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SVB Financial Group (NASDAQ:SIVB)

Q4 2013 Earnings Call

January 23, 2014 6:00 pm ET

Executives

Meghan O'Leary

Gregory W. Becker - Chief Executive Officer, President, Chief Executive Officer of Silicon Valley Bank, President of Silicon Valley Bank and Director

Michael R. Descheneaux - Chief Financial Officer

Marc Cadieux - Chief Credit Officer

Analysts

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Joe Morford - RBC Capital Markets, LLC, Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Josh Levin - Citigroup Inc, Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division

Gaston F. Ceron - Morningstar Inc., Research Division

Operator

Good afternoon. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group's Fourth Quarter and Full Year 2013 Earnings Call. [Operator Instructions] Thank you. Meghan O'Leary, Director of Investor Relations, you may begin your conference.

Meghan O'Leary

Thank you, Jamie, and thanks, everyone, for joining us today for our fourth quarter 2013 earnings call. Our President and CEO, Greg Becker; and our CFO, Mike Descheneaux, are here to talk about our fourth quarter and full year results. As usual, they'll be joined by other members of management for the Q&A.

I would like to remind everyone that our current earnings release is available on the Investor Relations section of our website at svb.com.

I wish to caution you that we'll be making forward-looking statements during this call and that actual results may differ materially. As usual, 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 may include references to non-GAAP financial measures. Information about those measures, including a reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release.

We plan to limit the length of the call, including Q&A, to 1 hour. [Operator Instructions] And with that, I will turn the call over to our CEO, Greg Becker.

Gregory W. Becker

Thanks, Meghan, and thanks, everyone, for joining us today. The fourth quarter of 2013 was an outstanding end to an outstanding year for SVB. We delivered earnings per share of $1.27 and net income of $58.8 million for the quarter. For the full year 2013, we delivered earnings per share of $4.70 and net income of $215.9 million. And total 2013 revenues, that would be net interest income plus non-interest income, excluding non-controlling interest, exceeded $1 billion for the first time in our history.

By all accounts, 2013 was our best year ever. We delivered strong growth across the business. We grew average loans by 24% to $9.4 billion, and we finished the year at $10.9 billion. We grew average total client funds, that is deposits plus off-balance sheet client investments, by 15% to $43.8 billion and finished the year at $48.8 billion. We grew net interest income by 13% to $697 million. We grew non-interest income, net of controlling interest, by 37% to $330 million. This number notably reflected significant gains from investment securities and warrants, thanks to healthy venture funding and exit markets.

Finally, we maintained excellent credit quality with net charge-off ratio of 33 basis points for the full year. We are very proud of these results, especially in light of the modest economy and continued low interest rate environment. Mike will go into the financial details in a few minutes. But first, I want to spend some time talking about our accomplishments in the business that helped drive these results.

Our strong performance was driven by a single-minded pursuit of 1 goal: to be the bank for the global innovation economy. Our strategy for achieving that goal is simple. It calls for building relationships with companies as they get started and keeping them as they grow, expanding our client base to include larger companies and select private equity firms within the innovation space, increasing our market share of the best companies, deepening our relationships with venture capital and private equity general partners as well as select CEOs through private banking and, of course, taking our business model global.

Our effective execution of our strategy in 2013 helped us to move closer to our goal. Let me provide some details. I'll start with the early stage. We added more than 2,000 new early stage clients in 2013. We were able to do this because, in our position as the banking partner of choice for angel, accelerator, corporate and venture capital-backed startups, we're able to cement relationships early and show clients how our knowledge, networks and solutions can truly help them be successful with their business. Solidifying relationships early is a significant advantage in maintaining our status as the go-to bank in the venture capital-backed market and retaining our clients as they grow.

In addition, our investments in digital and mobile client systems significantly streamlined our ability to on board and serve these clients and provide them a better client experience.

Our ability to keep early stage clients as they grow was helped by our investments in products and people geared to the needs of larger companies. The transition from early stage to what we call a growth company is a critical time in our client relationships. During this time, we need to make sure we're scaling with the growth of these businesses by supporting them with new products, services, larger credit solutions especially for the highest profile companies.

As we've worked to build relationships with high-profile companies, our market share with these companies has increased. One proxy for our success in this area is our market share of venture-backed IPOs. In 2013, 64% of U.S.-based venture-backed companies that went public were SVB clients, and the majority of these clients put all or the majority of their IPO proceeds into our client investment funds, which helped to drive off-balance sheet fund growth of 20%.

Our investment in working with larger companies also allowed us to add 51 new corporate finance clients and drive $600 million in new corporate finance loan outstandings. And although the number of new clients may seem small when compared to our early stage client numbers, these corporate finance clients typically use more products and services and generate 10x to 20x more revenue for us.

