SVB Financial Group Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.25.14 | About: SVB Financial (SIVB)

SVB Financial Group (NASDAQ:SIVB)

Q1 2014 Earnings Call

April 24, 2014 6:00 pm ET

Executives

Meghan O'Leary

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

Michael R. Descheneaux - Chief Financial Officer

Marc C. Cadieux - Chief Credit Officer

Analysts

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

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

Joe Morford - RBC Capital Markets, LLC, Research Division

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

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

David J. Long - Raymond James & Associates, Inc., Research Division

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

Gaston F. Ceron - Morningstar Inc., Research Division

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Matthew J. Keating - Barclays Capital, Research Division

Operator

Good afternoon. My name is Ian, and I will be your conference operator today. At this time, I'd like to welcome everyone to the SVB Financial Group First Quarter 2014 Earnings Conference Call. [Operator Instructions] Thank you.

Meghan O'Leary, you may now begin your conference.

Meghan O'Leary

Thank you, Ian, and thanks, everyone, for joining us today. Our President and CEO, Greg Becker; and our CFO, Mike Descheneaux, are here to talk about our first quarter 2014 results. As usual, they'll be joined by other members of management for the Q&A. Our current earnings release is available on the Investor Relations section of our website at svb.com.

I will caution you that we will be making forward-looking statements during this 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 may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release.

[Operator Instructions] With that, I will turn the call over to our CEO, Greg Becker.

Gregory W. Becker

Thanks, Meghan, and thanks, everyone, for joining us. The first quarter was an outstanding start to the year. We delivered healthy growth in the core bank, maintained high credit quality and recognized significant gains on our venture capital and private equity-related investments.

In the first quarter, SVB recorded our highest-ever net income of $91.3 million and earnings per share of $1.95. These results reflect, for the first quarter, 6.2% average loan growth, primarily driven by capital call loans; 6.5% average total client funds growth, that is deposits and off-balance sheet client investment funds, due to a strong funding environment and new client acquisition; 4% core fee income growth, as a result of new client acquisition and effective cross-selling; and strong gains on equity warrants and investment securities, driven by strong exits in public and private market valuations.

We are performing well, thanks to our own effective execution in a strong business environment for our clients, especially for funding, valuations and exits. We saw continued healthy funding of new companies in the first quarter and that activity is continuing.

In the first quarter of 2014, venture capitalists invested $9.5 billion in 951 deals, the highest quarterly dollar amount since the second quarter of 2001. In addition to strong VC funding in the first quarter, we've also seen an expansion over time in the sources of capital available to high-growth companies. While traditional VCs remain a key source of startup funding, VCs in recent years have focused more on mid- and later-stage companies. Angel and seed investors have filled the void in funding very early-stage companies.

At the same time, corporate venture funds and investors, which pulled back significantly during the economic crisis, have been reemerging to support new company formation. These corporate funds essentially provide research and development arms for mature companies trying to avoid disruption by startups with new technologies and delivery mechanisms. And in a testament to how pervasive technology has become, corporate venture funds are sponsored not just by technology companies, but by entertainment, auto, apparel, retail, financial and consumer product companies.

Innovation is now very much part of the mainstream and that is increasing the size of our target market. Together, by some estimates, these alternative sources of innovation capital are now providing us as much funding to U.S. startups as traditional venture capital firms. And we believe they will eventually surpass VCs in funding activity.

Just as we have teams dedicated to venture and private equity, we also have teams dedicated to working with these emerging providers of capital. New sources of funding, combined with the declining cost of starting and growing innovation companies, are helping to fuel a high pace of new company formation, and that is contributing to strong client acquisition for SVB.

In the first quarter of 2014, we added more than 1,000 new clients, a run rate 10% higher than in 2013. The majority of these new clients were early-stage companies, but we saw significant increases in private equity, private bank and global client counts as well.

The pace of new company formation has also been helped by healthy exit markets. There were 105 venture-backed M&A deals in the first quarter of 2014, with average valuations more than double what they were a year ago.

In addition, there were 34 IPOs of venture-backed technology and life science companies, more than 3x the number during the same quarter last year and the strongest quarter for new listings since 2000. The fact that 59% of these IPOs were SVB clients, speaks to our success at working with the best innovation companies in the market and keeping those clients longer.

Our investments in people, products, services, global capabilities are contributing to our improving client retention rate, and they continue to generate growth in cross-selling opportunities across all aspects of our business.

Let me share a few of the many metrics that we track. Loans to global clients were up 82% year-over-year. Payment and card revenue increased 38% year-over-year. FX dollar volumes increased 17% year-over-year, and our private bank client count increased 24% year-over-year.

We remain very focused on our efforts to generate this kind of growth, even without the help from interest rates. But although interest rate increases appear to be at least a year away, based on our current performance and balance sheet growth, we expect to benefit significantly from raising -- from rising rates when they come. Consider the 78% of our loan book that's tied to short-term rates; while that percentage has increased somewhat in the last 5 years, the size of our loan book has more than doubled to almost $11 billion.

Over the same 5-year period, our deposits have grown by 116% to $24 billion, 2/3 of which is noninterest bearing, and deposit growth has only accelerated as a result of the increased funding sources and strong new client acquisition I mentioned earlier.

Mike will talk in a few minutes about how we're thinking about deposit growth and capital, but the long-term earnings potential of this huge low-cost funding base in a rising rate environment is significant.

