SVB Financial Group (SIVB) 2015 Q4 法說會逐字稿

Welcome to the SVB Financial Group Q4 2015 earnings call. My name is Adrian and I will be your operator for today's call.

(Operator Instructions)

Please note this conference is being recorded.

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

Thank you, Adrian, 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 2015 financial results and our 2016 outlook. As usual, they'll 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 some forward-looking statements during this call and I want to warn you that 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 the 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. Follow-on questions are all right, but keep them to a minimum. With that, I'll turn the call over to Greg Becker.

Thank you Meghan, and thank all of you for joining us today.

The fourth quarter of 2015 was a strong finish to a great year. We delivered earnings per share of $1.68 and net income of $88 million, marked by healthy activity across the business, a growing balance sheet, strong core fee income, and stable credit quality. Mike will go into details of our financial performance in a few minutes. For the full-year 2015, we delivered earnings per share of $6.62 versus $5.31 in 2014, and we grew net income by 30% to $344 million. These results attest to the ongoing strength of the innovation economy and our ability to execute on our growth strategy despite interest rate, market, and competitive challenges. I am extremely proud of what we accomplished in 2015.

I would like to start by giving you some of our year-over-year financial highlights. We grew average loans by 28% to $14.8 billion, exceeding our original guidance of percentage growth in the mid-20s. We grew average total client funds, that is deposits plus off-balance-sheet client investments, by 29% to $75.5 billion. We increased net interest income by 18%, in line with our guidance, and it reached $1 billion in net interest income for the first time in our history.

We maintained solid credit quality, as we said we would, despite higher non-performing loans for the year. And although we exceeded our original expense guidance due to higher incentive compensation, if you back out the amount of incentive compensation related to outperformance, our expense growth was in line with our guidance for the year. Finally, we delivered a healthy return on the average equity, 11.18%, with almost no help from rates.

I am proud of these results, but I'm equally proud of how we achieved them, through our continued focus on building deep relationships with fast growth innovation companies and their investors, leveraging our platform and expertise to grow our market leadership, and maintaining our discipline in underwriting and partnering with the best clients. This focus enabled us to further strengthen our business in 2015 by increasing our share of the best clients, increasing volumes and penetration in our fee-based products, continuing our global expansion, expanding our digital delivery capabilities, and benefiting from the dynamic nature of our clients' industries.

Now I would like to give you a few examples of the progress we have made in each of these categories during the year. Starting with clients. We grew our net client count by 18% thanks to our dominant position serving early-stage companies and their investors, and our success in working with larger companies and PE firms. We maintained a market leadership of early-stage companies and added approximately 2,000 net new early-stage clients in 2015. 57% of all US VC-backed technology companies that went public in 2015 were clients of SVB, and 42% of life science IPO companies were SVB clients. On the private bank side, we added more than 400 new client households during the year and grew loans by 37%.

Turning to our global efforts, we continued to make meaningful progress in the execution of our global growth strategy. We grew international loan balances to just over $1.3 billion on a period-end basis, with the bulk of this growth in the UK, where period-end loans increased by 48% in 2015. We continued to add clients at a robust pace in our international offices, growing our total international client count by 33%. And our China joint venture bank received a critical long-term milestone in receiving its local currency license.

These joint efforts of strong client acquisition and global expansion helped drive higher fee income in 2015. Foreign exchange was particularly strong, posting a 21% increase in revenues, which reached $87 million in 2015. Payments were another bright spot. We saw significant growth in credit card revenue, which grew by 36% to $57 million. We also continued to make progress in our strategy of providing banking infrastructure services to our FinTech and payment-related clients. We had a 300% increase in payments processed on our direct transmission platform, Transact Gateway, and processed more than $21 billion of payments for our clients. Total payment-related revenue, including credit cards, wires, automated clearinghouse and merchant services reached $85 million in 2015, a 29% increase over 2014.

Another area of momentum was in our digital and mobile delivery capabilities, which we enhanced to increase our efficiency and simplify banking for our clients. We saw strong client adoption of our digital offerings, with 95% of all new SVB deposit accounts being opened through our digital onboarding platform in 2015. Adoption of our mobile banking app increased, as well. We processed $1.5 billion in mobile deposits in 2015, and active users increased to 58% across the bank. We achieved this momentum in 2015 through our ability to focus and execute.

At the same time, as the bank of choice for fast-growth innovation companies and their investors, we benefited from the health of our clients and their markets. In 2015, our gains from VC- and PE-related investments and warrants totaled more than $128 million. And although VC exits were down from 2014, which is one of the best years on recent record, venture investments were up and overall activity remained strong. In summary, 2015 was an exceptional year across the board, and we finished the year with strong momentum for 2016.

Now I would like to share how we see things shaping up in 2016. As we look into 2016, we are optimistic about our ability to deliver strong results despite recent market volatility. We expect another year of strong growth in loans and fee income, as well as continued solid credit quality. This expectation, of course, assumes no material change in the business environment for our clients. While volatility and investor uncertainty present a challenge for the markets overall and the interest rate outlook is still unclear, we believe new company formation, investments, and exits among our clients will remain sufficiently healthy to fuel our growth, even if the pace of those activities is off from its highs in recent years.