We're also successful at solidifying and expanding our relationships with private equity firms, which, like venture capital firms, are both clients and a source of clients. That effort drilled more than $400 million of growth in sponsor-led buyouts in 2013 and contributed to more than $650 million of growth in capital call lines of credit.

And what's important to note, as successful as we've been in growing this business, our market share remains modest, given the size of the market. With this in mind, we remain very well positioned for continued growth in the business.

Another focus in 2013 was our continued global expansion. Internally, we refer to global as the business that we do around the world outside of our domestic market. In 2013, we grew our global loan outstandings by 92% to $800 million, our deposits by 41% to $2.5 billion and our total credit commitments to $1.6 billion. While the direct bottom line impacting this growth will be more substantial in the future, the growth rates are inspiring.

After 18 months of operation by our U.K. branch, we've attracted more than 500 corporate clients in the U.K.. In China, which is a longer-term growth proposition, we just completed our joint venture bank's first full year of operation, and we continue to make progress in forming relationships and winning new clients that will support our long-term growth there.

In addition, we've gained more than 700 new clients since the inception of our global practice, who are leveraging our U.S. banking services as a result of in-market contacts made to our global expansions.

Our successful client acquisition in all markets, global and domestic, helped to fuel growth in our global treasury in 2013, including the addition of more than 400 new global treasury clients; $25 billion in FX trades; a 10% increase in FX fees; and a 45% increase in foreign currency deposits in global cash management accounts.

Our commercial bank's success has benefited our private bank, where we added more than 300 new client relationships during the year, reached period-end loan balances of $1 billion for the first time in our history and launched our new wealth management advisory group. Our private bank offers us the way to further cement our relationships with venture capital and private equity general partners, and CEOs are strategically important to our commercial banking relationships.

As you can see in 2013, it was a very big year for SVB. We delivered exceptional numbers, advanced our goal with being the bank for the global innovation economy and positioned the company for future growth in 2014 and beyond.

As we look ahead, our theme for 2014 is continued execution on our strategy. We believe we still have a lot of upside to our growth initiatives, so we will continue to cultivate relationships with larger innovation companies, venture capital and private equity firms and private bank clients. We'll continue to build our global presence. We will, of course, remain aggressive in supporting and working with early stage companies and their investors, and we'll continue to differentiate ourselves through our networks, our knowledge, our unique events that help move our clients' businesses forward and, of course, our dedicated employees.

From an operational perspective, simplicity and scalability remain high priorities. Clearly, we're still a growth company, and we'll continue to invest in people, technology and markets to support that growth. We work committed to demonstrating the return on that investment in terms of ROE, as well as client numbers and profitability. We will remain focused on growing efficiently and leveraging opportunities to effectively manage the cost of our growth, as we have done with multi-sourcing and with the establishment of our Tempe, Arizona office.

In addition, the digital mobile systems we have built to make it easy for our clients to do business with us will improve clients' experiences while allowing our client service teams to focus on the highest impact client interactions.

Our challenges in 2014 will remain similar to our challenges in 2013. We expect competition to remain intense and interest rates to remain low in the near term, despite an improving outlook. And now that the Volcker Rule has been finalized, we'll need to work with regulators to implement it, a process that will be challenging for all banks, but we believe we are well positioned to meet these challenges. We're starting in 2014 on a very strong footing, given our 2013 performance. And then as you saw in our financial release, our outlook for the year is positive, and we've increased the range for expected loan growth. We see ample opportunity ahead. The pace of new company and intellectual property creation is very strong, and the quality of new companies has never been higher. New industries, new technologies and new opportunities are being created every day, which means the pie is getting bigger. More capital-efficient business models have opened up the landscape to new investors and new entrepreneurs, and the IPO market has come back in earnest, which has inspired growing confidence among VCs and investors. Our clients are doing very well, and their success creates new opportunities for us. By staying close to clients and their markets, maintaining our credit discipline and remaining focused on our mission of helping clients succeed, we expect to succeed as well. Thank you.

And now, I'll turn the call over to Mike Descheneaux, who will talk about our financial results.

Michael R. Descheneaux

Thanks, Greg, and good afternoon, everyone. It was a great quarter across the board, marked by outstanding growth in loans and client funds as well as significant private equity and venture capital related investment gains.

There are 6 areas I will highlight my comments today: First, outstanding loan growth; second, exceptional growth in total client funds, meaning on-balance sheet deposits and off-balance sheet client investment funds; third, higher net interest income, despite a decrease in net interest margin; fourth, strong credit quality, notwithstanding a higher provision for loan losses; fifth, exceptional non-interest income growth due to substantial gains from our PE and VC-related investments and equity warrants, as well as strong core fee income growth; and, sixth, our capital ratios and the related impact of growth in the quarter, as well as our initial assessment on the finalized Volcker Rule impact.

