expect more of a continued ramp than a sudden leap in expenses. We're also active in DC to raise the $50 billion threshold, since we think $50 billion is too low for designating a systemically, important financial institution.

As we look at our first quarter performance and our outlook for 2015, we are pleased with our continued momentum and optimistic about the year ahead. Our client base is growing and doing well. The broader economy continues its march to recovery. Short of a major economic disruption, we believe we're on track to deliver another strong performance in 2015.

We have not assumed much help from rates this year, but every day is a step closer to a rising rate environment which we expect will have a tremendous positive impact on our business. In the meantime, we remain focused on executing on our growth plans, being the best at what we do, and maintaining a reputation as the go-to partner renovation companies and their investors worldwide.

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

Thank you Greg and good afternoon everyone. As Greg noted, we had a very good quarter across the board. I would like to highlight a few items in my comments today which I will cover in more detail shortly.

First, healthy average loan growth; second strong growth in total client funds; third, higher net interest income and modest margin oppression; fourth, a lower provision due to flat peered-in loans and continued solid credit quality; fifth, higher non-interest income due to strong investment securities gains, warrant gains and core-fee income; sixth, solid capital ratios which reflects the impact of our recent debt raise and new Basel III requirements. And finally, increased expenses and the impact of seasonal compensation items and growth in FTE.

Let us start with loans. As we expected, peered-in loans were stable at $14.4 billon reflecting a modest degree of repayment on capital call lines of credit that was offset by modest increases in other segments of the portfolio.

Average loans grew by 10.6% or $1.3 billion to $14 billion reflecting the impact of our substantial peered-in loan growth in the fourth quarter. Capital call lines of credit have proven to be somewhat more resilient than we anticipated and utilization of capital call lines of credit remained elevated at 6 percentage points higher than normal.

While we continue to seek good momentum, and an active pipeline, our commitment to smart growth for the long-term means we would expect the pace of loan growth in the coming quarters to trend towards an annualized run rate in the range of $1.5 billion to $2 billion assuming no changes in the markets.

Now, let us move to total client funds which includes both on-balance-sheet deposits and off-balance-sheet client investment funds. In the first quarter, average total client funds grew by 4.7% or $3 billion to $67.5 billion due primarily to continued healthy funding and exit markets for our clients.

In a shift from previous quarters, growth in our off-balance-sheet funds exceeded growth of on-balance-sheet deposits due to our ongoing efforts to encourage clients to use those products when appropriate. Average client investment fund balances grew by 5.5% or $1.8 billion to $33.6 billion. This growth was driven primarily by our early stage and private equity clients and much of it occurred in our off-balance-sheet suite product which is approaching $10 billion.

Average deposits grew by $1.3 billion or 3.9% to $33.9 billion also driven by our early stage and private equity clients. On a peered-in basis, deposits were down at $33.9 billion compared to $34.3 billion in the fourth quarter. On the other hand, peered-in client investment funds increased by 8.7% or $2.8 billion to $35.2 billion. Again, we believe this shift is due to our increased focus on ensuring our clients are using the right products. And we will monitor deposit levels with an eye towards potentially tempering our outlook for deposit growth if our efforts continue to succeed.

Moving on to net interest income and net interest margin. Net interest income increased by $4.1 billion or 1.8% to $239.3 million in the first quarter despite two fewer days in the quarter. The increase was driven primarily by higher average loan and fixed income securities balances as well as lower deposit interest expense. This was offset by lower loan yields and an increase in debt expense related to our senior debt issuance in late January.

Interest income from loans increased $3.7 million to $165.5 million, driven by loan growth, but loan yields fell by 27 basis points as a result of loan growth in lower-yielding private equity capital call lines and lower prepayment activity in the loan portfolio.

We expect loan mix, competition, and the low rate environment to continue to pressure loan yields moving forward. Investment internist income increased $1.3 million to $82.5 million driven by higher average balances of fixed income securities which increased by $499 million or 2.4% to $21.1 billion.

The yield on the total fixed income portfolio remains stable at 1.58% primarily due to the benefit of fewer days in the first quarter. New purchases of $1.3 billion during the quarter consisted of US Treasury and Ginnie-Mae securities with average yields of 1.66%. Portfolio duration remained relatively stable at 2.7 years.