Mike will go into details of our full-year 2016 financial outlook in a moment, but I'm going to steal some of his thunder and tell you that, based on our early momentum and our expectations going into this year, we are increasing our 2016 guidance for loans, net interest income, net interest margin, and core fee income. Our focus in 2016 will remain on the three key initiatives I told you about last quarter: First, continuing to enhance our brand and reputation through differentiation, service, added value, and our digital client experience; second, ongoing investment in long-term growth that includes developing and hiring the right talent and ensuring we have the systems, solutions, and infrastructure to support scalable growth; and third, continued strong risk management, which includes a focus on stable credit quality, and enhancement of our risk management and compliance infrastructure as we grow towards $50 billion.

We are keeping an eye on valuations, exits and the extreme market volatility we have witnessed so far in 2016. We view recent valuation pull-backs as healthy adjustments with the potential to reduce frothiness in the markets and refocus companies and investors on positive cash flow as a priority.

In closing, we are optimistic about the year ahead based on the performance we have seen from our clients and their industries, and our expectations that we will continue to execute our strategy. Our innovation clients continue to drive their business forward, regardless of the unicorn flu that has been going around. Our long experience, relationships, and insights into the markets we serve gives us access to many of the best companies and investors and enables us to deliver strong growth without compromising on quality. And our unique culture and place in innovation economy enable us to attract and retain the best employees, whose primary focus is increasing our clients' probability of success. We have consistently demonstrated our ability to execute effectively under a variety of marketing conditions, and regardless of market conditions, we believe that the innovation space as the engine that drives the broader economy is the best possible place to be for the long term.

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

Good afternoon, everyone.

As Greg commented, we had a strong quarter marked by continued healthy balance sheet growth, strong core fee income, and stable credit quality. The fourth quarter capped off the year where we continued to hit all-time highs in most financial metrics, and we believe we are well-positioned for 2016.

I would like to highlight a few items in my comments today, which I will cover in detail shortly. First, exceptional loan growth; second, strong growth and total client funds, both on and off-balance sheet; third, higher net interest income and a slightly higher net interest margin; fourth, stable credit quality, as we expected; fifth, higher core fee income with continued momentum in foreign exchange and credit cards and payments; and six, higher expenses, primarily due to higher incentive compensation given our strong performance. Additionally, I will discuss our capital levels, asset growth, and provide details and updates on our full outlook for 2016.

Let us start with loans. Average loans grew by $829 million, or 5.6%, to $15.7 billion. Growth was driven primarily by capital call lines to established private equity clients, although we saw healthy growth across the portfolio among new and existing clients. Period-end loans grew by $1.4 billion to $16.7 billion, primarily due to significant year-end activity among our private equity clients, much of which occurred in the last month of the quarter. This provides us a strong start to the year in terms of average balances, although we could see some run off of period-end balances in the first half of the year, as we did in 2015.

As always, we remain focused on high quality, smart loan growth with appropriate pricing, size, and structure relative to our risk appetite and cost of capital. Nevertheless, the strong activity we are seeing from high-quality private equity clients and across our portfolio is providing upside to our targeted average loan growth range of $1.5 billion to $2 billion annually, as well as to our original 2016 loan outlook, which I will discuss shortly.

Now let us move to total client funds; that is combined on-balance-sheet deposits and off-balance-sheet client investment funds. Average total client funds grew by $3 billion, or 3.8%, to $82.3 billion, driven equally by deposits and client investment funds, and marked by a significant increase in client activity during December. Growth in both deposits and off-balance-sheet client investment funds was driven by end-of-year activity among venture capital and private equity funds related to distributions, new funding rounds for our early-stage clients, and new client acquisitions. Average on-balance-sheet deposits grew by $1.5 billion, or 4.1%, to $38.9 billion, and off-balance sheet client investment funds grew by $1.5 billion, or 3.5%, to $43.4 billion. Period-end total client funds grew by $2.5 billion, or 3.1%, reflecting deposit growth of $2.1 billion, or 5.7%, and growth in client investment funds of $425 million, or 1%, to $44 billion.

Turning to net interest income and our net interest margin, net interest income increased by $14.4 million, or 5.6%, to $269 million in the fourth quarter. This increase was due primarily to higher loan growth. Interest income from loans increased by $10.4 million, due to higher average loan balances. Loan yields increased modestly by 2 basis points to 4.67%, primarily due to fees from early loan payoffs in the fourth quarter. Average fixed income securities increased by $621 million, or 2.7%, to $23.5 billion due to strong deposit growth.

Yields on the overall portfolio increased by 1 basis points to 1.55%, primarily as a result of lower premium amortization expense during the quarter due to higher market rates. New purchases of fixed income securities, which totaled $2.5 billion overall, were primarily in US Treasury and Ginnie Mae securities, with an overall average blended yield of 1.52%. Approximately $800 million of purchases were the result of portfolio cash flow reinvestments during the quarter. Portfolio duration in the fourth quarter remained consistent at 2.7 years. Our net interest margin increased by 4 basis points to 2.54%, primarily due to growth in loans.

Now let us move to credit quality. Our credit quality remained stable overall and is performing as expected. Here are the highlights. We recorded a loan loss provision of $31.3 million in the fourth quarter compared to $33.4 million in the third quarter. This amount reflected $13.1 million due to loan growth, $9.7 million related to charge-offs, and $6.2 million of additional specific reserves on nonaccrual loans. Nonperforming loans increased by $7.9 million to $123.4 million, driven primarily by one software loan. However, nonperforming loans as a percentage of total loans decreased by 2 basis points to 73 basis points. Criticized loan balances remained consistent at 5.5% of total gross loans and remained below our five-year average.