Let me start with loans. We had a phenomenal loan growth in the fourth quarter due to healthy demand across our client base. Average loans grew by 6.2% or $592 million and, for the first time in our history, crossed the $10 billion mark. This growth was driven by robust borrowing from our private equity clients, both directly and in connection with sponsor-led buyout transactions. Similarly, sponsor-led buyouts and capital call lending, combined with end-of-year activity, drove period-end loan growth of 11% or $1.1 billion. Period-end loans ended the year at $10.9 billion. A significant amount of our loan growth in the quarter came during the last 3 weeks of 2013, driven in particular by private equity capital call lines of credit. As a result, we could see tempered loan growth in the first quarter of 2014, similar to what we experienced in the first quarter of 2013. For the full year 2013, average loans grew by 24% to $9.4 billion, which was slightly higher than the upper range of our full year guidance.

Now let us look at total client funds. Again, this includes both on-balance sheet deposits and off-balance sheet client investment funds. In the fourth quarter, average total client funds grew by $3.2 billion to $47.7 billion. The increase was driven in part by average deposit growth of $1.9 billion to $21.5 billion. The growth was due to healthy liquidity among our existing venture capital, private equity and early-stage clients, as well as strong acquisition of new clients.

Average off-balance sheet client investment funds grew by $1.3 billion to $26.2 billion due to healthy financing and IPO activity for our clients, as well as strong utilization of our off-balance sheet suite product. For the full year 2013, average deposits grew by 9.5% or $1.7 billion to $19.6 billion with the majority of the growth coming in the second half of 2013. This was well above our outlook range of mid-single digit growth.

Moving onto net interest income and net interest margin. Net interest income increased by $10 million or 5.6% to $187 million. This increase was driven by extremely strong loan growth and was partially offset by a 6 basis point decrease in overall loan yields, primarily driven by low market rates. Loan yields for the quarter were 5.75%. For the full year 2013, net interest income grew by 13%, which was better than our guidance of low-double digits growth.

Moving to net interest margin. Our net interest margin declined 12 basis points to 3.2% compared to 3.32% in Q3. This decrease was primarily due to the significant growth in average deposits, which were invested in securities and due to lower market rates on loans. Our full year net interest margin of 3.29% fell in the middle of the guidance range we've provided. We expect our net interest margin in 2014 to continue to be significantly influenced by deposit and loan growth and, to a lesser extent, premium amortization related to our investment securities.

Turning to credit quality. It remained healthy. We recorded a provision for loan losses of $28.7 million compared to $10.6 million in the third quarter. The higher provision was primarily driven by $10.5 million in net charge-offs, $10.3 million related to period-end loan growth and an increase of $7.8 million in the reserve for impaired loans. Gross charge-offs of $13.5 million included $6.6 million related to the resolution of 2 previously impaired hardware loans. We also saw stronger-than-expected recoveries of $3 million. For the full year, net charge-offs were 33 basis points of average total gross loans, at the low end of our guidance range of 30 to 50 basis points. Non-performing loans increased by $13.4 million to $51.6 million. And at 47 basis points, were within our guidance for the full year. Classified loans were flat to slightly down in Q4. As a result of the increase in our reserve for impaired loans, our allowance for loan losses increased by 4 basis points to 1.3%. Our allowance for loan losses for our performing loans decreased by 2 basis points to 1.11%, primarily due to continued strong performance of our performing loan portfolio and was in line with our outlook for the full year 2013.

Now let us move to non-interest income. We had our second successive quarter of outstanding gains on private equity and venture capital related investment securities and equity warrants. These gains were due to strong IPO and venture-backed funding markets, as well as increasing public market valuations. As a result, non-GAAP non-interest income, net of non-controlling interest, was $100.9 million in the fourth quarter compared to $105.8 million in the third quarter, which was also an exceptional quarter due to investment and warrant gains. Gains on investment securities, net of non-controlling interest, were $26.1 million compared to $36.5 million in the third quarter. These gains were primarily from valuation increases, in other words, unrealized gains in our funds-of-funds and direct venture funds related to companies that went public during the third and fourth quarters. Valuation increases on our FireEye and Twitter holdings accounted for $13.6 million of these gains.

As a reminder, unrealized gains from valuation changes are subject to fluctuations due to market conditions and other factors. The extent to which these and other unrealized gains will become realized gains is subject to numerous factors, including the expiration of current lock-up agreements, the actual sales of the securities, the timing of such sales and market conditions.

Gains on equity warrants were also exceptionally strong in Q4 at $16.6 million compared to $18.8 million in the third quarter. They included $14.9 million in unrealized gains from valuation changes, driven by IPO and M&A activity, and $1.8 million in realized gains from warrant exercises. The unrealized gains notably included $6.1 million related to FireEye and Twitter.

