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SVB Financial Group (NASDAQ:SIVB)

Q4 2012 Earnings Call

January 24, 2013 6:00 p.m. EST

Executives

Meghan O'Leary – Director of IR

Greg Becker – President and CEO

Mike Descheneaux – CFO

Dave Jones – Chief Credit Officer

Analysts

Steven Alexopoulos – JPMorgan

John Pancari – Evercore Partners

Josh Levin – Citibank

Aaron Deer – Sandler O'Neill & Partners

Joe Morford – RBC Capital Markets

Brett Rabatin – Sterne Agee

Julianna Balicka – K.B.W.

Herman Chan – Wells Fargo Securities

Gaston Ceron – Morningstar

Operator

Good afternoon. My name is [Chris] and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SVB Financial Group Q4 2012 Earnings Conference Call.

All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

Meghan O'Leary, Director of Investor Relations, you may begin your conference.

Meghan O'Leary

Thank you, [Chris]. And thank you all for joining us today. Welcome to our fourth quarter 2012 earnings call. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux, are here today to talk about our fourth quarter and full-year results. They'll be joined by other members of management for the Q&A.

I'd like to remind everyone that our fourth quarter earnings release is available on the Investor Relations section of our website at svb.com. I will caution you that we'll be making forward-looking statements during the call and that actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information. This disclaimer applies equally to statements made in this call.

In addition, some of our discussion today may include references to non-GAAP financial measures, and information about those measures, including reconciliation to GAAP measures may be found in our SEC filings and in our earnings release.

We have a lot to cover today with the quarter, full year, and then our 2013 outlook, so we are going to try to power through it quickly and make sure we get to all your questions within the hour. But please do try to limit yourselves to one primary and one follow-up question to enable other participants to ask theirs.

So, thank you, and I'll turn it over to Greg Becker.

Greg Becker

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

Mike will go into more detail on our financial results for the quarter and the yearend in just a few minutes. What I'm going to talk about is our strategy, some of the non-financial accomplishments from 2012 that supports this strategy and the year ahead.

Our strategy is to be the best financial services partner and thought leader for high-growth innovation companies and their investors wherever they are in the world. Increasingly, through our private bank, the strategy includes the individuals who are part of this ecosystem as well. As we see it, this vision requires three things.

The first is the ability to support our clients at all stages. This means establishing a lifelong relationship, working with these companies at their critical startup stages, and supporting them as they grow to mature name brands. It also means growing our ranks of already established larger innovation clients. The second element is the ability to support our clients wherever they are. Since we already are in every key domestic market, this primarily means extending our capabilities to key global markets. The third element is the operational infrastructure products and services to support the first two elements. This is about creating a simple, seamless and increasingly mobile client experience. It's also about building a platform that will allow us to grow efficiently.

So let's look at what we achieved in each of these categories in 2012 and why we feel it was such a great year. Starting with the first piece of the strategy, supporting our clients at all stages. SVB has been the dominant player among venture-backed companies for years, and the pace of our new client wins in this area suggests that our lead is becoming even more entrenched. In 2012 we added more than 1,800 new venture-backed and non-venture-backed early-stage clients, a record year. In addition to maintaining our market share of high-growth innovation companies, we saw a noticeable improvement among the highest profile fastest-growth companies. We believe these companies are the most likely to go public, get acquired for substantial amounts of money, and be recognizable by all of you.

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

And as good a year as we had, we are just getting started. There is still a tremendous amount of opportunity with these later-stage clients.

A second part of our strategy is supporting our clients wherever they are, and in particular, globally. To this end, in 2012 we accomplished two major milestones in our global strategy. Specifically we obtained our banking license and opened up a branch in the UK, a task that included building a banking platform from the ground up. With the UK branch up and running today, we're adding new accounts at a healthy pace. As of December 31st we had 135 new accounts and are growing. These new accounts are coming from new clients in the UK market and US clients doing business in the UK and in Europe. While loan and deposit balances are still relatively small as a percentage of our overall base, roughly 3% of loans, we expect them to grow rapidly in the coming years.