I would like to provide a general update on the three nonperforming loans in our sponsored buyout portfolio, which we discussed in Q3. Consistent with our comments on our last earnings call, there has been no further deterioration in these loans. Moreover, we have had no new nonperforming loans in our sponsored buyout portfolio and credit quality in the portfolio remains stable. The three loans have shown modest improvement, but we still need to see sustained performance over time before changing their status.

Now let us move to non-interest income. I will discuss certain non-GAAP measures in my comments, and we encourage you to refer to the non-GAAP reconciliations in our press release for further details. GAAP non-interest income was $114.5 million in the fourth quarter compared to $108.5 million in the third quarter. Non-GAAP non-interest income, net of non-controlling interest, was $111.8 million compared to $102.1 million in the third quarter. This number was driven by three components: core fee income, warrants, and gains from investment securities. As a reminder, core fee income includes foreign exchange, credit cards, letters of credits, deposit service charges, lending-related fees, and client investment fees.

Core fee income was $72.7 million, an increase of $4.3 million, or 6.3% over Q3. This increase was driven by record high foreign-exchange revenues of $24 million compared to $23 million in Q3, reflecting higher volumes, and record high credit card and payment revenues of $15.8 million compared to $14.5 million in Q3, reflecting the ongoing implementation of our payment strategy.

We had warrant gains of $16.4 million, compared to $10.7 million in the third quarter, primarily driven by evaluation gains related to follow-on funding rounds. Private equity and venture capital-related investment gains net of non-controlling interest were $9.6 million compared to $12.7 million in the third quarter. These gains reflect a slower pace of exits during the quarter and included $6.5 million of gains in our strategic and other investments portfolio and $2.2 million of valuation gains from our managed funds of funds.

Moving on to expenses, non-interest expense increased by $23.9 million, or 13%, to $208.6 million in the fourth quarter. This reflects a return to more normalized expense levels versus the third quarter, in which we had a significant decrease in compensation expense due to lower incentive compensation.

Turning to capital, our capital position remained healthy overall due to steady earnings and stable credit performance. Although, deposit and loan growth continued to drive average assets and risk-weighted assets higher, which had an impact on our regulatory capital ratios. Our bank level tier-one leverage ratio decreased by 4 basis points to 7.09%. Our risk-based capital ratios, total risk capital and tier-1 risk-based capital decreased at the bank and the holding Company levels by approximately 25 basis points due to significant period-end loan growth.

We continue to closely monitor the trend in our capital ratios, in particular, our bank level tier-1 leverage ratio for which our general target range is between 7% and 8%. We are also keeping an eye on our average asset growth as we get closer to the $50-billion mark. As Greg pointed out, we continue to enhance and invest in our risk management and compliance teams to meet increasing regulatory requirements and have been preparing for this for some time.

Now I would like to discuss our 2016 outlook, and in doing so, provide some updates to the preliminary guidance we provided in October. This outlook is for the full-year 2016 versus the full-year 2015, and balance sheet numbers are based on full-year averages. Our outlook reflects the impact of the 25-basis-point Fed funds increase we saw in December 2015 and assumes no additional rate increases in 2016. If there were any rate increases in 2016, we would adjust our guidance accordingly. I should remind you that this outlook is based on our current forecast and assumptions about market conditions and is subject to change.

Starting with loans, we expect average loan balances to grow at a percentage rate in the high teens to the low 20s. This is an increase from our preliminary outlook of low double-digit loan growth. It reflects stronger than expected end-of-period loan growth in the fourth quarter of 2015. We expect average deposit balances to grow at a percentage rate in the low double digits, consistent with our preliminary outlook, although history has demonstrated that these balances can change quickly. We expect net interest income to grow at a percentage rate in the mid teens. This is also an increase from our original outlook of low double digits due to the impact of the 25-basis-point Fed rate hike in December. We are raising our preliminary net interest margin outlook by10 basis points to a range of between 2.5% and 2.7%. Again, this reflects the impact of the rate hike in December.

We expect credit quality to remain comparable to 2015 levels. Specifically, we expect net loan charge-offs of between 30 and 50 basis points of average total gross loans. We expect nonperforming loans of between 60 and 100 basis points of total gross loans. And we expect our allowance for loan losses for performing loans to be comparable to 2015 levels. We expect core fee income to increase at a percentage rate in the mid-20s, an increase from our preliminary outlook of mid-teens growth. This primarily reflects the impact of December's rate increase on our client investment fees and our improved outlook for foreign-exchange and card feeds.

We expect non-interest expense to increase at a percentage rate in the high single digits, consistent with our preliminary outlook. Keep in mind that if we outperform on our financial metrics, we could see higher incentive compensation, which would drive higher expense growth. Finally, while we do not provide an outlook for warrants and investment gains, venture investment levels, trends in funding rounds and the pace of M&A and IPOs in 2016 will all remain key factors to our overall earnings performance.

In closing, we delivered a strong performance in the fourth quarter and for the full year. Our outlook for 2016 is positive and has improved since we provided our preliminary guidance last quarter, thanks to continued healthy activity among our clients and a small but welcome boost from interest rates. We remain focused on delivering the right kind of growth and maintaining stable credit quality. Although, we are mindful of the environment in which we operate and the challenges presented by the economy and growing regulatory responsibilities, we see solid momentum across our Business and we believe we are well-positioned for 2016.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

We have a question from Ken Zerbe from Morgan Stanley. Please go ahead.