One final note on FireEye. As we noted in our press release, our combined FireEye investments and warrants have increased in value in the first quarter to-date due to FireEye's strong post-IPO performance. Since our valuation of those investments at December 31, 2013, FireEye's stock prices increased by approximately 70% as of yesterday's close. Based on this incremental increase in stock price, we would expect to record pre-tax gains, net of non-controlling interest, of approximately $50 million. I'm going to repeat that again, approximately $50 million. Of course, these gains are also subject to market change. The actual financial impact would depend on when we sell our holdings. As a reminder, they are in lockup until March of 2014.

Now moving onto core fee income. Core fee income was also strong in the fourth quarter. Core fee income includes fees from foreign exchange, deposit service charges, credit cards and payments, client investments, letters of credit and lending-related fees, which we have included for the first time this quarter. Core fee income grew by 13% or $5.8 million to $49 million in the fourth quarter. This increase was primarily driven by higher foreign exchange fees, which increased by $2.2 million due to seasonally higher volumes. We also saw an increase of $1.9 million in lending-related fees, in particular, loan syndication fees. Additionally, credit card fees and payment fees grew by $1 million due to higher volumes. For the full year 2013, we delivered core fee income growth of 11%, which exceeded the revised guidance we provided in October.

Now I'll move onto capital. Our capital position remains strong and is supported by continued solid earnings growth and credit performance. However, extraordinary deposit and loan growth during the fourth quarter did impact capital ratios across the board. In particular, our bank level Tier 1 leverage ratio decreased by 42 basis points to 7.04% due to the extraordinary deposit growth in the quarter.

In other capital-related matters, the final Volcker Rule was issued last month, and we are currently assessing its impact on SVB. We currently estimate that approximately $282 million of our venture capital and private equity fund investments will be subject to Volcker Rule restrictions. As a result, we will be required to wind down or divest these investments by the deadline of July 21, 2015, unless we receive extensions from the Federal Reserve Board. We intend to seek the maximum extensions available to us, which could extend that deadline to July 2022.

Now our comments on our 2014 outlook. Please note that this outlook is for the full year 2014 compared to the full year 2013. And in terms of balance sheet growth, we are looking at full year averages.

Starting with average loans, we expect average loan balances to grow at a percentage rate from the mid to high teens. We have raised the top end of our range for this metric from what we originally provided to you in October. As noted earlier, a significant amount of our loan growth in the fourth quarter came during the last 3 weeks of 2013, particularly from private equity capital call lines of credit. Our outlook assumes that we will see some of these balances run off in the first quarter, as we saw last year at the same time. Nevertheless, borrowing activity remains very strong in Q1-to-date. If these balances remain high, we could experience higher loan growth in 2014 compared to our outlook.

Moving on to average deposits. We expect average deposits to grow at a percentage rate in the mid teens. For net interest income, we expect percentage growth in the low teens. Net interest margin is expected to range between 3.2% and 3.3%. We expect credit quality to remain stable as well, with an allowance for loan losses for performing loans comparable to 2013 levels of 1.11%, net loan charge-offs between 30 and 50 basis points of average total gross loans and non-performing loans comparable to 2013 levels of 47 basis points of total gross loans.

We expect core fee income, as newly defined to include loan-related fees, to increase at a percentage rate in the low-double digits. And we expect non-interest expense to increase at a percentage rate in the mid-single digits, but recognize that this could change based on our performance.

In closing, we delivered a very strong financial performance in 2013, meeting or exceeding virtually all of our outlook metrics. And thanks to our thriving and growing client base, we are optimistic about 2014. While the low rate environment and intense competition will undoubtedly remain challenges in the near term, we believe our continued focus on strong client acquisition and retention, high credit quality, effective balance sheet management and efficient growth will enable us to continue to deliver excellent results.

Thank you. And now, we will be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Steven Alexopoulos from JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

I'd like to start. Growth in the capital call business was really solid in the fourth quarter and for all 2013 for that matter. Could you give color on what's really underlying that growth and how much of it is coming from you growing the number of firms you're doing business with?

Gregory W. Becker

Sure, Steve. This is Greg. It's really -- there's really a couple of things going on there. One is that as we expand the definition of what we're going after, both in venture capital and in private equity, it's just a much bigger pool of companies that we're looking at. But let's talk specifically about private equity. Private equity is a much, much bigger market. The funds are larger, and they tend to borrow for, I would say, a little bit longer periods of time. So unlike what a venture capital firm may borrow a capital call loan for maybe a few weeks, private equity firm may borrow for 30 days, 60 days or 90 days. And obviously, given the size of these loans, that really can add up, and it becomes a lot stickier. So that's really what's driving the growth that we saw in the fourth quarter and, for that matter, for the whole year.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay, that's helpful. And maybe just to follow up on your comments around Volcker, it seems you're in good shape to comply so long as you get the extensions through 2022. I'm not expecting you're going to give us a comment whether or not you think you will get the extensions. But are there any obstacles we should be thinking about from our side that could be a factor in your ability to get those extensions?