We also launched our new joint venture bank in China, which the Chinese regulators gave us approval to pursue at the end of 2011. Today we're gradually opening up in country accounts and building out our products and services to support local innovation companies as well as foreign companies doing business in China. Of course, China is a much longer-term play for us. Our JV bank can currently only open up onshore US dollar accounts. So we expect it to be three to five years before we begin generating meaningful revenues there. There's still a lot to do in both the UK and China, but we're pleased with our progress.

The final piece of realizing our vision is the infrastructure products and services to support our growth. This includes simplifying and improving our client experience, introducing relative products and services and creating a platform to help us grow efficiently. As part of this effort, in 2012 we implemented three new technology solutions for our clients that are transforming our product and service delivery. These include a mobile banking platform that had the fastest adoption rate of any product or service in our history. One client called the app a big leap forward for SVB with great usability.

We also rolled out the industry's first tablet-based B2B payment solution which has also been very well-received. And we launched the new streamlined client onboarding service. This is not only great for our clients but for SVB because it takes a multitude of forms it took to open an account and simplifies it to one process. Now clients enter their information online one time and that populates everything. Clients have told us it's a great experience. It's a great tool and one of my favorites, super awesome. Yes, that is a direct quote.

On the efficiency front, we opened an operational hub in Tempe, Arizona, which helps us by giving us access to a great pool of talent, particularly in banking operations and IT, while lowering our long-term operational expense growth trajectory and improving our business continuity framework.

Before I turn to the year ahead, I have two additional achievements that bear mentioning. First, we improved our scores on our annual client satisfaction survey for the fifth consecutive year. While the trend line in client satisfaction levels are great overall, I'm most proud of our exceptional satisfaction ratings in our private bank and private equity services which are considered best in class.

And finally, last year we were recognized by Fortune Magazine as one of the best places to work, something I'm particularly proud of.

Looking at 2013 and beyond, we believe the environment for our clients remains positive. A recent survey from the National Venture Capital Association suggests that VCs are reasonably optimistic about 2013 coming off a relatively strong 2012. They see opportunities in business and healthcare IT which appear to be overtaking the consumer applications that dominated the last few years. Global activity is also expected to play a more meaningful role with China, India and Latin America cited as important potential sources of startups.

And while fundraising challenges are expected to persist, the majority of VCs and startup CEOs surveyed said they expected that the fundraising environment in 2013 to be the same as or better than 2012. Solid venture capital activity coupled with solid corporate venture and angel investment points to a good year of company formation in 2013.

Our pipeline going into 2013 remains healthy and our clients for the most part feel positive about their opportunities this year. In terms of the buyout and acquisition loans that have driven most of our growth, we see ample demand and continue to pursue the highest-quality deals. This is of course assuming the economy continues its gradual improvement.

Many of the initiatives we focused on in 2012 will remain priorities for 2013. We'll continue our focus on engaging with the best startups early in their lifecycles and growing our ranks of larger companies. We'll work hard to be the best possible partner to our innovation clients and we'll use everything we've learned in the last 30 years to ensure our success.

We will continue to build momentum in our global strategy. While we completed a lot of the heavy lifting and established the infrastructure in the UK and in China, we're actively building partnerships, winning new clients, and expanding our global balance sheet in order to make the most of these opportunities and investments. We will continue to refine and improve our infrastructure to simplify things for our clients, deliver innovative products and services, and scale our business while effectively managing our base cost.

So I'm optimistic, very optimistic about our prospects, but I'm also realistic about our challenges. We're still dealing with an unprecedented low interest rate environment, as is every bank. Our dynamic client base and our unique model have allowed us to deliver strong performance regardless of these rates, but low rates and competition have impacted our yields and will continue to do so for the foreseeable future. These are challenges that we are well-equipped to handle as our performance have shown. So while we may not win every deal, we're winning most of the deals that matter to us. Those are the highest-quality companies, the best startups, the most influential VC and private equity partners, the ones we won, and our win rate has increased in the past year.

In addition, there are significant barriers to entry for potential competitors. It's not easy to lend money to our clients but it can be done. What's more difficult is providing the kinds of expertise and educational events that solve their problems and make it easy for them to do business with us, or the introductions and connections to the investors and potential clients that help them take their business to the next level, or government relations effort that give startups a voice in policy matters affecting their success, this kind of value that has become our brand over the last few decades.