Excellent. Good afternoon, guys. My first question I was hoping to talk a little bit more about the loan growth outlook. Or more specifically what has changed in the outlook? When you do your preliminary guidance, it seemed that there was a lot of competition, you weren't getting the right pricing. Why is your loan growth outlook stronger now than it was, say, a couple of months ago?

So Ken, this is Greg. I will start and then Marc may want to join in. There are a couple of factors there. And so one, let me just take a step back. We have talked over the last 12 months to two years and talked about an annualized growth rate of $1.5 billion to $2 billion. What we've referenced is that the upside that could be above that, if there is a number above that, usually would come from mainly private equity services capital call lending, so venture capital and PE partners, as well as some from the private bank. What we saw at the end of the year, as we did the prior year, not to the same extent, was a run up in capital call lending at year end, mainly from private equity partners. That is number one. Number two is we sat down and re-looked at our numbers and our outlook, backlog and all of those things. The teams basically said that they believed that it was going to be even a stronger year in those same categories. So for those two reasons, as we came and looked at our guidance, we upped to the high teens to low 20s.

All right. Thank you. And then just another question for you. Help us understand, there has been such a huge amount of volatility in the market, and one of the concerns that myself and people I talk to have is that loan growth could slow. Granted, I understand your loan growth outlook just went up. But help me understand why we -- why VCs, when they think about doing capital calls or even PEs wouldn't slow investment, just given the material amount of volatility that we are seeing in the markets?

This is Greg again. First of all, it's been a short period of time. And I will give you a couple of data points. Just over the last week, as this volatility has been, obviously, very active and we've all experienced it, the number of rounds that we've seen close that have been in the $25 million to $50 million to $75 million levels of activity actually is consistent with what we saw in the third quarter and the fourth quarter of last year. Although it is just in a very short time period. So that's a very recent data point, to give you an example. We haven't seen any slowdown. That's number one. Number two is we spend time talking to investors, venture capitalists. They have raised funds. Last year was a good fundraising year, and money is coming in from a variety of different areas, and the number of innovation companies is very broad. So we still see that the activity levels, although they may slow down, are still going to be very healthy. That's a broad umbrella.

The second piece is a lot of the rounds that were the big fundings last year were to these larger later-stage companies. And these are companies that historically, we would have seen working capital borrowings. We would have seen acquisitions financing. We would have seen other borrowings that we didn't see because there was so much equity capital going in. So from that standpoint, we believe utilization could actually increase in some of the working capital facilities, as these companies get closer to profitability and are doing traditional working capital financing and not relying on equity. Those are the reasons we look at why we're still optimistic about loan growth in 2016.

Great. All right. Thank you very much.

And our next question comes from Ebrahim Poonawala from Merrill Lynch. Please go ahead.

Good afternoon, guys.

Hey, Ebrahim.

I think the first question, just going to Mike's comments on capital, if you can help us think about within the capital stack where are your preferences. We did a common equity in 2014, [inaudible] last year. If you do decide to raise some capital, is there a preference common versus debt or preferred?

I think what you are referring to is that our tier-1 leverage ratio is getting closer to the lower end of our range, and whether or not we are contemplating to raise capital or not. And so let me just first throw that out there. Our intentions right now are to do everything we can to avoid going to the capital markets. But, as you know our deposit franchise is extremely strong. And if it continues to grow, yes, we may have to consider that. The answer to your question about whether it is a common, or whether it's a preferred, or whether it's debt, obviously it just depends on the state of the market when you go to. But generally, I would probably say if we had to, hypothetically, and it's a big hypothetical, would probably be, as you've seen, we've always demonstrated typically common, but certainly the preferreds are always open. The route for debt is certainly available, but not necessarily to the certain extent, because you're always mindful of your double leverage ratio between the HoldCo and the bank level. Again, that is based on the presumption, again big presumption, that we would raise debt at HoldCo and downstream to the bank to increase the capital rations. But again, Ebrahim, those are all just hypotheticals.

There are still a number of levers that we are focused on to making sure our clients are getting their deposits into the right off-balance-sheet products. There is also the potential with the recent rate increase and also potential prospects going forward of rate increases that could perhaps make those discussions much easier, to actually have with the clients to get them more interested than hey look, you can actually get a more appropriate yield off the balance sheet, which again, was where your deposits probably should be in the first place. So there are still a number of things we would do before we would do that capital markets route.

Very clear. And tied to that, did I hear you correctly that as you get closer to $50 billion, which you could potentially hit at the end this year, 2016, would you look to manage the asset growth to delay crossing the $50 billion mark?

No, I think the short answer is no. We always are very cognizant about return on capital from whether it's deposits or other relationships with clients. But again, no plans to slow down growth, but it always is about what ROE can we really get.

This is Greg. The only thing I would add on to that is there isn't -- if you're approaching $50 billion, if you end up at $48 billion, $49 billion, and even now as we approach that number and the requirements that you would have by hitting that CCAR level at $50 billion, we're already starting to work on those things and those things are already starting to be expected of us. Not required, but starting to be expected. So from that standpoint, we don't look at the bright line of $50 billion maybe as bright as others may.

Understood. And if I can ask a second question just in terms of your NPA guidance. We are at 75 basis points, given the range of 75% to 1%. From the outside, it feels like there has been a lot of weakness, going back to your response on loan growth. Over the last six to nine months, when I look at some of the VC funding in fourth quarter, tech IPOs, what gives you confidence? And I recognize, Greg, you were one of the first guys to talk about a potential bubble in some of the private markets, but what gives you confidence that charge off and NPAs will be manageable despite maybe potentially some more weakness as the go through the next few months?