Finally, we have $27 billion in off-balance sheet client investment funds, which we expect will generate significant fees when the rates rise, all the more so because we would expect to see these balances grow in a rising rate environment.

Although higher rates are a long-term opportunity, they remain one of our major challenges in the short term. While we have demonstrated that we are able to deliver strong organic growth without help from rates, our earnings power is nevertheless constrained by the current rate environment.

We face other challenges as well. The cost of being regulated continues to rise and new regulations around the world require us to constantly adapt and reevaluate our business activities.

Competition remains intense and shows no signs of letting up. Some lenders appear to be stretching for growth at any cost, and we're seeing more situations where we have to decide whether it makes sense to sharpen our pencils or walk away.

Finally, we're keeping a close eye on valuations. The markets are hot. In our experience, a certain amount of frothiness is expected to be in any hot market. We take some comfort in the fact that the lessons of the dot-com era have significantly raised the bar in business models and IPO readiness. We believe the pre-IPO companies in the market today generally have much stronger business models than the pre-IPO companies we saw 15 years ago, and many of the valuations are justified. While we have a long history of working with hot markets and we have taken the lessons we've learned to heart, in particular, we had learned to take a measured approach when things are heating up.

In closing, we are pleased with our results in the first quarter and our ongoing performance. We've delivered outstanding results, grown our client base and executed effectively. And as Mike will detail you -- with you in a few minutes, we are raising our full year 2014 expectations for loan and deposit growth, as well as net interest income and core fee income.

While we recognize the challenges facing us, we have the advantage of a thriving client base, significant value-add beyond products and the best people in the industry. We remain optimistic about the year ahead and the improving economy.

Thank you. And now, we'll turn it over to Michael Descheneaux who will talk about our financial results.

Michael R. Descheneaux

Thanks, Greg, and thank you all for joining us. We had an outstanding quarter, highlighted by strong growth in revenue and gains from venture capital-related investments. Our results were driven by healthy funding environment for our clients and robust client acquisition.

I would like to call on a few highlights, which I will cover in more detail shortly: First, strong average loan growth; second, exceptional growth in total client funds, which includes on-balance sheet deposits and off-balance sheet client investment funds; third, higher net interest income, despite a lower net interest margin; fourth, excellent credit quality; fifth, significant gains from our private equity and venture capital-related investment securities and warrants; and sixth, solid growth in foreign exchange fees and card fees. Additionally, I will comment on expenses and our capital levels, as well as changes to our 2014 outlook.

Let me start with loan growth. Average loans grew by $630 million or 6.2% to $10.8 billion during the first quarter. This growth was driven primarily by private equity capital call lines of credit, as well as by our growth in corporate finance clients. Period-end loan balances were relatively flat as expected and ended at $10.8 billion compared to $10.9 billion in the fourth quarter due to pay-downs of short-term capital call lines of credit, following a significant increase at the end of Q4.

Moving to total client funds. Average total client funds increased by $3.1 billion or 6.5% to $50.8 billion during the first quarter, an all-time high, driven by a strong funding environment for startups and our continued success at winning new clients.

The increase in average total client funds reflects significant growth in average deposit balances of $2.2 billion or 10.2% to $23.7 billion, primarily from our Accelerator and Growth-stage clients. We also saw an increase in average off-balance sheet client investment funds of $910 million or 3.4% to $27.1 billion, primarily driven by continued growth in our client funds managed by SVB Asset Management.

Moving to net interest income and net interest margin. Net interest income increased by $9.3 million or 5% to $196.8 million in the first quarter, primarily due to increases in investment securities and loans. Average available-for-sale securities balances increased by $1.2 billion or 11% to $12.2 billion, driven by higher deposit balances, resulting in an increase of $8.3 million in interest income. The yield on our AFS portfolio increased by 13 basis points in the first quarter due to lower premium amortization expense and the impact of 2 fewer days in the first quarter. Overall yields on our AFS portfolio during the first quarter were 1.81% compared to 1.68% in the fourth quarter.

Interest income from loans increased by $1.2 million to $148.2 million. This increase reflects the positive impact of higher average loan balances and was offset by the impact of 2 fewer days in the first quarter, as well as lower loan yields. Loan yields declined due to competition and a changing loan mix as a result of continued strong growth in capital call lines of credit. Overall loan yields for the first quarter were 5.58% compared to 5.75% in the prior quarter.

Our net interest margin was 3.13% compared to 3.2% in the fourth quarter. The decline was primarily due to the increases in investment securities, which was helped by significant increase in average deposits.

Moving on to credit quality. It was excellent during the first quarter, marked by improvements in impaired balances and a reduction in classified loans. We recorded a provision for loan losses of $494,000 versus a provision of $28.7 million in the fourth quarter. The loan-loss provision reflects net charge-offs of $19.8 million and the release of reserves related to the resolution of several loans, for which reserves were established in prior periods. Additionally, the loan-loss provision reflects an overall reserve release of $4.8 million due to an improvement in the overall credit call quality -- credit -- sorry, overall credit quality of performing loans.

Our allowance for loan losses for total gross performing loans decreased 4 basis points to 1.07%, driven by continued strong performance of our performing loan portfolio. Nonperforming loans decreased $27 million to $25 million, reflecting $22 million in repayments. Classified loans decreased by 16%, primarily due to the resolution of certain nonperforming and performing loans, early-stage clients receiving follow-on funding rounds and the improved operating performance of certain later-stage companies.