We know that the more successful we are, the harder we have to stay to work ahead. So whether it's simplifying the opening of client accounts so it can done in minutes rather than days, or delivering loan documents on Christmas eve because a client needs them, our employees are constantly raising the bar and themselves to innovate and be the best partner to our clients. That attitude of doing whatever it takes to increase our clients' chances of success is a one thing that will never change and our clients are counting on it.

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

Mike Descheneaux

Thank you, Greg, and thank you all for joining us today.

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

There are six areas I want to highlight today. First is strong loan growth from normal client activity and from some -- excuse me. I'll start over for them.

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

Let me start with loan growth. We had an outstanding quarter. Average loans grew 4.6% or $367 million to $8.3 billion while period-end balances increased by 9.2% or $755 million to $8.9 billion. Those increases stem from strong growth in sponsor-led buyout loans in our software portfolio as well as venture capital and private equity capital call lines of credit.

In addition, as I alluded to earlier, a portion of our fourth quarter growth was due to clients working to get certain deals completed by the end of the year in anticipation of tax changes. Given the huge run-up we had in the fourth quarter, we would expect the pace of average loan growth to moderate in the first quarter with Q1 period-end loans remaining flat to down.

For the full year 2012, we grew average loans by $1.7 billion or 30%, exceeding our 2012 growth outlook of percentage growth in the high 20s, which we increased in the mid-20s in July. We grew period-end loans by $2 billion or 28% in 2012 to reach an all-time high of $8.9 billion. Growth throughout the year was primarily driven by sponsor-led buyouts and capital call lines of credit.

Now let me turn to our deposit franchise, which showed extremely strong growth. Average total client funds grew by $1 billion in Q4 to $40.2 billion. This reflects on-balance-sheet deposits of $19 billion and off-balance-sheet funds of $21.2 billion. Period-end balances grew by 7% to $41.7 billion, reflecting deposits of $19.2 billion, an all-time high, and off-balance-sheet funds of $22.5 billion.

Average deposits grew by 4% or $731 million as a result of strong acquisition of Accelerator in growth clients and strong activity by our private equity clients. On a period-end basis, deposits grew by 8% or $1.45 billion, further reflecting elevated yearend activity levels. For the full year 2012, we grew average deposits by $2.3 billion or 15%, which slightly exceeded our outlook of low-teens growth. Period-end deposits also grew by 15% or $2.5 billion. This growth was driven by our clients' continued health and by our solid pace of client acquisition.

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

Moving on to net interest income and net interest margin. Net interest income grew by $6 million or 4% in the fourth quarter to $161 million as a result of growth in loan balances and lower premium amortization expense on our investment securities portfolio. For the full year 2012, net interest income grew by an impressive $92 million or 17%. This growth was within our outlook range of high-teens growth.

Higher net interest income during the quarter was primarily driven by stellar loan growth, although loan yields were lower. Average loan yield during the quarter was 5.98% compared to 6.11% in the third quarter and 6.51% in the fourth quarter of 2011. The decrease in loan yield during the fourth quarter was driven in part by the increasing proportion of our loans that are tied to the national prime rate of 3.25% versus existing loans tied to the SVB prime rate of 4%.

Additionally, decreasing loan yields during 2012 were due to changes in the mix of our loans including significant growth in loans to larger companies which typically have higher credit quality than loans in other segments. For the full year 2012, average loan yield was 6.21% versus 6.7% in 2011. Lower amortization expense in our available-for-sale securities portfolio also contributed to higher interest income in the fourth quarter.

The yield on the investment portfolio in the fourth quarter was 1.6%, an increase of 10 basis points compared to the third quarter and a decrease of 15 basis points from the same quarter in 2011. For the full year 2012, the yield on average investment securities was 1.66% versus 1.83% in 2011 due to lower reinvestment rates and higher premium amortization expense.