This is Greg. I'll start and I am sure Marc will want to add. The one thing that I think it's important to start is to just take a look at our overall loan portfolio. Right? Where we would see weakness, if there was rounds that didn't close and companies would struggle to get equity raised would be in the early stage. Right? And so from that standpoint, we want to make sure everyone remembers that that's a small portion of our overall portfolio, roughly 8% of our overall loan portfolio. Where we have grown in the last two or three years, we've grown there, but it's been modest relative to what we've done in private equity, which is very low risk; what we have done in the private banks, which is very low risk; and in other areas. And what we tried to talk about in prior calls and the sponsor-led buyout is those companies tend to have lower leverage than you would see in traditional industries. So we've stuck to our knitting. We haven't expanded our EBITDA levels, multiples, even in the markets heated up. We've lost more deals. Our growth has slowed down there, but we think that's the prudent or smart way to grow that business. So we feel good about the portfolio construction, and we haven't seen any activity that would cause us to say that there is a change in behavior of venture capitalists. But again, even if you did see some, that -- our cushion that we have built in when we look at that outlook, we believe again, unless there's something more dramatic would happen, could absolutely withstand that.

The only thing I would add to that is, in addition to credit quality being stable throughout 2015 and the second half of the year, one of the things that we did not see was anything out of pattern in connection with investor behavior. But we did see one thing that was encouraging in terms of the companies themselves, and that was a pivot, so to speak, an increasing number of companies starting to prioritize positive cash flow over cash burn for revenue growth. Putting that together with what, on average, in our borrowing client base would be fairly robust balance sheet liquidity. The combination of prioritizing positive cash flow and having more cash on the balance sheet than usual, given the fundraising environment, I think helps give me some comfort that we're not going to see anything that would hopefully impact or change our guidance for credit quality. And then I think just going back to buyouts, because that really was the source of the nonperforming loan increase in the main in 2015. Again, we didn't add anything new there in the fourth quarter, and credit quality in that segment of the portfolio look stable overall.

Got it, thank you for taking my questions.

Yes.

Your next question comes from Steven Alexopoulos from JPMorgan. Please go ahead.

On credit first, with the handful of charge-offs in the early-stage portfolio, can you give us color in terms of what you are seeing on the funding side and the ability of early-stage clients to go out and get that next round to pay off the loan?

So this is Greg. I'll start and then again Marc will add to it. You could look at the venture capital numbers in the fourth quarter, roughly $11 billion, and it depends upon what data source you look from. If the number was $58 billion for the year, you're at a $44 billion annualized level. We look at that and so that's a more normal level. I wouldn't be surprised if you see that number carry forward into 2016 on a quarterly basis. That's still a healthy number, number one. Number two, we have to remember there are other sources of capital, and there is still a lot of money around looking for the innovation economy. There's still more corporate venturing than we've ever -- we ever had, and I believe this time, I've spent time with several of them. And they're not -- their approach isn't a short-term, from my standpoint, go in and try and make some money. It's more strategic.

And here's what's different about it this time compared to last time. Companies have to look at investing in new disruptive technologies to protect their business and to grow the business more than ever. So therefore, it's not, from my view, as optional as it was historically, whether they invest or not in innovation and new technologies. That's a very different set of circumstances than we had before. Then you look at the angel market. So there's a broader source of capital than we had before. Still a healthy number in the fourth quarter of venture capital. It was a strong year of fundraising last year for venture capital firms. And then last point, which is your first question is did we see any change in behavior in the fourth quarter? And the answer was no we didn't.

All right. That's very helpful. I appreciate that. Just to change gears for a second, on the off-balance-sheet client funds, can you give us a sense how much did your revenue from the off-balance-sheet funds increase by or what should it increase by tied to the December hike? I imagine you'll make a little bit more there. In terms of the rate the alternatives are now able to offer, did that change enough to make it easier for you guys to redirect funds off-balance-sheet?

Yes, Steve. I'll go. This is Greg. So in the first question, the off-balance-sheet is -- the 25 basis points gives us 2 basis points of increase that we look at, which doesn't sound like a whole lot. But when you look at it on a $40-billion portfolio, that actually does become meaningful, number one. Number two, and again, that gives you some belief that as rates increase, and we hope they will continue, maybe not level they were expected to, but we believe there may be one or two increases this year. There will be more lift in that category. So that's one answer to your first question. Second question is, and Mike highlighted this, it does help. It makes the conversation easier. If you can go to a client and say moving that money off-balance-sheet, it was 5 basis points before is what you could get and now you can get off-balance-sheet 20 or 25; that is compelling, especially when you're talking about the dollars or talking about whether it's $50 million, $75 million or $100 million balances. It does make the conversation easier. Kind of what Mike said about another tool in our toolbox that we can use to make sure that we're managing those capital ratios appropriately without having to go to the capital markets to raise more capital equity or debt.

Okay. That's helpful. I'm hope you don't mind, Meghan, I'm going to try and sneak one more in. The alternative on capital, this evaluation we have, we don't see that often for your stock, right? Would you guys consider using any cash at the holding company to buy back stock?

Steve, we've been talking about the tier-1 leverage ratio, be it the bank level at the holding company. And as we've talked about, at least at the bank level, we want to target at 7% to 8%. Similarly, if you can have a corresponding proportion for the holding company as well too. I just don't think we're in a position right now that we would do that, despite the fact that we all believe our stock price looks attractive. We continue to have strong growth that we've got to continue to redeploy our growth and capital, redeploy it back in and investing into the bank to continue to grow. So at this time, I don't think we would be in a position to do that.

Okay. Thanks for all the color, guys.

And our next question comes from Jerry Shaw from Wells Fargo. Please go ahead.

Good evening. Thank you. Most of the questions were answered and asked. Could you give us an update maybe on what to expect as you go through the year for Volcker, and any changes we can expect to see in the balance sheet as you approach the implementation date, or the full implementation date of that?

Generally, as you probably heard us talk about, really the next [witching] date would be in 2017 or so, so there's obviously still some time left. We have, as you know, have stopped making any new commitments into that area. So over time, you're going to see those balances continue to come down. Now when we get to 2017 depending on where our level is at, we would -- if we still need to bring down those levels of investments, we would look to certainly request for an extension. But again, at this point, we still have some time away before that time comes.

Okay, great thanks. Just on credit, could you give us an update on what the breakdown is on the allowance between specific reserve and unallocated reserve?

Yes, this is Mike. What I would suggest is wait until we get our full 10-K, which will give you the more disclosures with respect to the breakout of the credit and reserves. But generally, as you probably have seen through time it has essentially been fairly consistent and there has not been any significant moves one way or the other.

Okay, so there wasn't any real big move in that as you went through fourth quarter?

No, using wider -- wide percentage ranges, generally no.

Great. Thank you.

And our next questions comes from Aaron Deer from Sandler O'Neill. Please go ahead.

Hi, good afternoon, everyone.

Hi Aaron.

You are obviously disinclined to give guidance on the warrant and equity gains or potential for those anyway. For those of us from the outside, you guys have the best visibility in terms of what your holdings are and are seeing very current activity in terms of up-and-down rounds on funding. Is there any way that just to help give us something to work with you can give us a sense, at least in terms of the direction of magnitude, of what you would expect for equity and warrant gains in 2016?

Aaron, this is Greg. I'll start. So we don't give guidance on it, but let me give you a couple -- few pieces of color. One is you said that we have a good visibility to up rounds and down rounds. Again, what we saw through the fourth quarter was no, I'll call meaningful, and I honestly can't think of any or many down rounds that we saw. Do we think that is going to change? Sure, that's going to change. But, when you look at it, the market, these companies continue to still perform, this is a broad statement, perform at a very high level, number one. And number two, going back to what Marc said, they are refocusing their efforts on going and becoming cash flow positive. We think those are good signs. And there is the availability of capital. So we don't believe it's going to be a complete shrinking of capital in 2016 so that down rounds are going to be the norm. But of course, it will happen. So do we expect it to be lower than last year? Absolutely. But, we're still feeling okay about the outlook.

And the last point I would make is, one thing I'd pay attention to is when you look at our filings and look at the number of warrants that we actually have, we continue to take warrants actually at a faster pace, and it has been that way the last few years. That gives you a sign, and it may not be for this year, because that is what is difficult to predict. But the trend is that we continue to take warrants and if there are down rounds, that's going to be a good opportunity for us to price rounds at warrants at a lower level.

Maybe perhaps if I may, the one thing -- or a couple things I would add, Aaron, as you know, probably, is generally you have to monitor and follow what is the state of the IPO activity or M&A activity? If those two things are -- continue to be strong going into 2017, particularly M&A, then you could likely see some nice gains there. Obviously, continue to watch the stock markets and evaluations thereof as well too. Look for tech spending as well too. But sometimes, unfortunately, we get some bad press or headlines, well IPO activity slow down or ended. But the reality is a lot of the exits from, whether it's warrants or the investment gains, really comes from M&A. And again, that has demonstrated over the past year that it's pretty healthy, and it is likely probably to continue at least a healthy clip.

And maybe just to add on to that. The last part is on M&A. Is it goes back to one of my comments that thinking about the activity levels of these technology companies that are the larger, more mature companies, I believe you're going to see a greater activity level of acquisitions in M&A then we even saw in the last few years because of their focus on having to fill their R&D pipelines. They have to figure out how to grow and differentiate themselves. That's happening with technology companies, innovation companies in that early and mid-stage level. So you may see a little bit of change here and there, and you may see a slowdown, but I think it will pick back up, if it does, very quickly.

That's great. Thank you for the additional color. And then for my follow-on, I was just curious to know what you've been seeing in the first few weeks of the year in terms of any pay-downs. Obviously there's a big run-up at the end of the year and some of this was pay-down early in the first quarter. Just curious to know what you might have seen there?

Yes, I'll just give you some general color, and I think you might be able to discern it from some of our comments. We did talk about that we had a strong run-up in capital call lines in the private equity. And we mentioned in the notes and the comments that look, you could see something similar to what happened last year, which is we may hold through the first and maybe go into the second quarter and then you may see some pay downs. But going into 2016, as we said, the balances look strong and at this point in time and seem -- are holding. And we'd probably be expected to hold fairly well, but again, there is always the risk of the pullback, as you're alluding to.

Great, thank you.

And your next question comes from Joe Morford from RBC. Please go ahead.

Thanks. Good afternoon, everyone. Congratulations on a strong quarter.

Thank you.

First is just a quick follow-up on Aaron's on the warrants. Can you just remind us, Mike, how you carry them on the books? As I recall, there is some discounts for liquidity and time value of money that would also give you a little cushion for potential down valuations.