Moving on to our net interest margin; our net interest margin declined slightly by 2 basis points to 2.64%. Driven by higher balances of investment securities and lower yields on loans due to loan mix and lower loan fees.

Now turning to credit quality. It remained strong overall during the first quarter. We recorded a provision for loan losses of$ 6.5 million compared to $40.4 million in the fourth quarter which was elevated due to significant peered-in loan growth.

The majority of the provision in the first quarter was due to a specific reserve related to the problem software loan we talked about last quarter. This increase was offset somewhat by a 5-basis point reduction in our reserve for performing loans to 99 basis points. This reduction was attributable to portfolio mix that favored capital call lines of credit which continue to experience excellent credit quality.

Net charge-offs remained very low at $3.9 million or 11 basis points of total gross loans. Gross charge-offs of $5.5 million came mostly from our early stage clients. Nonperforming loans increased by $6 million to $45.5 million in the first quarter and also remained low at 31 basis points of total gross loans.

Now let us move to non-interest income. GAAP non-interest income increased by $4.4 million to $172 million in the first quarter. Non-GAAP non-interest income, which is net noncontrolling interest, was $109.8 million compared to $90.3 million in the fourth 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 $58.2 million of core-fee income, $20.3 million of gains from warrants, and $19.6 million of gains from private equity and venture capital related investment securities.

Now I will go into the details of our non-interest income. We had private equity and venture capital-related investment gains of $19.6 million net of non-controlling interests compared to $16.6 million in the fourth quarter. The strong first-quarter gains were split between valuation increases from positive investment and exit trends for our clients and related gains from distributions inclusive of a $3.3 million gain from the sale of our remaining investments in FireEye.

We had equity warrant gains of $20.3 million of which $10.9 million was related to four companies. Valuation increases accounted for $16.5 million of the gains with the remaining $4 million due to warrant exercises. We are pleased with the performance of these investments in the first quarter, however, it is important to note that while we continue to see elevated gains from these line items, these gains are significantly greater than average historical levels.

Turning to core fee income. Core fee income remained healthy, increasing 5.2% or $2.9 million to $58.2 million Core fee income includes fees from foreign exchange, credit cards, letters of credit, as well as 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 first quarter was due primarily to higher credit card volumes which drove interchange fee income and higher letter of credit volumes. Foreign exchange fees were lower by approximately $900,000 during the quarter following a record fourth quarter although we continue to see pressure on spreads.

Moving on to capital. Our capital levels remained healthy. In the first quarter, Basel III requirements became effective and as a result our holding company risk-based capital ratios decreased during the quarter primarily as result of new risk waiting requirements for unused loan commitments and investments.

Total risk-based capital decreased by 54 basis points to 13.38%, and tier 1 capital decreased by 49 basis points to 12.42%. Our bank level capital ratios increased due to our $350 million debt raise, the proceeds of which we downstreamed to the bank. Our bank level tier 1 leverage ratio increased by 79 basis points to 7.43% and our bank-level total risk-based capital ratio increased by 123 basis points to 13.35% inclusive of the impact of the new Basel III requirements.

We continue to closely monitor the trend in our capital ratios of the bank level tier 1 leverage ratio in particular. And at this time, we expect it to remain within our target range of 7% to 8% for the remainder of 2015.

Turning to expenses, non-interest expense rose by $10 million to $196.1 million. This increase was mainly due to an $8.5 million increase in compensation and benefits expenses as a result of seasonal increases in 401(k) contributions and payroll tax expenses as well as higher FTE.

Moving on to our Outlook. We are on track to meet our 2015 guidance in all categories. With the exception of expenses. We are raising our expense growth outlook from the mid-single digits to high single digits driven by our strong performance and the expectation of higher incentive compensation related to that performance. Outside of this performance-related increase in incentive compensation expense, expense growth is in line with our expectations.

In closing, we are pleased with our strong financial performance in the first quarter, the momentum we're seeing in our markets and continue execution of our growth strategy. Growth levels and valuations are extremely strong given the current rapid growth rates in the innovation markets. We're well positioned in our markets, however, the challenges posed by low rates against a backdrop of intense competition have underscored our commitment to reasonable and smart growth and building for the long term. Thank you and now I would like to ask the operator to open the lines for Q&A

Will now begin the question-and-answer session.