Amortization expense in the fourth quarter was $13.1 million, a decrease of $4.2 million compared to the third quarter. The decrease was the result of a slight decline in actual prepayments on premium mortgage securities and a decline in estimates of future prepayments. Because prepayments on mortgage securities can track changes in interest rates, premium amortization expense will continue to be a factor impacting our interest income in 2013.

As a result of these factors, our net interest margin remained relatively stable during the fourth quarter at 3.13% versus 3.12% in the third quarter.

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

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

Gross loan charge-offs were $7.6 million, primarily from our hardware and life science portfolios. This compares to $4.6 million in the third quarter. For the full year 2012, net charge-off was 31 basis points of average total gross loans, which was at the low end of our outlook. Our allowance for loan losses as a percentage of total gross loans remained stable at 1.23% for the quarter and for the year, consistent with our outlook.

Impaired loan balances decreased slightly to $38.3 million in the fourth quarter compared to $39.4 million at the end of the third quarter and $36.6 million at the end of 2011. For the full year, non-performing loans were 42 basis points of total gross loans, well within our outlook.

Moving on to non-interest income; it increased significantly in the fourth quarter to $127 million from -- sorry, from $69.1 million in the prior quarter, primarily as a result of higher gains on investment securities and warrants. Net of non-controlling interest, non-interest income was $75.6 million.

We recognized net gains on investment securities of $68.2 million. Net of non-controlling interest, the gains were $17.2 million compared to $7.5 million in Q3. The big item there was exceptional significant unrealized gain on investment securities from our venture capital related investments.

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

Overall it was an outstanding quarter for our funds business, with additional gains in our debt funds and certain strategic investments.

Moving on to warrants, we recorded net gains on warrants of $7 million in the fourth quarter compared to $500,000 in Q3. This increase was driven primarily by net valuation increases of $4.7 million and $2.4 million from warrant exercises.

Looking at the rest of non-interest income, our core fee income increased by 7% or $2.5 million to $37 million, primarily due to letter of credit and foreign exchange fees. In addition to letters of credit and foreign exchange, core fee income includes fees from deposit services, client investments and credit cards. Our outlook on core fee income for 2012 was growth in the mid-teens, and we met that with growth of 16% or $18 million.

To wrap up on our results, I'll just touch on some of the items I did not highlight, namely expenses and capital ratios. Expenses remained within our expectations, although we saw a bit of an uptick in the fourth quarter due primarily to performance related increases in incentive compensation tied to our overall performance.

Non-interest expense was $143 million in the fourth quarter compared to $135 million in the third quarter. For the full year, our non-interest expense excluding non-controlling interest increased by 9% or $43 million to $535 million. This increase was within the high single-digit range we indicated in our outlook.

Our non-GAAP operating efficiency ratio, which excludes non-controlling interest and certain other items, fell to 59.7% in the fourth quarter compared to 63% in the third quarter. For the full year, our non-GAAP efficiency ratio improved to 62.2% compared to 65.6% in 2011.

Our capital ratios remained strong with some risk-based capital ratios dipping down slightly due to our exceptional loan growth in the fourth quarter. Bank tier 1 leverage increased by 5 basis points for the quarter to 7.05% due to earnings growth.

Now I will move on to the full year 2013 outlook, starting with our assumptions. We assume that our clients' healthy pace of activity continues and that VC activity grows modestly. We further assume that we'll continue to execute effective on our efforts to win new clients domestically and around the globe. In terms of credit quality, we assume no significant deterioration of the economy. And finally, as well as unfortunately, we expect no changes in the Fed funds target rates.

Please remember that these growth estimates are for the full year 2013 compared to the full year 2012. We expect average loans to grow at a percentage rate in the low 20s driven by our clients' continued healthy activity. We believe the strongest loan growth will come from our corporate finance clients and in particularly from buyout lending. We expect average deposits to grow at a percentage rate in the mid single digits due to continued client acquisition.

We expect net interest income to increase at a percentage rate in the mid single digits due to continued loan growth but offset by downward pressure on loan yields related to our loan mix, use of the national prime rate versus SVB prime, continued competition, as well as downward pressure on investment yields. And we expect our net interest margin to be between 3.1% and 3.2%. This outlook is based on our outlook for interest rates, our changing mix of loans, including the gradual trend toward national prime as a benchmark, and our expectations for yields on mortgage securities.