Now let us move on to noninterest income. We continue to benefit from strong gains on private equity and venture capital-related investment securities and warrants. These gains stemmed from healthy IPO and venture-backed funding markets, as well as increasing public market valuations. As a result of these factors, non-GAAP noninterest income, net of noncontrolling interests, was $123.5 million in the first quarter compared to $100.9 million in the fourth quarter.

Investment securities gains, net of noncontrolling interests, were $37.4 million compared to $26.1 million in the fourth quarter and were driven by evaluation increases in our investment funds related to companies that went public during the last 3 quarters.

Gains on equity warrants were exceptionally strong as well at $25.4 million compared to $16.6 million in the fourth quarter. These gains were primarily related to gains on our exercise of equity warrant assets and valuation increases in our nonmarketable securities due to IPO and M&A activity.

The securities we hold in FireEye were the largest driver of gains in the first quarter. It is important to note that FireEye will also impact our second quarter results, as we held investment positions in FireEye as of March 31. I will refer you to our press release for specific details, but the summarized version is as follows: One, we recognized a $21.8 million gain, net of noncontrolling interests, on our funds that held FireEye shares; two, we recognized a $15.2 million gain when we exercised our equity warrants in FireEye and converted them into shares; but the last point we have to note is the decline in the FireEye share prices, subsequent to the exercise of the warrants and conversion into shares, resulted in the recognition of an $8.2 million unrealized loss in equity. This loss is recorded in other comprehensive income. The value of these holdings will continue to be subject to changes in FireEye's stock price until we dispose of them.

Based on the decrease in FireEye's common stock as of April 23, we would expect a decrease in the valuation of our warrant-related shares of approximately $13 million and a decrease in valuation of the shares held by investment funds of approximately $48 million or $9 million, net of noncontrolling interests.

Now moving to core fee income. It remained healthy, increasing by $2 million or 4% in the first quarter to $50.9 million, primarily driven by foreign exchange in credit cards. As a reminder, in addition to foreign exchange and credit cards, core fee income includes deposit service charges, lending-related fees, letters of credit and client investment fees. Foreign exchange fees increased by $1.3 million or 8% to $17.2 million, due to increased activity across all client segments and higher client counts. Credit card fees grew by $1.1 million or 12% to $10.3 million, also due to higher transaction volumes related to increased use of our cards by our clients.

Turning to expenses. Noninterest expense increased by $3.5 million or 2.1% to $172.4 million in the first quarter. This increase was driven primarily by an increase of $6 million in compensation and benefits cost due to higher FTE, as well as seasonal 401(k) contributions tied to annual incentive compensation payouts in the first quarter. This increase was partially offset by a decrease in professional services expense of $2.2 million. Given that we are starting the year off with such a strong performance overall, we expect high incentive compensation to remain a factor in expense growth.

Moving on to capital. Our capital ratios remained solid overall in the first quarter, with our risk-based capital ratios increasing at both the consolidated and bank levels. However, our leverage ratios declined due to exceptionally strong deposit growth. Specifically, our bank level Tier 1 leverage ratio declined 32 basis points to 6.72%.

As we have said in the past, our target Tier 1 leverage ratio is generally around the 7% to 8% range. As a result, we are closely monitoring our Tier 1 leverage ratio, especially in light of our expanding markets, strong new client acquisition and growth of total client funds over the last 3 quarters, as well as the last several years. Although our earnings remain strong, Tier 1 leverage could continue to trend down if the extraordinary deposit growth continues and if we do not take action.

We have grown deposits $6.8 billion or 36% over the last 3 quarters. We expect deposit growth to continue and to be robust for the second quarter and likely the remainder of 2014. We are looking at the range of options available to us to increase our Tier 1 leverage ratio to our targeted levels, which includes raising equity or debt or both at the holding company to support our growth.

Now I will turn to our outlook for the full year 2014. We are improving our overall outlook and adjusting our ranges on several business drivers. We are narrowing our outlook for average loan growth based on strong first quarter performance. We expect average loans to increase at a percentage rate in the high teens, which is at the top end of the range we previously provided of mid to high teens.

We are increasing our outlook for average deposit growth based on our exceptional performance in the first quarter. We expect deposits to increase a percentage rate in the high 20s, which is significantly higher than our previous outlook of mid-teens growth.

We expect this higher deposit growth to have a ripple effect on net interest income and net interest margin. As a result, we are increasing our outlook for net interest income based on the expectation that deposits deployed in our loan and available-for-sale securities portfolios will drive higher interest income. We expect net interest income to increase at a percentage rate in the high teens compared to our previous outlook of the low teens.

We are lowering our outlook for net interest margin to a range of 3.1% to 3.2%, which is down from our previous outlook of 3.2% to 3.3%. This change is based on our expectation that higher deposit growth will pressure our net interest margin.

We are increasing our outlook for core fee income due to strong client activity. We expect core fee income to increase at a percentage rate in the low teens versus our previous outlook of low double digits.

And finally, we are increasing our outlook for expenses as a result of higher incentive compensation due to our strong performance in the first quarter and improved overall expectations. We expect expenses to increase at a percentage rate in the low double digits versus our previous outlook of mid-single digit growth. If we were to exclude higher incentive compensation due to our performance, expenses would most likely be in line with our original outlook.