(Operator Instructions)

John Pancari, Evercore ISI

Good afternoon. I have a question regarding loan growth. Your capital call lines, they only declined a bit it looks like for the quarter. I had expected a bigger decline than what you saw. Could you give us a little bit of color on what you're seeing there on those balances and how should we expect that they trend in coming quarters.

John, this is Greg and then Marc Cadieux, our Chief Credit Officer, will add to it. We did see a little bit less of a decline than we thought, as we saw significant run-up in the fourth quarter so that was good for the average growth in the quarter. I think it goes back to what I said earlier. We are still seeing a lot of activity.

We had a great growth in the fourth quarter but it still was a very active quarter both on a venture capital and a private equity basis. Plus we continue to add clients. The combination of those things is still allowed to be a solid quarter albeit obviously slightly down from Q4.

Yes, I think that the only thing I would add to that is that our growth in recent years has been increasingly tilted toward the private equity fund end of the spectrum and those funds tend to borrow larger amounts and keep them outstanding for longer periods of time. I think that is contributing to what may be becoming a new normal in terms of utilization of credit facilities in that segment of the portfolio.

It's more sticky, it's not a timing factor?

Yes.

Okay, and then separately, if I could just hop over to expenses. On a higher level question again I know you have been asked this in the past but I want to see if you have an update on how SVB is preparing on the regulatory and infrastructure side and preparing to cross $50 billion in assets. I know you're just shy of $40 billion now but can you possibly give us some more detail on where you are spending and where you stand in that investment process?

This is Mike. We have been investing and ramping up for quite some time just given the nature of our model and how we bank. We have been required and looking at a lot of the requirements the $50 billion for quite some time, such as the capital stress testing, such as risk appetite statement, such as risk committee on the board and so forth.

We feel that we're on the right track but certainly there's always many things to do. The regulators do continue to raise the bar on expectations and that will continue over time but nonetheless again we don't expect, as Greg was saying, any massive ramp-up in expenses but certainly expenses will continue to grow over time related to these areas. But again we just don't expect anything to just jump up significantly overnight.

Okay. And then lastly If I could ask one more. Around the increase in the MPAs, the two loans. Can you give us a little more detail on the industry and the types of credit and also they weren't loan participations were they?

No. They weren't. This is Marc Cadieux. Both loans, the addition was split almost evenly between the two. There's no trend or commonality in terms of industry, those loans were both 100% ours. That's pretty much it.

Were they hardware credits?

One would be in our software portfolio, the other would be broadly described as clean tech.

Thank you.

Maybe I will just reiterate, on the non-performing loans what you're referring to is they remain extremely small overall, John. When you look at it we have $45.5 million dollars which only represents 31 basis points of total gross loans. Very solid levels.

I think that's right and the other comment would be that more than half of our non-performing loans remain centered in that one loan that we talked about last quarter.

Thank you.

Jared Shaw - Wells Fargo Securities

Finishing up on the asset quality there with the growth in the allowance for impaired loans having been rising, should we expect to see some charge-offs increasing in the future quarters from that? And if so do you think the allowance is adequate here because there is loss on that?

So most of the increase in specific reserves is related to that one problem loan for the fourth quarter that we referenced. It's too early to tell how that will turn out. I would say for the moment I'm feeling confident that would be reserve is the adequate both for that loan and then overall.

Okay. Shifting to loan growth, what was the growth in the accelerator early stage sector this quarter search specifically. What was the dollars of growth and the end of period balance? And any dollar growth of loans over $20 million?

This is Mike. We will come out with detailed disclosures by segment here over the next week or so as we get closer to the 10Q, so we will have it updated detailed information for you. Perhaps maybe Marc wants to talk about general color of what we will be seeing in the loan in that area.

Generally our loans and our software niche continue with in broader technology to be the strongest of the growth segments.

Okay. Finally, do you anticipate that the water crisis in California is going to have any negative impact on the premium wine business? Is there any stress to the portfolio for that are you migrating the loans to higher risk ratings given the drought?

Our current view is that -- this is Marc Cadieux again. If the drought were to continue for another couple of years, invariably it is going to have some impact on harvest and ultimately output. But it's really too early to tell and certainly too early for us to be changing credit risk ratings for example with regard to that segment of the portfolio.