Turning to our credit quality outlook, the key drivers here will be the continued health of our clients and gradual improvement of the economy. We expect our allowance for loan losses for performing loans to be comparable to 2012 levels of 1.16%. We expect net loan charge-offs to be between 30 and 50 basis points of average total gross loans or comparable to 2012 levels. And we expect non-performing loans as a percent of total gross loans to be similar to 2012 levels of 42 basis points.

Our core fee income, as I defined it a few minutes ago, is expected to increase at a percentage rate in the mid teens. One of the key drivers is expected to be credit card income, which will benefit from improved penetration among our clients and enhanced card solutions. Another driver will be foreign exchange which will benefit from our UK expansion.

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

In 2012 we continued to lay the groundwork for our growth strategy of winning and supporting clients at their critical early stages and keeping them as they grow. We have made tremendous gains in expanding our ranks of larger innovation companies and extending our platform globally. We are well-positioned to continue that work in 2013 and we believe that we're off to an excellent start in 2013 given our 2012 finish. And if we get help from interest rates, that will certainly help things even more.

The innovation sector is alive and well, our pipeline looks good, our client relationships have never been better, and our people are the best in the business. For all these reasons, we are very positive about our prospects for 2013. Thank you. And now I'll ask the operator to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions].

Your first question comes from the line of Steven Alexopoulos from JPMorgan. Your line is open.

Steven Alexopoulos – JPMorgan

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

Mike Descheneaux

It's not too far off. I mean the premium amortization expense that we experienced in Q4 was obviously lower than Q3 as we pointed out. And our expectations going into 2013 is more or less at that, you know, similar level for each quarter as we experienced in Q4.

But to answer your point more specifically, the reinvestment rates that we're kind of getting with new investments are around 140 to 150 basis points. So as you know, we finished the quarter at around 160 basis points of yield. So you're not out of the woods yet, a lot of it depends on the prepayment fees as well too, but it feels like a lot of the downward drag is out, but again it all comes back to that premium amortization expense. So, how goes repayments or prepayments, that's really going to dictate the 2013 year.

Steven Alexopoulos – JPMorgan

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

Greg Becker

So, Steve, this is Greg. I'll start. Maybe Dave want to add to it. Yeah, we see more people entering the market. And I guess it's not surprising, mainly because it's one market. And we've said this for years, and we should expect to see this, that it's a high-growth market, it's performed well through multiple cycles, and again, it's one of the only fast-growth areas in the market. So that's not surprising.

From our standpoint, knowing that this was the -- would be the case for years to come, for the foreseeable future, our focus is on making sure that we have the most diversified product set, can cover pretty much anything any of our clients need wherever they want, any geography, product service, etc. and then you work on the client service side and the value-add. So it's not just one thing, it's multiple things.

That being said, is it going to be competitive? Absolutely. And again, all the things that we're doing to make sure that we're positioned well in the market either to win, add clients, that's what we do. We've been doing this longer than anybody else and we're definitely not complacent, is probably the short story.

Dave Jones

And Steve, this is Dave. So, yes, we have acknowledged that City National has been hiring in the marketplace and they will compete with us. It isn't clear exactly at what level. Are they going to be competing at the particularly early stage or are they going to be middle or later stage? I would guess more likely model or later stage, but that's strictly a guess.

And I also will point out that an important part for us is to look at the value of the entire client relationship. And while it may be that competition forces us to think hard about the interest rate and the loan fee that we may charge, the important part is keeping the entire relationship, the benefit of existing and growing opportunities for non-credit revenue.

Steven Alexopoulos – JPMorgan

Okay. Appreciate all that color. Thanks.

Greg Becker

Yup.

Operator

Your next question comes from the line of John Pancari from Evercore Partners. Your line is open.

John Pancari – Evercore Partners

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

Greg Becker

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

John Pancari – Evercore Partners

Well, specifically the loan yields, I mean that's part of the margin story, you know, I'm just asking about the loan yields. It certainly seemed to be holding up better.