Michael R. Descheneaux

Steve, this is Mike here. The rules just came out. And of course, everybody is still going through them, inclusive of the regulators and the Federal Reserve Board. So you would imagine that they're also putting together some guidelines. So whilst there are some criteria in the original rules on Volcker about the criteria for extension, the interpretation on how that actually will play on practice remains to be seen. So again, we'll continue to take a look at it. As we mentioned in our prepared comments, we will absolutely seek all maximum extensions. And to your point, if we get all the maximum extensions, we'd feel pretty good about the position we're in.

Operator

Your next question comes from Joe Morford from RBC Capital Markets.

Joe Morford - RBC Capital Markets, LLC, Research Division

Mike, you talked about the Tier 1 leverage ratio of the bank falling to around 7%. Now I recognize it may be a little exaggerated because of some of the year-end window dressing. But can you remind us of how low you're comfortable in letting that ratio fall and some of the options you have to boost that without raising additional equity besides the FireEye gains, of course?

Michael R. Descheneaux

Yes. Our capital levels, Joe, remain strong. Of course, as you saw, Q4 was just an extraordinary amount of asset growth there as well too. So certainly, it -- growth began to temper -- potentially temper going into this year here, obviously, earnings will be a great source to help continuing to build those capital levels as well. But if we continue to exhibit phenomenal growth, our deposit franchise continues to be strong, clearly, you'd have to look to take some other actions. And we certainly can do that and see that ratio go low. We still feel very comfortable considering the high quality equity we have, but you would certainly begin to perhaps incentivize sales forces to be thinking about how you can drive some of those deposits off to the balance sheet. And in certain cases, that's probably where a lot of those deposits belong. In this low rate environment, people tend to just put it on their bank's balance sheet. So you see that phenomena across the United States. The deposit levels are growing quite considerably. So as we went through the last time, when the leverage ratio dropped in the mid-6.5 range or somewhere around there, we still have a lot of levers that we can actually activate and pull and kind of incentivize the right behavior of moving certain deposits. So the last thing we want to do is raise debt or raise equity. So -- but again, I think we still got quite a bit of runway here in order to see how this plays out.

Joe Morford - RBC Capital Markets, LLC, Research Division

Right. I understand. Okay. Yes. The other question is just this is the first period in a long time where you've actually built reserves. And again, I know part of that was the strong loan growth, but impaired loans did increase 40% off a low base, charge-offs doubled or so. Are these largely one-off issues? Or do you see some signs of stress emerging in the portfolio at all?

Marc Cadieux

Hello, Joe. It's Marc Cadieux, and the short answer is no. With regard to charge-offs, that was really primarily driven by 2 previously impaired accounts that are now fully behind us. And aside from that, 2/3 of charge-offs came from early stage, which is fairly typical for us, as you know. And so, there really wasn't anything from charge-offs that would be indicative of an emerging adverse trend. With regard to non-performing loans, the increase there and the increase in specific reserve is driven in the main by 1 loan that appears to be the occasional isolated event that, as a function of making larger loans, we'll have every now and again.

Operator

Your next question comes from John Pancari from Evercore.

John G. Pancari - Evercore Partners Inc., Research Division

On the growth in the rest of the loan book, outside of the capital call lines, particularly the growth in the software segment, can you give us a little bit of color, just what you're seeing there? And then, also, how much of the -- of your loan growth came out of M&A financing this quarter?

Gregory W. Becker

So, John, this is Greg. I'll start, and then I'll ask Marc Cadieux to add some commentary. So the -- a lot of the growth was driven by really 2 things, and you said one, Capital Call Loans is 1 driver; and the second driver was buyout financing. And as you have followed and many people have followed, that's been a driver of growth for quite a while. A lot of the buyout actually does come from software, which is why you see it ticking up. And I think it's really important to note, those buyouts are mainly for software companies that had a high dependence on recurring revenue. And we certainly believe that, that is a significant risk mitigator to the loans, given that they are larger loans, so we feel very good about that portfolio. But it is significantly software-driven in that buyout side. So, Marc?

Marc Cadieux

Yes. There's really nothing I would add. I think you said the highlights.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. So it doesn't imply that, at least, the loans in that segment are increasingly skewed towards the later stage companies?