Okay, great. And then just finally, given how asset sensitive the loan deposit mix is and the core balance sheet, would you consider going further up the curve at all with the investment portfolio? Should we expect the [incremental from the middle] to stay the same? Very short?

I think at this point the duration we have in the portfolio is very sensible, particularly when you consider the size of our investment securities portfolio in relation to our total assets. At this point, the notion or the idea of going out longer in this low rate environment, I just don't see us really going there.

Thank you.

Ebrahim Poonawalla - Bank of America Merrill Lynch

Good afternoon. I want to circle back on your statement on loan growth and expectations of $1.5 billion to $2 billion and then there's loan growth. I guess as we think through in terms of where peered in loans were at the end of first quarter, is it fair to assume granted quarter to quarter volatility that we should grow loans around that $1.5 billion to $2 billion annualized range going forward?

Ebrahim, this is Greg. I will start and then Mike or Mark may want to add to it. What we said was because we had such a strong fourth quarter and average of loan growth in the first quarter was so significant, we really just wanted to go back and calibrate for everyone to say as we look out, and we've said this as you know, for the past few years, we said that kind of $1.5 billion to $2 billion per year is where we're comfortable at, but we could see some higher growth in that in certain areas.

One area we would highlight and have highlighted is private equity services, which is what the fourth quarter was all about and the average growth in the first quarter was really tied to -- see if you kind of normalize that, you get back to that range of $1.5 billion to $2 billion. We are really just giving what we would say a forward look on what we expect and what we anticipate so that people can build that into their models.

Let me ask this another way. You mentioned the capital call lines have been stickier than you initially expected. Do you see those balances declining meaningfully from where they were at the end of the quarter given the sort of overall activity within that space?

This is Marc Cadieux; it's always challenging to forecast what the borrowings will be for that segment of the portfolio. We are -- generally speaking you see repayment coming but then you don't know how much of that will be replaced because it's so dependent on deal activity which has remained robust.

Certainly now for a second quarter, we see higher utilization and that's being driven in the main by the private equity fund borrowers in the capital call product, and while two quarters is perhaps not a long trend, given that we are increasingly weighted towards private equity, given that they do tend to borrow for longer periods of time, it's becoming in my mind at least increasingly likely that what had been more our historical normal utilization in the mid- to high-20s could be creeping up into the mid-to high 30s. Time will tell.

I got that. Just on a separate topic, I think Mike talked about the increase in off balance sheet funds for the first time in many quarters exceeded on balance sheet deposit growth. Is that -- can we read into that and think that is the first of the next few quarters in terms of the strategies that you have instituted and the success of that in terms of being able to move these clients off-balance sheet or to soon to tell?

This is Greg. I would love to tell we have this perfect dial that moves it on and off balance sheet. That clearly isn't the case. What we usually try to do is create a balance, but again, as Mike said, get our clients in the right products For them.

If we are to sit back and say what would be -- if I did have a dial what would that look like? The dial would be the growth rates we talked about, really about half would be on the balance sheet and half would be off the balance sheet. If you look at last year, the year before that, it was mainly on balance sheet with a little bit going off. In the first quarter we saw more go off.

You may see a quarter to quarter swings, maybe one quarter goes more on balance sheet and one of the quarters it will go more off balance sheet, but if we were to say what does that threading the needle look like? About half of the growth would be on and half of it would be off.

That's helpful, thank you take my questions.

Aaron Deer - Sandler O'Neill

Good afternoon. Circling back to the subject of expenses, I was curious, I know there's a lot of seasonal noise in the first quarter but I was wondering if any of the lifts that we saw this quarter might be part of the compensation lift that you talked about and some of that may be tied to the outsized warrant and equity gains in the quarter? Related to that with respect to your guidance, is there any way you can break out how the expense increase with respect to comp would break out between say performance expectations versus new producers that you're hiring versus the higher regulatory cost you're taking on?

The first part of your question is in relation to let's say incentive compensation warrants and investment gains and the answer is yes to some of the increase in expenses is related to those outsized gains we did have. The second part of your question I would just perhaps refer you to when we come out with the 10-Q that we'll have more of that disclosures and breakdowns of expenses related to the questions you're asking there.