Dave Jones

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

John Pancari – Evercore Partners

Okay, all right. And I guess on that point, could you give us a little more color on where -- what are the yields that you're getting, the new money yields by loan types? So, for that product and for your -- I guess, update us in the capital call line, etc.?

Dave Jones

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

John Pancari – Evercore Partners

Okay --

Mike Descheneaux

So perhaps the only thing I would add on to that, John, just to be cognitive of the fact that it all depends on where the growth is going to come from, right? Because obviously if you have a heavy amount of growth than the buyout, that's obviously going to help it, but if you're growth is heavier on the private equity venture capital lines of credit which are downward on the prime, that's obviously going to be a little bit of a drag on the loan yield itself, albeit accretive to net interest income. So just be cognitive of the fact that the mix does heavily affect the overall loan yield.

John Pancari – Evercore Partners

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

Mike Descheneaux

So it's approximately $115 million.

John Pancari – Evercore Partners

Okay. Thanks.

Operator

Your next question comes from the line of Josh Levin from Citibank. Your line is open.

Josh Levin – Citibank

Thank you. Good evening.

Greg Becker

Hey, Josh.

Josh Levin – Citibank

My question is about the gains from non-market fund investments. You mentioned they're driven by valuation changes. I assume those investments are fairly illiquid. So what's the process for valuing them and what's -- what are the inputs you use?

Mike Descheneaux

You know, it's a host of metrics. Obviously, you know, it's probably nothing surprising to you, you're looking at comparables of other companies, you're looking at multiples of revenues and things. And so again it's probably nothing surprising there, any rocket science I would say. I don’t know if you really want to go nano-specific thread or an area that might help you more.

Josh Levin – Citibank

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

Greg Becker

Josh, this is Greg. And it's still -- on a percentage basis, it's growing faster than the overall percentage growth rates. But again, as I described then, I described specifically just for the UK, roughly 3%, it's still a small absolute dollar amount. So, over time, as I said in my comments, you've got this smaller base but growing at a faster rate than you do the overall average, so over time it will be coming increasingly larger percentage of the overall portfolio.

But what's interesting about the UK and other markets, because we have this early-stage to late-stage segmentation, we're winning clients at the early stage, we're winning clients at the mid stage, and we're also winning corporate finance and buyout clients as well. It's our strategy to stay with clients longer and work with larger companies still plays out in the markets like the UK, which is what I think we're going to see over time a decent amount of growth from.

Josh Levin – Citibank

Thank you very much.

Greg Becker

Yeah.

Operator

Okay. Your next question comes from the line of Aaron Deer from Sandler O'Neill. Your line is open.

Aaron Deer – Sandler O'Neill & Partners

Hi. Good afternoon, guys.

Greg Becker

Hey, Aaron.

Aaron Deer – Sandler O'Neill & Partners

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

Dave Jones

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

Greg Becker

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

Aaron Deer – Sandler O'Neill & Partners

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

Mike Descheneaux

Aaron, this is Mike. I'm just [switching off] on memory here, but it's somewhere around that 20% number.

Aaron Deer – Sandler O'Neill & Partners

Okay, very good. Thanks.

Operator

Your next question comes from the line of Joe Morford from RBC. Your line is open.

Joe Morford – RBC Capital Markets

Thanks. Good afternoon, everyone.

Greg Becker

Hi, Joe.

Joe Morford – RBC Capital Markets

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

Dave Jones

All right. So the concentration of software, software ended the quarter at roughly $3.3 billion and venture capital ended the quarter close to $1.7 billion.

In terms of the buyout portfolio, did you say that you thought it was 30% of the portfolio?

Joe Morford – RBC Capital Markets

No. I was just -- I was curious how big sponsor-led buyout was, but large loans, over $20 million -- yeah.

Dave Jones

I'm sorry. Yes, thanks. So the sponsor-led buyout portfolio ended the year a little bit over $1 billion. And in evaluating that, considering the type of structure that we put, the underwriting effort that we put, the niche that the individual loans would be situated in, we have plenty of growth opportunity still in the sponsor-led buyout space.