Gregory W. Becker

Yes, definitely. I mean, it's both later stage, it's high revenue. And again, buyout loans would tend to be on the larger side. But as I pointed out, knowing that they're software-related and they're recurring revenue is something we really look at from a quality perspective, and we believe that the larger loans that we're putting on the books are clearly higher quality.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. And then, lastly, the decline in the NIM for the quarter, I appreciate the detail you gave, can you really just quantify how much in terms of basis points you would attribute as being a result of the higher excess liquidity in the quarter?

Michael R. Descheneaux

For the most part, John, it's -- most of it was driven by the liquidity. Any time you bring on $2 billion, $2.5 billion of deposits in a given quarter and given where Fed funds is, you initially part with the Fed funds earning only 25 basis points. That's going to drive a significant amount of that decrease. And if you look at the loan yields, as we mentioned in our prepared comments, loan yields held up relatively well. I mean, they were down about 6 basis points or so in the quarter, but again quite strong considering the low market rate environment.

Operator

Your next question comes from Ebrahim Poonawala from Bank of America Merrill Lynch.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Actually, my question has been answered. I just had one question for Greg. If -- there's been a lot of chatter in terms of whether you're seeing a bubble on the tech sector and whatnot, and I was wondering if you can comment in terms of -- obviously, your outlook seems fairly upbeat. And I'm just wanting to see if there are any specific areas where you pulled back or sort of put an increased focus in terms of underwriting when looking over the next 12 months? Or do you feel that we're still far away from being in any sort of a bubble scenario?

Gregory W. Becker

Yes. So, Ebrahim, I would say it a couple of different ways. And I'd just like to go back and reference the last time the market was, I would say, very robust, and that was back, in kind, of the 2000 time period. And if you go back to that time period, there was high valuations and there were business models, and there was almost a business model bubble and a valuation bubble. And clearly, from a risk perspective as a bank, it's the business model bubble that is what you're really concerned about because whether a valuation for a company is -- as long as the business model is good, maybe a $1 billion valuation is too high, maybe it's inflated and maybe the real valuation we would say is $500 million, that really doesn't impact the ability to repay that loan at all because the business model itself is what repays it. So, yes, I could say that the valuations are definitely at a high point. Whether they're too high or not, I think it is clearly dependent upon what sector you're looking at. But from a risk perspective, I'm more concerned about the business model, and I'd say the business models are incredibly strong right now. I've seen more disruption, more truly fundamental changes to the business model that I think have a lot of legs than I have seen in history. So I'm optimistic from that standpoint.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Got it. And just one quick question on Volcker. I understand investments -- correct me if I'm wrong, regardless of the extension or not, the earnings impact from the rule [indiscernible] exiting these funds should be none?

Michael R. Descheneaux

Well, it just depends. Obviously, we have our own equity invested in different funds. And to the extent that Volcker reduces or limits what you can invest, certainly, that will have an impact on your capital gains. But one important point is we still have an active funds investment business and our so-called SVB Capital segment, so we are still out there, raising funds and providing value to our clients as well and giving them access to some of the investments in the venture capital and private equity space. So we will still continue that business model. It's just you're going to have a less amount that you can actually invest with your own money in these different funds. So from that standpoint on the capital gains, potentially, it could. But again, as you've seen, we've just now recently over the last 18 months or so really started to see some nice significant gains starting to come out of those -- some of those investments. So -- but hopefully, that answers a little bit of your question there.

Operator

Your next question comes from Josh Levin from Citi.

Josh Levin - Citigroup Inc, Research Division

You've talked about your strategy. You're focusing more and more on your -- on larger clients, and that focus entails sacrificing some loan yield, but you're getting a big pickup in fee income. So when you think about it, given how your loan portfolio is evolving, if we would assume that Fed funds would go closer to normal to, say, 3%, 3.5%, what could we think about would be a normalized net interest margin for SVB?

Michael R. Descheneaux

That's a good question, Josh. I mean, obviously, if the Fed funds was more normalized at 3%, 3.5%, I mean, that would be fantastic for our bank. Obviously, we're very, very much geared towards the shorter end rates, given the fact that 75% to 78% of our loans are tied to variable rates. As far as what that net interest margin would be, we do come out at the end of each quarter, and we'll give the updates on those impacts. But clearly, it will be very, very significant, again, primarily driven by the loan yield. Now the wildcard, of course, will be what your cost of funds does do when the rates go up. And again -- and that's more difficult to predict. There's an upcoming go-around about what we'll actually have to pay for deposits and things. But again, clearly, it's a very significant impact.

Gregory W. Becker

Josh, this is Greg. Just one more thing to add on to it. So in addition to what Mike said, the other benefit we would get from -- if Fed funds were about 325 basis points or higher is, right now, if you look at our off-balance sheet funds, which is substantial, because the rates are so low, we have -- we get very little margin on that for ourselves, very little fees compared to what our historical average is. And so, if rates go up, we'll be able to pick up some of the fees we would get. So there's definitely some leverage we could get in that side of the business as well. So there's several different places we would benefit from increasing rates.

Josh Levin - Citigroup Inc, Research Division

Okay. Things are going really well -- have been going really well for several quarters now. Can you see anything on the horizon that could derail the story? I mean, is there anything keeping you awake at night?

Gregory W. Becker

So we think a lot about this, and there are several things, right? So one is clearly the economy. Right now, the economy is on a slow but nice, I would say, trajectory. And clearly, if something were to derail in a significant way, it wouldn't take much from my standpoint and the economy is pretty fragile and we could have some challenges there, that's one. That's probably the biggest one. Competition, clearly, is one that we're keeping an eye on. And as you heard in my remarks, in Mike's remarks, we spend a lot of time figuring out how we can add more value to our clients and differentiate ourselves in a meaningful way. I think we've done a really good job of that, but we have to continue to do that. And the last part -- and the Volcker is a great example that, from a regulatory perspective, there's changes that are coming on a regular basis, and we don't know exactly what those regulatory changes will be. We assumed, I guess, I assumed, that Volcker -- we would be -- it would just be an automatic, where the extensions will be granted and we'd be willing -- we'd be open to winding down those investments over time. It's more of a risk that we may not get those extensions or it may be more challenging. Now we, again, hope we will, believe we will. But regulation is just one way that you just don't know what's out there.

Operator

Your next question comes from Ken Zerbe from Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

I just want to go back to the Volcker impact. If -- it's more a theoretical question, but if the Volcker will have been enforced today or in this quarter, what -- how much income would actually not have flowed through to the bottom line? I mean, meaning, is it the vast majority of your client investment -- or your gain on investment securities plus all your warrants? I'm just trying to get a sense of how much that $282 million that we're talking about that's allowed, actually contributed -- or contributes in general to earnings?

Michael R. Descheneaux

Ken, that's a really difficult question. Remember, Volcker does allow for you to invest in funds up to only 3% of the fund, so we'd have to go back and calculate that. So -- but again, we would still be able to recognize quite a fair amount. And here's the other reason to consider because part of the gains that we're reporting to today also included carry interest, right? And so, you may only own 3% of the fund, but you're still the general partner. And if the funds are performing well, you'll still be able to collect carried interest. And so, as we continue moving forward and we continue with our funds business, we're still going to be able to participate in carry. So I mean, I don't have the point of answer to you. But again, they -- we will still recognize some nice gains.

Ken A. Zerbe - Morgan Stanley, Research Division

Got it. Understood. And just in terms of FireEye, maybe just -- if you can remind us of your holding period? Because, obviously, it went public. I know you said that it's in lockup until March. But is it typical that on these IPOs that you hold for several more months? Because I guess I was under the impression that you sold a little more rapidly.

Michael R. Descheneaux

Yes. So with FireEye and with -- quite common with the lot of the IPOs, in particular the high-profile ones, which we've been a part of. Typically, it's 180-day lockup. So to your point what you just mentioned, that would put us sometime towards the end of March that we -- that the lockup would expire. And then, of course, the teams will evaluate whether or not that's the right time to sell and how do you also do -- if you are going to sell, how do you do it in an orderly fashion as well, too, to kind of optimize and maximize your gains. So -- but again, that's still a decision to be made by the teams here in the future.

Operator

[Operator Instructions] Your next question comes from Julianna Balicka from KBW.

Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division

I have a couple of questions. One, on -- in your expense outlook for next year, expense growth, how much of that is coming from keeping up with front line revenue growth versus how much of the expense growth is coming from back office infrastructure, regulatory costs, et cetera?

Michael R. Descheneaux

Typically, roughly 60% or so of our costs come from compensation-related matters, and we have -- and the rest coming obviously from operations. And so, as you know, we've been investing quite heavily on the front line sales forces, particularly as we've growing our footprint. But at the same, we've also been investing heavily in the technology as well to make it easy to do business with us and to also help scale and make it a better client experience. And then, when you also add on top of that as well, given the fact that we've been going -- growing globally as well, too, building out the U.K. and building out China as well, too, clearly, those are so significant expenses. But again, by and large, the rule of thumb has been roughly about 60% related to, kind of, comp matters.

Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And so, that's not changing for the coming year now that you've made a significant...

Michael R. Descheneaux

No, not overly significant. It's pretty much in similar run rate.

Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then, my other question is in your guidance, on your outlook for next year of NIM for 3.20% to 3.30% off your current NIM of 3.20%, if you can walk us through how you're getting to the increases. Because when I think about your loan growth guidance and your deposit growth guidance, that still creates a gap of -- if I just take the average 2013 balances and grow it by the midpoint, that creates a gap of roughly $1.2 billion or so of more deposits than loans, which would go into securities. And given the pressure on pricing, I'm just kind of wondering where the uptick in NIM will come from.

Michael R. Descheneaux

Yes. I mean, in general, the uptick in the NIM is going to come primarily from the loan growth, and a lot of it also comes between the mix of where that loan growth is coming from. And so, if -- some of the healthy growth which we have seen in the past is coming from sponsor-led buyouts. Those tend to have much, much higher rates than our net interest margin. If they're just coming from the capital call lines, which -- those typically are probably roughly around our net interest margin. But again, in general, when you're adding a loan, that contributes significantly to increasing the net interest margin. And then, also, again, what -- depending on how you invest in the investment securities and how much cash you're keeping as well, too. Don't forget that as well. Deploying cash, moving it out of the 25 basis points to higher-yielding investment securities has also helped us. But again -- primarily, again, I'll just reiterate it, it comes primarily from the loan growth.

Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division

And what are the new loans pricing in that by category right now these days?

Michael R. Descheneaux

So it just depends. I mean, sponsor-led buyouts, you're probably looking at LIBOR plus 4.50% with a bit of a floor sometimes on 1%. Cap call lines are coming in somewhere around prime plus, prime minus depending on the quality of the deal as well. So they are all over the map there. But they haven't changed over -- significantly over, I would say, over the last 2 quarters. I mean, it's more or less still fairly consistent, but again notwithstanding the fact that it's still extremely competitive out there particularly for high-quality loans.

Operator

Your next question comes from Gaston Ceron from Morningstar Equity Research.

Gaston F. Ceron - Morningstar Inc., Research Division

I just have a question going back -- I'm sorry if I missed this, but going back to the deposit growth outlook. So correct me if I'm wrong. But I guess, when I looked at what your guidance had been for 2013, I think you guys said, like, obviously, you ended up sort of performing than, I think, your guidance had -- I think as of the third quarter had been for average deposit balances in 2013 to increase in the mid-single digits and forget exactly how you ended up, but you ended up above that. And so, obviously -- and then, for this coming year, it seems like you're going right out of the gate and just saying something -- it doesn't feel like you're being as conservative as you were this past year, like, you're a lot more confident. It seems like you're a lot more confident from the get-go on growing at that rate. I mean, granted you had a pretty nice finish with end-of-year deposit balances, but I'm just curious just how you see sort of the deposit story playing out over the longer term.

Michael R. Descheneaux

I think you answered your question. You're right on to the right point, which is we finished the year extremely strong. And if you remember in some of our comments as well, we said that lot -- most of the growth we had in 2013 came in that second half of the year. So now, you're going to have all that growth in the full year 2014. So that's why we feel pretty good about the deposit outlook, assuming the economy continues to hold. And as you see with the period-end deposit balances, they're quite elevated and quite strong. And so, as long as they don't temper or fall off or remain flat like they did last year, we're going to continue to see some strong deposit growth. And hence, they're reflected in our outlook numbers.

Gaston F. Ceron - Morningstar Inc., Research Division

And then, finally, as a follow-up on the same subject, I mean, how sticky do you see the deposit base, sort of, behaving as the rate environment changes and that sort of thing?

Michael R. Descheneaux

That's a really good question. I'm sure a lot of bankers across the United States are going to try to figure out what happened. They will probably remain sticky if rates remain low. Now if rates start to move up, they will probably start to try to migrate to yielding instruments. And so, it's going to become a decision for banks to decide, "Do I need to keep these deposits on the balance sheet? If I do, then I'm going to probably have to pay up to keep them on the balance sheet." Now it probably won't happen with the first 25 or 50 basis point move and might start to get a little bit more difficult to keep deposits on when you start to see 75 or 100 basis points. But from us, we're prepared either way. If the deposit is going to stay on the balance sheet, we can certainly benefit. If they do migrate off the balance sheet, we have plenty of liquidity to handle that, it will move into our off-balance sheet funds. We'll get a fee on that if they also move into off-balance sheet funds. So we're very well positioned. And even if it does move off the balance sheet, it does free up a fair amount of capital as well, too. So it just creates a lot of flexibility for us. So -- but again, it's really going to come down to that consumers -- or that customer's decision, and that's really difficult to predict at the moment.

Operator

There are no further questions at this time. Greg Becker, I'll turn the call back over to you.

Gregory W. Becker

Thank you. So before we sign off, I just want to say a word of thanks to all our employees and clients for making 2013, which was our 30th anniversary, our best year in our history. We say this a lot, which is we certainly believe we have the best employees and the best clients. And with all our success, our commitment to our clients' success hasn't changed. It's the most important thing for all of us. We feel really good about the start of 2014 and are looking forward to a great, great year as well. So with that, thanks, everyone, for joining, and have a great day.

Operator

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

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