Clearly, we are off to a very strong start in 2014. We delivered healthy growth; and in almost every respect, we are on track to exceed our initial performance expectations for 2014. Growth in the technology sector, healthy investment and exit markets for our clients and our own continued solid execution are driving a healthy pipeline and continued expansion of our business.

Notwithstanding the challenges of intense competition, the persistent low rate environment and some market frothiness, we are very pleased with our performance in the first quarter and our expectations for the year remain high. Thank you.

And now, I would like to ask the operator to open the line for Q&A.

Question-and-Answer Session

Operator

And your first question comes from the line of Ebrahim Poonawala from Merrill Lynch.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Mike, just going back to your comments around the leverage ratio and the possibility of looking at a common or debt combo to raise there, it seemed like you guys, in general, have been reluctant to go that route, especially in terms of raising common. I'm just wondering, given sort of a relatively strong outlook on balance sheet growth, what would drive that decision as we move forward over the next few months or in the next couple of quarters to go for it or not?

Michael R. Descheneaux

We give you -- as we pointed out, we've grown the deposits so significant, right. And a lot of the actions we've been taking internally as well to try to deal with the deposit growth as well is just really, really difficult in this low-rate environment. And so we continue to monitor and look at our different options. So we'll continue to assess the situation and the market conditions and then make a final decision on when we may do this.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Good. And Mike, as a separate question in terms of, obviously, there's been a lot of chatter and volatility around high-growth stocks and Greg referred to that in his opening remarks. I'm just wondering in terms of when you look at your outlook, and it's much difficult for us from the outside, in terms of the visibility that you have, how do you see the downside risk to your sort of 2014 forecast because of what we've seen in the markets over the last few weeks in terms of some of the IPOs not going through or not pricing where they had to in terms of the exit markets getting a little tighter? How does that impact your fundamental outlook on balance sheet NII growth?

Gregory W. Becker

Ebrahim, this is Greg. Let me start, and then I'll -- Mike comment as well. So I'll take the question from the perspective of growth in total client funds and the loan outlook, and then maybe Mike can comment on the securities portfolio, the warrants and securities gains and how that could be impacted. Look, where we are right now, and part of the answer to your first question, which is why have we changed possibly in how we think about maybe raising capital or debt or equity, and it's really because into the fourth quarter and in all the way through the first quarter and as I made in my comments, we've continued to see substantial growth in deposits, new client formation, new company formation, new client additions. And so that has really driven our view that this capital, this new liquidity is happening at such a pace that we really need to consider other alternatives to bolster up our capital ratios. So we think that's going to be continuing. So if the market start to correct, the stock market turns down and the sources of capital I talked about putting more money into the market starts to pull back, clearly that would slow down deposit growth. But again, we still expect it to be a very robust market out there. So I don't view either for loans or deposits a substantial change in the outlook if the market corrects a little bit. In fact, I think it actually would be healthy for the long run. Maybe, Mike, you can comment on the security side.

Michael R. Descheneaux

Yes. I think it's pretty much the same answer correlated to it. As you know, the value of warrants in our investment is really highly correlated to the markets as well in the valuation, so they all relate off of that. So that wouldn't add anything else to that.

Operator

And your next question comes from the line of John Pancari from Evercore.

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

On the outlook, the loan growth outlook and deposit growth for that matter as well, can you just kind of give us some more granularity on each? What changed from January? I know you keep citing the stronger-than-expected deposit growth, for example, during the quarter. But what really changed in the 3 months that you saw a much bigger inflow of deposits than you had projected at that time, for example?

Gregory W. Becker

Yes. John, this is Greg. Let me start. So towards the end of the fourth quarter, we did see a nice tick -- uptick in deposits. And there's 2 -- and that carried -- as I said, carried through in the first quarter. There's 2 aspects of it. First of all, about 20% roughly of the new total client -- the total client funds of growth has come from new client acquisition, and about 80% of that is existing clients that have raised additional rounds of equity. What's been happening in the market is these companies are performing at a very strong level, and they're getting this preemptive rounds that are substantial; $50 million, $60 million, $75 million. We thought that, that would be potentially temporary, and we thought that would slow down some time in the first quarter. We're not seeing that. And so you look at the size of the rounds and you look at the new client acquisition, the combination of those 2 factors is causing us to feel very good about the outlook, which is why we raised the outlook for the balance of the year. The same holds true from a lending perspective, with the only caveat being that, as we said, the market is very intense from a competitive standpoint. And although we have better products and services than we ever have, the market's growing, we still have to take that into consideration when we want to sharpen our pencils, as I said, or walk away. So we've increased the outlook, but I'd say we're more cautious on that side.

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

Okay. All right, that's really helpful. And then, on that competitive point, Greg, can you talk about -- are you seeing an increasing number of your early stage competitors that are not taking warrants on new originations? And do you think that could be an issue for you, that kind of starts to develop from here?