In terms of the large loans, the loans over $20 million, looking at that, yes, it is at the 30% level and up quite a bit over the year. I look at the composition of it and I see that the software space and the venture capital private equity call lending space were the two largest components. What I am seeing in the software particularly is the contribution of the sponsor-led buyout. What we have said over the years is that a target hold position for us and a buyout would be $20 million to $25 million. So as we are growing that book of business, de facto each one of the new opportunities would then fall into this disclosure, and I am okay with that.

What I saw with the venture capital for the fourth quarter was an unusually large amount of activity very late in the quarter. And my sense of it is, because it was large, because of the nature of those loans, and frankly what we have seen in the three weeks or so of the quarter is that the typical pattern of a capital call funding being funded for 10 to 20 days has played out and we've seen about as much erosion or decline in venture capital, capital call lending in the first quarter as we saw in the last 10 days, two weeks of the fourth quarter.

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

Joe Morford – RBC Capital Markets

No, that's particularly helpful, Dave. Thank you. The other question, for Mike I guess, is just curious if you've seen any impact from the new money market reform rules being talked about. Is there a chance you could see some of that money repatriate on the balance sheet?

Mike Descheneaux

You know, Joe, at this point we really haven't seen -- I mean, you look at our numbers here in the deposit and deposit franchise, it's, you know, everything is still the same. So, no real significant issues to report at the moment.

Joe Morford – RBC Capital Markets

Okay. Thank you.

Greg Becker

Yup.

Operator

Your next question comes from the line of Brett Rabatin from Sterne Agee. Your line is open.

Brett Rabatin – Sterne Agee

Hi. Good afternoon.

Greg Becker

Hi, Brett.

Brett Rabatin – Sterne Agee

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

Mike Descheneaux

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

The other aspect is, when we're growing our loan portfolio, as Dave mentioned, some of the yields on some of these larger corporate finance clients, they're much less than let's say typical historical average of 6%, 6.5%, 7%, right? So, Dave was mentioning loans coming on it, you know, kind of the area of prime, around that area, right? So that's obviously going to be a drag on the loan yields. So the effect of what you have essentially is you're growing your volumes but the net interest income is going to be growing at that same steep path as it has been in the previous course because again the yields on these loans are much lower.

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

So for the investment securities portfolio, again you've been seeing the pressures in the rates. I mean during Q2 or so, you saw the 10-year getting down to, say, 130, 135 basis points as well too. So that's been all over the map, and naturally we've been impacted pretty heavily by the premium amortization expense. And whilst it got better this quarter, again they're still elevated levels than they were, say, a year ago. So there continue to be that pressure on yields.

And as you see, your opportunities to reinvest, I mean the reinvestment rates of securities that are maturing, I mean you're looking at 140 basis points when you're reinvesting. So again, continue to be a bit of downward pressure on that. Maybe not as much as it was, say, 18 months ago, but still quite a bit of pressure. And when you're looking at, you know, it may not sound that big, 10 basis points in investment securities coming down, but you've got to remember the fact that our investment securities portfolio is huge, right? It's $11 billion or so. And so when you're -- just a few basis points can have quite a lot of downward pressure on that interest income coming from investment securities.

So I'll stop there and maybe if Dave or Greg has anything to add, we'll do that, but I'll let you kind of digest that many response to that.

Brett Rabatin – Sterne Agee

Okay. Thanks for the color.

Operator

Thank you. Your next question comes from the line of Julianna Balicka from K.B.W. Your line is open.

Julianna Balicka – K.B.W.

Good afternoon.

Greg Becker

Afternoon.

Julianna Balicka – K.B.W.

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

Greg Becker

Yeah, Julianna, this is Greg. Just a follow-up to what Mike said, you know, the part of that, the deposits, that's a driver of it. And deposits we don't expect to see a lot of growth. More of the client funds will grow, which implies it'll be more off our balance sheet, in the -- our off-balance-sheet vehicles. Now as we've seen in prior years, that's our expectation, but it's also something that's very difficult to predict. So to the extent that it happens the other way, meaning more of it comes on the balance sheet, obviously that puts more money into the investment securities portfolio, assuming loans are consistent with where we are predicting, and that obviously would drive a higher level of interest income.

Now again, we're forecasting more of it to off-balance-sheet, but it's just one of the more difficult things to predict because what we're trying to do is obviously put our clients in the right product but obviously our clients are going to decide what they want to do. Bottom line is we do expect VC activity to still be good this coming year.

So, total client funds growth we expect to see at a good pace. But again to my point, more of that will be directed off-balance-sheet.

Julianna Balicka – K.B.W.

Okay. And then --

Mike Descheneaux

I'll just -- maybe just add one -- just one other quick thing. It's really as Greg said, luck. Net interest income, if that happens where deposits are greater than we expected, net interest income will go up. But as you know, net interest margin would be negatively affected, which is okay, right? I mean because at least in these low interest rates environment, really the key is just to try to continue to grow your net interest income, you know, all things being equal. So, just to make sure you have that color.

Julianna Balicka – K.B.W.

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

Mike Descheneaux

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

Julianna Balicka – K.B.W.

Okay, great. Thank you very much.

Greg Becker

Yup.

Operator

Thank you. Your next question comes from the line of Herman Chan from Wells Fargo. Your line is open.

Herman Chan – Wells Fargo Securities

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

Greg Becker

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

Herman Chan – Wells Fargo Securities

Great. And Greg, you mentioned Latin America as a potential source for startups going forward. Keeping in mind the bank's growing international presence, what's your appetite to expand in these Latin American markets?

Greg Becker

So we are looking at other markets, but just to be clear here, our view into Latin America, let's say Brazil specifically, is much like some of the other foreign markets outside the UK and in China. It's more exploratory. If we were to look to do anything there, it would be truly over the long term. Right now what's happening with a lot of these countries, are startup venture-backed companies get formed in their holding companies outside of the local country.

So let's take Brazil for an example. It gets formed outside of Brazil, in the US, or came as another entity. We can still bank that entity legally, and then they downstream money on an as-needed basis to their local relationship, local bank in those countries. So that's actually still a small piece. My point was just more that it's something we're paying attention to because over the long run we believe that Brazil and other markets are markets that we need to pay attention to. But short answer is don't expect us to be opening up there anytime soon.

Herman Chan – Wells Fargo Securities

Great. Thank you very much.

Greg Becker

Yup.

Operator

The next question comes from the line of Gaston Ceron. Your line is open.

Gaston Ceron – Morningstar

Hi, good afternoon.

Greg Becker

Afternoon.

Gaston Ceron – Morningstar

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

Greg Becker

Gaston, this is Greg. And I guess the short answer for this one is I don’t think it's going to have a big impact. And the reason I said it is if you look at the overall venture capital activity, it's still a relative small number in the overall scheme of capital, so, $20 billion, $25 billion a year, which sounds like a lot of money, but if you look into overall capital flows, it's not as significant. If carried interest taxes were to increase, so it's a short-term tax rate, do I think it would have an impact?

No -- I think modest at best. I'd say right now, clearly people are describing it as a pain, they don't want it, the venture capitalists, and that's the fight you're hearing about. But clearly, even if it happens, people are still going to want to be in this business, they're going to want to continue to invest in these companies, because there's still upside that can be had even if the tax rates are higher. So, bottom line, I don’t expect to see a big impact.

Gaston Ceron – Morningstar

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

Greg Becker

You know, two things there, Gaston. One is it's too early to tell. As you know, we have the joint venture in China and --

Gaston Ceron – Morningstar

Right.

Greg Becker

-- and it's too early to forecast how that plays out. And bottom line is I think every -- any country we would go into is going to be specific to what are the risks in profiles and opportunities with that specific country. So it's too difficult to make a general comment about what our approach would be in any given country.

Gaston Ceron – Morningstar

Good enough. Thank you.

Greg Becker

Yeah.

Operator

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

Greg Becker

Great. Thanks.

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

So we want to thank our clients for their trust in us and their support. We are going to be there to continue to support them. We want to thank our employees for really doing the heavy lifting to accomplish the things that we described. We get to describe it to all of you, but at the end of the day, they're the ones that are really driving it, and I think it's really important for everyone to acknowledge.

So with that, looking forward to a great 2013, and thanks everybody.

Operator

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

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