Yes, I don't know if I'd describe it as cushion, per se. But as you know, we carried at a fair value and the way we value the warrants is using a Black-Scholes model, which has a few inputs certainly, which you can certainly look up to. But it's certainly at fair value. One of the larger drivers is whether there is an up or down round, aka, the stock price component of a Black-Scholes model. There's certainly the risk-free rate. There's the time value of money. There's a volatility factor as well too, and then obviously the fifth factor in the Black-Scholes model is dividends, which obviously none of these pay. So really it's just a fair value we market each quarter.

Okay.

Hey Joe, this is Greg. One of the things you may be thinking about is in the investment securities portfolio. So we do have, there two different parts. One is held at fair market value and then there is others that are held at cost, and it's basically the structure of the investment. If you look back over the last quarter, there was roughly between $80 million and $100 million of value difference between the cost, which is what we are carrying it at, and the fair market value. And it's in the financial statement, so if you are talking about some cushion, that's one place where you may see it.

Okay. That's helpful. The other thing was I noticed that 20% of your average deposit growth this quarter came from new client additions. How does that compare to prior periods? And you touched on this a little bit, but what can you tell us about your expectations for the pace of new client additions and new Company formations in the coming year, given the environment that we are in right now?

So this is Greg, Joe, I'll start. I just think when you look at new client additions, the last couple of years have been very strong, and so they have obviously contributed to it. So I don't think there has really been a change materially from new client contributions versus existing client contributions.

Okay. Thanks much.

The next question comes from Julianna Balicka from KBW, please go ahead.

Good afternoon.

Good afternoon.

I wanted to follow-up on a couple of the topics [that have been raised.] One, Aaron brought up the outflows in terms the loan, so I wanted to ask about seasonal outflows in terms of deposits. What you look for in next quarter, given the short-term volumes that you put on the balance sheet at the very end of the quarter. Has that already slowed out, or what is the timing that we should be expecting for that to depart?

This is Mike. I will actually be brief. We don't really see, I would say, a characterization of seasonal flow of deposits for us. As you have seen, it has pretty much been consistent growth for the last several years in deposits. So at this juncture, at this point, we really don't anticipate any major change in that. Now again, as we alluded to, we talked about how maybe perhaps the higher interest rates might be able to help us move some clients' deposits products or off-balance sheet. But in general, as Greg was also talking about, the Company formations continue to be healthy and some of the funding rounds were healthy, even getting towards the end of December as well too. So we don't really see any pattern at the moment in terms of deposit outflows related to any seasonal items.

On the borrowings that you have after year end and December 31 the short-term borrowing are already gone?

No, as we commented about that as well. We actually think, it may happen similar to what happened last year where the loans actually held fairly well going into Q2 last year. So we possibly could see a similar experience. The categoric answer is we really have not seen any major runoff so far this quarter.

Okay. And then as a follow-up, I just wanted to ask in terms of the capital call line growth that you've been experiencing in the VC, PE line, could you break that down between VC and PE for us? And also are you seeing an incremental trend in terms of later stage PEs, maybe those are focused on more of distressed countries or anything to comment on the mix between those two?

As you may have guessed, we really don't break it down between PE and VC, but I will just say generally, a lot of the strength and the growth over the last couple quarters has been driven primarily by some of the PE. There's just much more larger dollars and more funds and firms there in order to grow. So that's where we've seen the predominant amount of the growth. There's certainly still some growth in the VC area, but it's largely driven by the PE area.

It's Marc Cadieux. The only thing I would add is that our PE clients invest across multiple asset classes. There are actually very few that are focusing on distressed assets.

Got it. Thank you very much.

Our next question comes from John Pancari from Evercore. Please go ahead.

Good afternoon.

Hi, John.

On credit, can you give us just a little bit more color on the early stage credit that hit NPLs? And on that point, I think Mike, it was you that said that there was one software credit that hit NPLs. But I think in page 5 of your release, you indicate that there is two loans, one software, one Internet. So I just wanted to see if we can reconcile that as well. Thanks.

Hi, this is Marc Cadieux. Maybe first starting with the one significant addition to NPLs and what was responsible for the $7.9 million increase was actually a later-stage software company that's encountered some operating performance challenges. But to your point, not related to early stage. Then I think the comment might be in thinking about what was in the release, the charge-offs in the fourth quarter was primarily driven by three loans. All of them early stage, two in the software space, one in life science. Is that what you are alluding to?

Well, I don't know. I'm looking at page 5 and you say the new nonaccrual loans included $12.5 million from two early-stage clients in software and Internet loan portfolio.

Yes, so that references -- it seems to be related to charge-offs, as I mentioned. So it says gross loan charge-offs total $11.6 million, including $3.8 million from the two early-stage clients that are software segment, as I mentioned, and then one $3.1 million early-stage loan loss from the life sciences healthcare portfolio.

Yes, and I was looking two paragraphs below that, but.

Oh, I'm sorry. So the -- yes, there was the first software company that I mentioned, again, the one that was the big driver, that is one of the drivers of the increase in specific reserves. The other was an early-stage loan, similarly in the software space. I hope I'm answering your question.

Okay. All right. And then, so again, nothing to flag in the early-stage loan book that is anything systemic or anything at this point?

No. As has been the case for as long as I've been here, generally our loan losses come from early-stage, regardless of where you are the cycle. It's the nature of venture; not everything in early-stage works. But what we saw in the fourth quarter is very consistent with what I would characterize as in the normal range. And in particular, as we mentioned earlier, no change, no anything discernible related to pull-back in valuations or market volatility or any of the things that we saw in the second half of 2015 and so far this year.

Okay, Marc. Thank you. Mike, on the spread revenue benefit from higher rates, I know you indicated that you do not model or you are not expecting additional Fed hikes in 2016. If we did see 25 basis points of a hike, can you just remind us of the net interest income benefit from that?

Let's just wait till we come out with the 10-K to show you the general. But you can refer in our past in the 10-Q about the impact of the rate increases.

Okay, so not materially different then?

They will be directly consistent, yes.

And then lastly, on the drivers of loan growth, I just want to see if you can give us a little bit more color on 2016. Is it fair to assume that the bulk of the loan growth is still going to be concentrated in the capital call lines, in terms of how you are expecting it? Or if you could just talk about the distribution across later stage versus capital call versus early stage and buyout.

Sure, this is Greg. So you are going to see greater numbers, bigger numbers from private equity. Secondarily, you will see it in the private bank. You'll see it in global. And those are the sequencing and a prioritization of where the growth is coming from. And below that you are going to see growth consistent across the other industries, niches, so life sciences, technology, later stage, early stage. That's a good breakdown of what we see happening from a growth perspective.

Okay great, thank you.

I'm just going to interject here. We are at four o'clock, but we're going to keep going and get your questions answered. So keep on asking.

And our next question comes from Geoffrey Elliott from Autonomous Research. Please go ahead.

Hello. Thank you for taking the question. How do you stress the portfolio for an environment where financing just dries up for VC companies and what does that sort of stress testing show you?

Geoff, this is Greg. So when we look at -- so we've done stress testing for a while, and although we are not required to do stress testing and what I'll call idiosyncratic. So this isn't one of the guidances that the Fed gives you; they don't talk about a tech impact. We obviously do that. And from the standpoint of how we're looking at it, we feel good about it. And here's an important point: when we see the stress in the portfolio, we keep referencing back, and I will reiterate that 8% of the portfolio is the early stage. That is where you see the stress. That's when you would see a big impact. But if you look at that and even if you had a 10% loss in that, you are looking at 80 basis points across the overall portfolio. Now you'd see it in other parts of the portfolio as well, but it mainly early stage. That's one way to think about stress overall, but we obviously don't publish the details of that. They are just part of our risk management.

Could you just remind us the break down of the portfolio into pre-revenue, pre-profit, and then profitable companies. What does that look like?

Yes. So it's Marc Cadieux again, and I think the pre-profit, and what we think of as early stage being that early revenue, zero to early revenue stage is really the 8% that Greg is talking about, is that category.

Okay, thank you. Thank you very much.

The next question comes from Brett Rabatin from Piper Jaffray. Please go ahead.

Hi, good afternoon. Just a quick one on expenses. Just want to make sure I understood the incremental spend as you are approaching $50 billion. Can you give us maybe a little color on what you've done so far and then incrementally what you need to do as you approach that number from here?

We haven't come out and commented exactly how much we're spending. Part of the challenge is we obviously have been growing extremely fast and our expense growth rate have obviously been growing as well, as we invest in our business. So we have not broken that out to give you any indication of that. But having said that, we are continuing to invest and spend money, but it's not as if something you're going to really notice any pick up in our expense run rates at the current rate. We have been investing for a number of years, so it's in our run rate, and we will incrementally continue to add. But again, once again, it's just not going to raise it's head for you to see necessarily any major changes in our expense growth rates.

Okay. That's great color, thank you, Mike.

Our next question comes from Gary Tenner from DA Davidson. Please go ahead.

Thanks, I had two quick questions. One, I was just wondering if you could tell us what the average new loan yield was for the fourth quarter?

Average across the portfolio. Yes, I'm not sure we have it for the fourth quarter in isolation, but it's in the plus or minus 4% across the portfolio.

Okay. Great. And then I know you've said you're not going to provide guidance on the Chinese joint venture until we get closer to 2017. But I wonder if you could just comment on what your perception is of that market from a tech investment and strength perspective, given the overall slowdown.

This is Greg. There's two aspects of it. One is that the last two years in venture capital activity, although we've had a robust growth in venture capital activity in the US, the growth in venture capital numbers actually was even stronger on a percentage growth in 2014 and 2015. As we look at that market, we do expect a pullback there, potentially even greater than what we see in the US. That being said, in the innovation economy in China continues to be on an uptick. And you think about it, what's happening in China actually ends up not being a negative for the innovation economy. Right? So China has got two different markets, right, they have the innovation economy and the old economy. Old economy is the one that is struggling. And they have got to figure out how to balance that, which means that more than likely, they are going to reemphasize or increase their emphasis on the innovation economy, which from our standpoint, bodes well. And actually, we may overtime accelerate that. So we feel good about what we're looking at in China, about the outlook. But remember, as we said on the last call, this is a long-term strategy. So you're not going to see very much change in the next 12 months, 18 months with our financials from any real impact on China.

All right. Thank you for the color.

We have no further questions at this time. I will turn the call back to Greg Becker for final comments.

Great. I want to just thank everyone for joining us today. We had a record year in 2015, which I'm extremely proud of. But what I am even more proud of is how our team, and that means all 2,000-plus SVBers, executed on our strategy and took great care of our clients. Our outlook for 2016 is strong, despite this early volatility that we've seen. We tried to give you as much color as we could and have seen on that, and we remain committed to long-term smart growth. So I want to thank all our employees for doing such a great job in 2015 and getting excited about 2016, and to our clients for putting their trust in us and hopefully trust for many years to come. With that, have a great 2016. Thanks, everyone.

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