Okay. Since you highlighted the private bank as one of the other areas we saw some better growth this quarter, we talk about that being part of the portfolio, I'm curious, maybe give us a sense of how that book breaks out between real estate secured product and mortgages versus restricted stock loans or unsecured lines? What all is in and what would you consider being the private bank book at this point?

Being consistent with Mike's last response, we will have more detail and more breakout there. In the 10-Q. Broadly speaking though, real estate and primarily mortgage lending would have been the majority of the average loan growth in the first quarter.

Thank you.

Joe Morford - RBC Capital Markets

Congratulations on another strong quarter.

Thank you.

First just following up on the growth in the off balance sheet deposit. Just wondered if you could provide an update in terms of some of the actions you are doing to help drive that activity along those lines. I noticed that quarter to quarter at least, the rates paid on your money market deposits and your now deposits on balance sheet were down quite a bit and I wondered if some of this activity is being encouraged by lower pricing that is driving people off balance sheet.

Yes Joe, this is Greg, I'll start. That is part of it but I will say it's really the bigger driver was a really getting attention on it. And really having our sales teams and relationship teams being able to articulate to our clients where their options are and encourage them to look at off-balance-sheet. Historically, and I would say it's still not easy to do it, because whether -- even if we move what we are paying for on balance sheet deposits, 5 basis points or 7 basis points, it's still isn't that much. There isn't much yield to get either on or off.

So really it is just educating clients on how to create a more of a balance and having your long-term cash off balance sheet and your shorter term cash on balance sheet. It's probably more education than anything else.

Fair enough. That's helpful. Another question is on the global network, I notice VC investment activity in London specifically has been steadily growing and actually upped significantly in the first quarter. Wondering if you could give us an update on how the UK strategy is progressing and also an update on where we stood at period end in terms of footings and all?

Joe, this is Greg. When I look at how UK is going, I would say it is at or exceeding expectations. When we talked about over the last few years we have said that's an area of growth and we expected that area to grow which is originally in the early days 40% to 50% growth and tempered that a little bit to a 30% to 40% growth. That's really where we have ended up.

As I mentioned in my comments, the global loans are really, they hit about $1.2 billion at the end of the first quarter and when you look at those numbers, there -- more of it is in the UK and Israel. So roughly, $800 million in that category and about $400 million in what I will call Asia. When I look at that, you're going to see that growth I would say pretty consistent from growing proportionally to those two numbers.

Very good about what's happening in the UK. We had a great team and it's both -- a point to make, it's not just working with UK companies, it's also working with the mix of US clients that are going setting up operations in the UK and banking them there as well. That's an added benefit and that's why the client count is growing and that is why the loan growth is increasing at a nice pace there as well.

Thank you.

Thank you. Steven Alexopoulos - JPMorgan

I think you guys know who it is. Hello. I want to start. When you think about getting ready to cross $50 billion, we have seen other banks like New York Community and First Republic slow their growth to give themselves more time.

You guys seem like you are pretty far ahead of the curve in terms of investing but with that in your prepared comments you did say you're keeping a close eye, you're lobbying. Do you need to tweak the strategy at all to give yourself more time to cross or do you think you're potentially ready at this juncture?

This is Greg. Couple comments. One is I don't think we are ready yet for it. I just want to pile onto Mike's comment about the expense growth we have seen. I really believe, and we talk about this a lot, we are more prepared than most banks to eventually cross that threshold because of what we have had to build over the last 3, 4, 5, 6 years, and again as I mentioned you have holding company structure that adds additional complexity that we have had prepared for. We operate on the international basis which we prepared for.

There is a lot of other things that we've had to do, we've been doing stress testing. All these things I think are really laying this foundation that we've done I would say the team has done an excellent job on so I feel really good about that.

There are things we would have to do, no question. But as we have done a high level analysis of it, we sit back and there really isn't -- aren't a lot of things that I would lose sleep over crossing that $50 billion threshold. That's one side of it being prepared for.

Second part then, is, are we at all slowing growth because we're worried about crossing in. We are not.

We look at the growth we have whether it is deposits on our off-balance sheet, it is really a function of the growth in our client business, it's having our clients in the right product, at the right time. And it's looking at our capital ratios and so we have done what we believe the right thing is to make sure that even if we do have more deposit growth, our capital ratios are going to be in good shape. We are definitely not slowing growth in fear of crossing a $50 billion threshold.