Gregory W. Becker

Yes. From a competitive standpoint, again, I'd say let me start with the positive parts about the market that we're going after. First of all, the market that we're going after, this whole innovation economy is growing at an incredibly fast pace. So we're not all fighting for the same share of market. The market itself is growing at a very fast pace, so that's one really positive part. Second part is, for us specifically, over the last 2, 3, 4 years, our credit product set has expanded significantly. When you look at mezzanine debt, expanding our various flavors of asset-based lending, so we can compete more broadly than we ever have been able to, and we could add a lot more value. So I think our ability to compete in the market is better than it ever has been. Now to your point about competitors; clearly, there are more competitors: It's large banks; it's small banks; it's venture debt funds. And as we've seen in other markets -- or other cycles, I should say, you do see people pushing the envelope. So we do see some companies looking for non-warrant deals in situations where we think there should be one. When that happens, clearly, we think it's temporary, and we think that, that isn't priced effectively, not being priced effectively for the risk that they're taking. And we've seen people cycle in and out of the markets when they go down that path. So from our standpoint, it's not prudent to head down that path because we believe you -- and you've paid for the risk and we feel good about where we stand in the market right now.

Operator

And your next question comes from the line of Joe Morford at RBC Capital.

Joe Morford - RBC Capital Markets, LLC, Research Division

I guess I was curious if you could talk a little bit more on the loan side. Obviously, the end period, as expected, was fairly flat, yet you raised your guidance, suggesting the pipeline is building. And I was just wondering if you could talk about the kind of mix of growth you expect going forward relative to capital call lines or buyout financing. And you talk about more clients doing financing, so the bigger ones with that. Is that on some level actually tempering loan demand? Or on the flipside, is it just that VCs are making more investment and that's more a call round or a call line that's needed and things like that?

Marc C. Cadieux

Joe, it's Marc Cadieux. So maybe starting in reverse order, I think the higher activity levels, and we saw some of that in the first quarter with the number of investments made, does translate to more activity on our capital call lending and you see that reflected in our numbers. I think going back to the front end of your question, the -- your suspicion's right on the money. I think we are seeing continued demand in the -- I'll call it the better credit quality segments, so capital call lending, sponsor-led buyout lending, and also loan demand in our private bank as well are continuing to give us confidence that the loan growth that we're hoping for is going to be there throughout 2014.

Gregory W. Becker

And Joe, this is Greg. The only thing I would add on to it from a growth perspective, as I had said in my comments, the global loan portfolio grew roughly 82% year-over-year. It's roughly $850 million right now. So when you think about the growth rate and the size of that portfolio now, if that growth rate -- it won't continue at that pace, but let's say if it goes 30% or 40%, it's still a substantial contribution to the overall growth. So as we've said in prior calls, the growth portfolio is very broad: It's buyout; it's capital call lending; it's the private bank; it's global; it's much more broad than just one area, which is why we feel good about the outlook. But the outlook increase was mainly driven by the higher average loans starting in the first quarter and that obviously carries through throughout the year.

Joe Morford - RBC Capital Markets, LLC, Research Division

Right, okay. And then the other question, I guess, for Mike on the growth in the investment portfolio, also looks like cash balances were up quite a bit. I just wonder; is there still some remixing that can be done either from cash or securities or investing in higher-yielding securities that can maybe help support your margin going forward at all?

Michael R. Descheneaux

Joe, it's a bit of a tough dilemma, right. Because the larger your securities portfolios gets, the more sensible you need to be on as far as duration and avoiding duration extension risk. So we're right now probably around a 3.2, 3.3 year of duration on the investment securities portfolio, and we'd like to try to keep that tight and keep that in and perhaps, even maybe bringing in a little bit. Because, again, when you look at the size of the investment securities portfolio in relation to the proportion of the balance sheet, it's obviously significant. So we would probably expect to start -- we've been buying U.S. treasuries lately. So we've been kind of targeting an average duration somewhere around 3.25 years. Now obviously, the yields on those are significantly lower. But we're probably looking around 100, 110, say 1.1% interest. So it is actually lower than our current overall yield of 180. But overall, clearly, it's going to drive net interest income higher.

Operator

And your next question comes from the line of Steven Alexopoulos at JPMorgan.

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

I wanted to start with the loan growth guidance. If we look at the average first quarter balance, you're already 15% above the 2013 average and the guidance says for high teens, right? So it implies maybe 2% or 3% additional growth for the year. Why is the loan forecast so low? Do you expect the average to fall, given period end was down in 2Q and then bounced back up for the rest of the year?

Gregory W. Becker

Yes. Steve, let me start and then Marc may want to add. So we raised -- we kind of tightened the range. But obviously, we moved towards the higher end of that based on the first quarter average. As we said in the last earnings call, I'd say we're looking at where that growth rate is and basically saying that with the both competitive landscape and how we look at the market, we're, I'd say, being a little more cautious as far as how we look at that outlook. Obviously, if the second quarter comes in and that momentum continues, we'll be raising guidance in the second part of the quarter. But I'd say, just being a little more cautious in looking at that outlook, given where the competitive landscape is right now, is kind of how we positioned it.

Marc C. Cadieux

Yes. I think that's, your last point, the point I would have made. The frequency with which we'll lean in versus walking away likely goes up if the competitive environment remains what it is.

Gregory W. Becker

And maybe one more last point, Steve, on that. One of the things we've grown significantly over the last 3 or 4 years is our buyout portfolio. And if you look at the level of refinancings that we've had in the buyout [ph] portfolio over the last few years, it's actually been relatively few. We're starting to see more refinancings in the portfolio, mainly because of the competitive landscape. And so we haven't wanted to chase EBITDA multiples to a bad place or, in some cases, one of the price deals where we think they're inappropriate from a risk-reward perspective. So we have -- probably see, in that portfolio, a little more churn and not as much growth as we've seen in prior quarters.

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

Okay, that's helpful. And I just wanted to follow up on the comments on the leverage ratio. How low will you let that level go before you do pull the trigger on a capital action? And if there was equity, do you have a preference for common or preferred?

Michael R. Descheneaux

Steve, this is Mike here. So as we pointed out, we're generally trying to target the 7% to 8%. And it really is just a question on trends and where that's heading. And so we -- obviously, we have forecasts and outlook and looking at it. So it just wouldn't be become -- we continue to digest information and understanding the trends in the growth and we'll make a decision on where to proceed from there.

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

Okay. Mike, any commentary on preferred versus common?

Michael R. Descheneaux

No, no commentary.

Operator

And your next question comes from the line of Brett Rabatin from Sterne Agee.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Wanted to ask you, Greg, you mentioned a couple of times, "some market frothiness" and was just curious if you could maybe walk us through, specifically, what you're seeing in terms of the markets that are too frothy and what you might be avoiding, either in tech or life sciences as a result of that "frothiness"?

Gregory W. Becker

Yes. So Brett, thinking about frothiness, we get questioned a lot about the -- whether we're in a bubble and what does that look like. And I think it's really important, first and foremost, to talk about why this is different than the dot-com bubble back in -- 15 years ago. And back at that time period, there were really 2 things going on: one is the business models themselves were -- weak business model is probably the simple way to describe it and then you had high valuations on top of that. And so you have a recipe, when one fell, they both collapsed kind of at the same time. Today, what you see is incredibly sound business models. I -- when I talk to venture capitalists I look in our own portfolio, you meet with CEOs, there's more disruption going on in traditional businesses than any of us have ever seen. Now the question is what's the value of these disruptive businesses and these growth rates? And so the valuations that we're seeing, which are, in some cases, billions of dollars in a private basis, I would argue, are justified. Now the question is when you see multiples of these companies in similar industries, all getting high valuations, they can't all be successful. So it's hard for us to predict which ones are going to be successful and which ones aren't going to be successful. But it is kind of just a general frothiness that we're looking at. But again, the business models themselves are much more sound. So what happens there? From a credit perspective, I look at it and say the valuations are less of an issue than the business models themselves. Because it just means they'll still be able to raise money, but the valuation may not be at $1 billion, maybe they raise money at $300 million or $400 million or maybe $200 million. So as we look at it, could it slow down client funds? Possibly. We're really watching it more so right now from a credit perspective, and we feel good about where we are, again, going back to the quality of the business models.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Okay. And I guess the other thing I wanted to ask was just around competition. You mentioned increased competition. Would you say loan spreads have tightened more dramatically in the past quarter than they did perhaps last year in any of the larger pieces of the portfolio? Or how would you describe that?

Gregory W. Becker

I think -- I wouldn't say it's changed from the trend line that we have seen back in 2013. And when you look at our loan margin, there's really a few things going on. First, a part of it is loan mix. When you look at the growth we've had in the portfolio, it's mainly been, over the last few years, capital call loans, some private bank loans, some sponsored buyout loans and corporate finance. Those tend to be of higher-quality loans, which command lower rates, right. It's part of the reason why our loan loss reserve against performing loans has continued to decline as well. So you can look at that in one context; a part of that is mix. Second part of it absolutely has to do with the competitive landscape, but I wouldn't say that it is -- has gotten more intense this quarter. It's kind of a continuation of the trend that we have seen -- or that we saw back in 2013.

Operator

And your next question comes from the line of David Long at Raymond James.

David J. Long - Raymond James & Associates, Inc., Research Division

Looking at the guidance that you gave on FireEye for the quarter, you said that there was a $22 million impact, $9 million from the noncontrolling interests or net of the noncontrolling interests from the securities and that warrant-converted shares was $13 million. Are you saying that, that $22 million will be a negative for the quarter and for the securities? And then the reason why I'm asking is the -- I thought the warrant-converted shares at 3/31 were already down $8 million of that $13 million.

Michael R. Descheneaux

So maybe just -- I mean, the clearest way to see it and read it is obviously in our press release. I think we were laying it out, but let's just walk through it real quick. What we said is, in the quarter, we recognized $21.8 million in gains on our funds, okay? Those are obviously at fair value mark as of 3/31. Now I guess a little bit more depth -- in depth of a discussion is we recognized a $15.2 million gain on the exercise of the warrant. But subsequent to the date of the exercise of the warrant, the price of the shares had gone down. And the way the accounting works is you actually recognize that in the other comprehensive income section, which is the reduction of equity. So -- and that was $8 million. So it depends on how you look at it. GAAP doesn't look at it necessarily this way, but you would take the $15.2 million gain on the exercise, less the $8 million to kind of give you that mark as of 3/31, which obviously, the net of $15 million and the $8 million, it gives you around $7 million. So then you have to look at what's happened since March 31, and again, that's -- we've put a disclosure in there as well. Subsequent to March 31, the value of FireEye has actually declined as well, and so we provide those numbers for you as well.

Operator

And your next question comes from the line of Julianna Balicka from KBW.

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

In terms of -- so a lot of my questions have been covered, but a couple of housekeeping questions. One, on the loan losses, the 80 basis points and then you mentioned in your remarks that your performing allowance is decreasing because of the mix shift of loans. But in terms of just kind of the loan loss history impacting your forward-looking reserve requirements, is this something that we need to start thinking about, this 80 basis points of charge-offs pushing forward your reserves in the future? Because I mean, you did say that the charge-offs were already previously covered. So how should we think about that kind of from an allowance methodology perspective?

Marc C. Cadieux

Julianna, it's Marc Cadieux. So the 80 basis points, I think you're getting there by annualizing the first quarter gross charge-offs, yes?

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

Yes.

Marc C. Cadieux

Yes. And so the way to think about the first quarter charge-offs is we had a larger loan in the fourth quarter that we impaired. And in the first quarter, we had an opportunity to resolve that one loan. And I think, as we said before, we occasionally will have those larger loans come along. And thankfully, they are an occasional thing and not a regular thing. So we had an opportunity to resolve it in the first quarter. In connection with resolving it, we did take a charge-off in order to put that situation largely behind us, which we thought was a good thing to do. If you separate that out, it was a typical quarter, I would say, in terms of charge-off activity and that was both from an amount and also from a loan portfolio segment standpoint in that it was all early stage. And so I don't expect the 80 basis points to be what we delivered and rather are sticking with our guidance of the plus or minus 40 basis points.

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

And from the perspective of 8 to 12 methodology, that 80 basis points recognized loss once upon a time will not push your reserves up higher than they've already been trending, right?

Marc C. Cadieux

Correct.

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

Okay, and then the other question I wanted to ask you, in your remarks, you mentioned the 20% of [indiscernible] your new client acquisition. This quarter, 80% came from clients already in place, and I believe this was in reference to deposit growth, and 20% came from new clients. The 20% of new clients, did that come from early-stage, extension-stage, later-stage clients? Could you give us a little bit more color on that 20%, please?

Gregory W. Becker

Yes. Julianna, this is Greg. And those new clients, again, mainly are in our Accelerator and Growth, so kind of early and mid-stage, and that's where the vast majority of these deposits and total client funds came from.

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

Great. And then final housekeeping question, kind of going back to the capital questions that had been asked earlier in the call. You didn't want to comment between preferred versus common, but could you comment in terms of your thoughts at the whole co level raising debt versus actually going out and raising a form of equity?

Michael R. Descheneaux

Yes. Julianna, as we said in the prepared remarks, we will consider the options. It's either debts, it's either equity or a combination of both. If we do decide that that's a route we want to pursue.

Operator

And your next question comes from the line of Gaston Ceron from Morningstar.

Gaston F. Ceron - Morningstar Inc., Research Division

I just got a quick question, going back to the issue of competition. As the space continues to attract interest and perhaps you see some rising competition, maybe not just granularly looking at this past quarter, but just in general over the last, I don't know, couple of years. I mean I'm curious; has that had an effect on your ability to recruit and retain sort of the talent that I believe at least gives you part of your edge here? These folks that have strong networks or have relationships with the markets that you're targeting, or no, are you still finding it relatively straightforward to attract and retain this banking talent?

Gregory W. Becker

So Gaston, this is Greg. I'll start and I'll hopefully won't jinx my -- jinx where we are by saying this, but we've been very fortunate to retain a significant number of our key employees. And what we look at is we have literally hundreds of people inside the organization. This is what we have been doing for a long period of time. There is no question that periodically we're going to lose 1, 2, 3 people to competitors because, again, if you were a competitor, this is the place where you would end up coming to look for that talent. But so much of what we do is about culture. It's about opportunities, it's about the platform that we have and making sure that we pay competitively and all the other things that you would talk about from being able to retain employees. And I think we've done a good job of that. It doesn't mean we can't get better at it, but we've done a good job. And again, we retained -- we've retained really well.

Gaston F. Ceron - Morningstar Inc., Research Division

Okay, that sounds great. And then, just very quickly, maybe just one last sling at the thoughts -- at thoughts on a capital action. I mean, is that something that you foresee as a possible decision that you might have to make in the near term or is it something further out? Or it's just hard to say on timing.

Michael R. Descheneaux

Yes. I mean all we can really say is we just continue to evaluate it. I mean you see the trends where we're at and how strong the deposit growth has been and so, obviously, we mentioned we want to have that target of 7% to 8%. So again, we just continue to monitor very closely.

Operator

And your next question comes from the line of Aaron Deer with Sandler O'Neill.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Just one question on the -- well, this kind of ties in with the capital question, but with the deposit growth really driving some of those pressures, are there additional strategies that you can take to help persuade some of your client funds to move from deposits into off-balance sheet products?

Gregory W. Becker

So Aaron, I'll start and then maybe Mike will comment as well. It's really tough right now. And again, it starts with you have to do the right thing for the client, and that's the first and foremost most important thing. When you look at this, as I said in my comments, again, 2/3 of our deposits, they're sitting in noninterest-bearing accounts, right. So they're earning 0. And when you look at the alternatives off our balance sheet, from the investment perspective, maybe they can get 5, 6, 7 basis points. And that, quite honestly, isn't compelling enough for the simplicity of just having it in their normal operating account. And although we have -- continually have conversations with our clients about the best place for it to be, we make recommendations, it comes back to that timing isn't -- that delta isn't really worth making a change right now. And so we'll continue to have those conversations. We'll continue to target the higher balances to kind of show them the opportunity that they're missing out on. But it is hard, which is why we're talking about the Tier 1 leverage ratio, which is why we're talking about if it doesn't change, we'll be looking at these alternatives from a capital perspective. But I could think of a lot worse problems to have than a great client franchise where you've got deposits coming in at the pace we have them.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Yes and I do. There are plenty banks that are [indiscernible] of your deposit base. The -- one last question for Mike. Can you identify if there was any outsized compensation cost that were tied to the high level of warrant investment gains in the quarter?

Michael R. Descheneaux

I mean, there're certainly some. As far as the question of high and material, probably not overly significant for you to really recognize on the general trend of the compensation expenses. I mean, by and large, really what -- the growth really came from was certainly the solid incentive compensation -- sorry, solid performance, which just drives some incentive compensation overall for the entire bank. But also that you may recall some of the seasonal expenses that we do have as well in the first quarter, related to the beginning of the new year and the 401(k) matchings that a lot of companies have to do towards the beginning of the year, as well as the new taxes or the updated tax positions for individuals on payroll on as well. So there're a variety of seasonal items.

Operator

And your next question comes from the line of Matthew Keating at Barclays.

Matthew J. Keating - Barclays Capital, Research Division

I was hoping you could -- I appreciate the update on the, I guess, the fund or the investments that would be covered under the Volcker Rule. I was wondering if you could maybe size the magnitude. If these Volcker Rule restrictions were in effect today, what the magnitude of the impact on earnings per share might have been in the most recent quarter?

Michael R. Descheneaux

That's a very hypothetical one for me. There's a few components where we actually make money from our funds business. Clearly, we make money on -- well, we receive revenues on management fees as well. We have our own capital gains that we can make, as well as a carried interest position. Certainly, it would have a significant impact on particularly investment gains that we -- you were talking about. And in relation to FireEye, for example, you would exclude the warrants. But outside the warrants, we actually had some very solid gains from the investment security. So I think that's the way to look at it, is if Volcker was in place, it would essentially affect your investment gains, but not necessarily the carry position as well, which we obviously outlined in our press release as well.

Matthew J. Keating - Barclays Capital, Research Division

So would the Volcker Rule then impact sort of warrants? Or that's outside the scope of the Volcker Rule?

Michael R. Descheneaux

Our belief is that it's not in scope.

Operator

And your next question comes from the line of Steven Alexopoulos with JPMorgan.

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

Actually, I had a few follow-ups. Sorry, my apologies. What was the average balance of the capital call loans in the first quarter? And how did that compare to last quarter?

Michael R. Descheneaux

I don't have that right at the tip of my fingertips, but it certainly grew as we talked about. I would probably characterize -- again, don't quote me necessarily. I'm going to go out on a limb here a little bit. But approximately half of our average loan growth in the quarter, Steve, was related to kind of the capital call lines of credit. So that probably puts us around close to $2 billion-ish, plus or minus, of it. But it was a very strong category for us in the first quarter.

Gregory W. Becker

On an average basis, Steve, I think period -- at period end, actually, there wasn't a dramatic change at period end. But it was -- we had kind of a run-up at the end of the year and then the average was held for quite a while, and then it dropped back down at period end.

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

Okay, that's helpful. And then, was there anything unusual driving the loan portfolio yield down so much this quarter?

Michael R. Descheneaux

So that would have been primarily a mix item. So again, when you look at capital call lines of credit, which tends to be based off prime in this environment, it's prime minus, so you're looking at 3.25% and less than -- on 3%, somewhere in that area. And if we're looking at loan yields, the previous quarter is around 5.70% area. Obviously, that's going to bring it down.

Operator

And your next question comes from the line of Julianna Balicka with KBW.

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

In terms of the warrants that you have in FireEye, you stated before that your general practice is to sell your equity holdings as soon as practical. So are there -- I mean, I know some of the shares held by the funds, you don't have control over. But in terms of your warrants, are those free and clear and available-for-sale? And how should we expect about your actual realization of an exiting of the FireEye position?

Michael R. Descheneaux

So that's right. In general, we do try to exit when it's reasonably possible. What happens is when you exercise warrants, you actually have to wait for the delivery of the shares, which can take some time as well, too. And then also, before you sell them, you got to go through a process or governance process as well internally to make sure that you're free and clear and there's no inside information, for example, or things that prevent you from selling. So there is a process and a governance process that you do need to follow before you can actually sell. So it does take some time, a couple of weeks to actually get out of the position.

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

And is it reasonable to think that by the end of the second quarter, you may very well have sold your shareholding? Or is this something that will take like a couple of quarters?

Michael R. Descheneaux

So with respect to the warrants, yes, you are correct. We -- it would be reasonable to assume we would sell the warrants during this quarter.

Operator

And there are no further questions. I will now turn the call over to your, CEO, Greg Becker.

Gregory W. Becker

Great, thanks. So again, as you heard on the call, we are off to a great start so far in 2014. And as Mike highlighted, we have increased guidance in several fronts due to our belief that, both from our performance in the market, we're trending in a good direction, better direction even than we expected.

So I just want to thank all our clients for being part of SVB's platform, our shareholders for trusting us and our employees for making it all happen. So thanks to everyone for joining us, and have a great rest of '14. See you.

Operator

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

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SVB Financial Group (SIVB): Q1 EPS of $1.95 beats by $0.41.