The increased success in the quarter of moving the deposits off-balance sheet is not related to a strategy to give yourself more time.

No. It goes back to what I said on one of the other questions, which is if I were to be able to have the perfect dial, the perfect dial for me would be a 50% on balance sheet and 50% off balance sheet, but of course on a quarterly basis, we can't dial it in that close, which means some quarters you're going to have more on, some quarters you're going to have more off and the first quarter was just more one-off.

Shifting gears. Looking at the decline in the period in software loans, I'm assuming that was sponsor led by -- it slowed a bit is my guess -- can you talk, is the competitive environment heating up or did the market just slow a bit? Thanks.

Hey Steve. I will let Marc talk about the quarter to quarter fluctuation, but let me comment about the competitive landscape on sponsor led.

Sponsor led buyout is absolutely a very competitive market. What we have seen is more firms are looking to chase yields and close out is one area where yields have been up on a higher-level basis and they have been that way for quite a while although clearly the margins have gone down from their peak.

What we are seeing is you are seeing some bank competition but you are really seeing more non-bank competition again from another reason I talked about it has had a good track record from a credit quality perspective, number one, and number two the yields there are better so you are seeing more of senior lenders and you are seeing more mezzanine lenders and they are willing to put pretty aggressive terms on the table. A lot of refinances, a lot of that is being driven by competition and the availability of what I will call more flexible, cheaper debt.

That being said, we are still seeing lots of opportunities, and what I'll say is I said on the call we're picking the deals we want to play in and which ones we want to pass on.

That might be the thing I would add, since growth and sponsor led buyout slowed roughly four quarters ago, what I have been encouraged by is notwithstanding leverage levels that have gone up and increased competition -- leverage levels that have gone up in the market, I should say in terms of loan demand. Increased competition.

What is encouraging to me is we that are still seeing good opportunities from good sponsors who value the speed and certainty that we bring in helping them close transactions. Going back to the smart growth that we mentioned, our ability to continue to win business but win it without reckless levels of leverage or weakened loan structures. Is again for me, that's pretty encouraging.

Maybe just one final one. You had a nice quarter in the life sciences area, are these new client wins or are you are you seeing clients get more active? Any color there?

This is Greg. Sciences across the board. We have an exceptional team in life sciences and I think they have their hands on the pulse of the market probably better than anybody else I would argue, so that's helpful in deciding what I had said earlier, which is I think it's very important in all markets but especially in life sciences, to make sure you're working with the best companies, the ones that have -- if it's a drug company, the ones that have multiple drugs out there and aren't just relying on one drug going to market and if that drug fails, the whole company is quote unquote in question. They're incredibly thoughtful about it and I think the combination of having this team together for a long period of time allows them to pick deals and they've been very successful in the first quarter, they have been very successful last year and our market share in the market has actually been increasing.

Thank you.

(Operator Instructions) Julianna Balicka - K.B.W.

Good afternoon. In terms of your outlook in terms of the deposit growth you're looking for in your Outlook, what kind of rate environment are you assuming for the rest of the year in that outlook.

Our rate environment is pretty much what the forward curve is showing. So essentially a Fed funds rate increase toward the very end of this year, just one small modest one. I wouldn't say that the rates would really have a whole lot impact on us for 2015.

If one were to hypothetically have an assumption that rates would rise sooner or further, then one should lower deposit growth assumptions with the idea with the idea that with higher rates more deposits would flow off balance sheet.

In theory, perhaps for a lot of other banks that is probably true. But particularly for our clientele, typically at least what we have seen historically is that whether it is the first couple of rate moves, tends not to have a dramatic impact. Perhaps when rates are more up 100 basis points, 150 basis points, then certainly you're going to have perhaps more attention to the rate increase and perhaps more dialogue on moving deposits from on balance sheet off balance sheet. But if it's just a typical 25 basis point move initially one time, it tends not to have a dramatic effect initially.

(Multiple speakers) Julianna, again we have a lot of balances off balance sheet. That's more -- they are long-term cash that's the ones that really should be paying more attention to from a yield perspective.

The more operating cash which is on the balance sheet, our clients tend to burn through that relatively quickly and replenish it with another round of equity financing. So again to Mike's point, they spend less time thinking about what yield us around that just because it's shorter term cash.

I see, that make sense. Another question if I can ask, back to the $1.5 billion to $2 billion long-term healthy loan growth rate. As you grow bigger, should we think about that range expanding with your balance sheet growth because you are incrementally adding lenders, or is that range going to be consistent whether you are $40 billion or $50 billion because that's kind of the healthy amount that is digestible in terms of underwriting and picking up the best clients from your target market?

This is Greg. If you look at the next few years I think you are going to be in that range again. There may be some things that move it up or down but I think that range as I said we feel pretty comfortable. Eventually as you look out and as certainly we may expand into other areas, global maybe taking off, accelerating it, even if it stays at this pace it will grow at a faster -- absolute dollars. Those are the things that can have an impact but I think again the next few years in that category of $1.5 billion to $2 billion we feel pretty comfortable.

That make sense. Then in terms of your reserve coverage, with the growth in PE and VC loans in your portfolio, when we look out, right now in a benign credit environment, but when we look forward to a more normal credit environment what is the reserve coverage of VCPE loans in your book that would be appropriate as we think about where your reserve coverage may go relative to the past cycles.

Marc Cadieux here. Certainly private equity loans or capital call lines of credit in our portfolio -- I guess I will back up here. For the 20 years plus that we have been doing this, we have never had any loan losses in that segment of our portfolio. So, so long as that remains true, the concentration that we have with that segment of our portfolio, should in effect help keep loan-loss reserves to a more -- a lower level than they otherwise would be say if it was a smaller of the portfolio.

To add on to that, Julianna, is again, even though Mark's obviously accurate about not having losses, we still take reserves against that obviously. Because we can't believe that will happen forever. When you look at the performing loan coverage, at roughly 100 basis points, the more you add, there will be pressure from an accounting perspective to move that down. What happens to the overall mix if we could accept expected credit losses will increase if we start to see a bump in the road, but you're right, if all things being equal if we continue to grow PES the same rate you would see that number more than likely being driven down on a performing basis.

That make sense. In terms of the FTEs that you added this quarter, could you provide us a little more color? Are these front line lenders or are these back-office personnel, infrastructure? Compliance?

It is definitely a mix across the board. You can look at people in the UK, it's operations, it clearly is on the compliance side and the risk management side, front-line sales. There isn't one area that you look at and say, gosh, the quarter was way weighted in one category. Quite honestly it's been that way for quite a while.

If you go back to last two or three years, to Mike's earlier point, we probably had an increase in the proportion going to risk management and compliance. But again it hasn't been a huge number, it's just increased as a percentage over the last few years.

That make sense. Finally, could you remind us what the duration of the PE versus the VC capital call lengths are?

Yes, so, like all things there's a spectrum. But generally the venture capital side of the capital call line portfolio tends to repay quicker. And repayment terms tend to be on average more in the 90 day to 120 day period. Repayment terms on private equity funds by comparison get -- have repayment terms between 180 days to 270 days, sometimes 364 days.

Again not all firms keep their advances out that long, some pay back more quickly some pay back less quickly. Generally speaking, it's about 1.5 times to 2 times longer outstanding for the private equity funds than it is for the venture capital.

Got it. Thank you very much.

Great, thank you. And at this time we have no additional questions. I will now turn the call back over to our CEO Greg Becker for closing remarks.

Great. I just want to thank everyone for joining us today. We're really pleased with the first quarter and as Mike and I both articulated, we feel good about the momentum we have and the outlook for the balance of 2015.

We described some challenges we are dealing with and it is just part of the market we are in. It is competitive because it's a great market. We have low-interest rates and we're watching the compliance costs related to the $50 billion as we approach it. Al those things we feel good, we have under control.

At the end of the day we just remain focused on execution, our long-term plans, and strengthening our position as the financial partner to the market that we think is the most interesting and most dynamic market and that's the innovation ecosystem. I want to thank our clients for trusting us. It's just remarkable every single day we look at our clients and I do believe we have the best clients. Period. End of story.

Also I also thank our employees for making those client relationships possible. Thanks everyone for joining us and look forward to talking to you next quarter.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating.