SVB Financial Group's (SIVB) CEO Greg Becker on Q4 2015 Results - Earnings Call Transcript

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SVB Financial Group (NASDAQ:SIVB)

Q4 2015 Results Earnings Conference Call

January 21, 2016 06:00 PM ET

Executives

Meghan O'Leary - Director of Investor Relations

Greg Becker - President and CEO

Mike Descheneaux - CFO

Marc Cadieux - Chief Credit Officer

Analysts

Ken Zerbe - Morgan Stanley

Ebrahim Poonawalla - Merrill Lynch

Steven Alexopoulos - JPMorgan

Jared Shaw - Wells Fargo

Aaron Deer - Sandler O'Neill

Joe Morford - RBC

Juliana Balicka - KBW

John Pancari - Evercore

Geoffrey Elliott - Autonomous Research

Brett Rabatin - Piper Jaffray

Gary Tenner - D.A. Davidson

Operator

Welcome to the SVB Financial Group Q4 2015 Earnings Call. My name is Adriane, and I will be your operator for today's call. [Operator Instructions] Please note this conference is being recorded.

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

Meghan O'Leary

Thank you, Adriane, and thanks everyone for joining us today. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux, are here to talk about our fourth quarter and full year 2015 financial results and our 2016 outlook. As usual, they'll be joined by other members of management for the Q&A. Our current earnings release is available on the Investor Relations section of our website at svb.com.

We'll be making some forward-looking statements during this call and I want you to warn you that actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information, which applies equally to statements made in the call. In addition, some of our discussion may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release.

We'll limit the call, including Q&A, to an hour. Follow on questions are all right but keep them to a minimum. And with that, I will turn the call over to Greg Becker.

Greg Becker

Thank you, Meghan, and thanks all of you for joining us today. The fourth quarter of 2015 was a strong finish to a great year. We delivered earnings per share of $1.68 and net income of $88 million marked by healthy activity across the business. A growing balance sheet, strong core fee income and stable credit quality. Mike will go into details of our financial performance in a few minutes.

For the full year 2015 we delivered earnings per share of $6.62 versus $5.31 in 2014 and we grew net income by 30% to $344 million. These results attest to the ongoing strength of the innovation economy and our ability to execute on our growth strategy despite interest rate, market and competitive challenges. I'm extremely proud of what we accomplished in 2015.

I'd like to start by giving you some of our year-over-year financial highlights. We grew average loans by 28% to $14.8 billion, exceeding our original guidance of percentage growth in the mid 20s. We grew average total client funds that is deposits plus off balance sheet client investments by 29% to $75.5 billion. We increased net interest income by 18% in line with our guidance and it reached $1 billion in net interest income for the first time in our history. We maintained solid credit quality as we said we would despite higher non-performing loans for the year. And although we exceeded our original expense guidance due to higher incentive compensation, if you back up the amount of incentive compensation related to outperformance our expense growth was in line with our guidance for the year. Finally we delivered a healthy return average equity of 11.18% with almost no help from rates.

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

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

Turning to our global efforts, we continued to make meaningful progress in the execution of our global growth strategy. We grew international loan balances to just over $1.3 billion on a period end basis, with the bulk of this growth in the U.K. where period end loans increased by 48% in 2015. We continued to add clients at a robust pace in our international offices, pulling our total international client account by 33%. Our China joint venture bank achieved a critical long-term milestone in receiving its local currency license. These joint efforts of strong client acquisition and global expansion helped drive higher fee income in 2015. Foreign exchange was particularly strong posting a 21% increase in revenues which reached $87 million in 2015.

Payments were another bright spot. We saw a significant growth in credit card revenue, which grew by 36% to $57 million. We also continued to make progress in our strategy of providing banking infrastructure services to our in-check and payment related clients. We had a 300% increase in payments processed on our direct transmission platform Transact Gateway and processed more than $21 billion of payments for our clients. Total payment related revenue including credit cards, wires, automated clearing house and merchant services reached $85 million in 2015 a 29% increase over 2014.

Another area of momentum was in our digital and mobile delivery capabilities, which we enhanced to increase our efficiency and simplified banking for our clients. We saw strong client adoption of our digital offerings with 95% of all new SVB deposit accounts being opened through our digital on boarding platform in 2015. Adoption of our mobile banking app increased as well. We processed $1.5 billion in mobile deposits in 2015 and active users increased to 58% across the bank. We achieved this momentum in 2015 to our ability to focus and execute. At the same time as the banker choice for fast growth innovation companies and our investors, we benefitted from the health of our clients and our markets.

In 2015 our gains from VC and PE related investments and loans totaled more than $128 million. And although VC exits were down from 2014, which was one of the best year's on recent record venture investments were up and the overall activity remained strong. In summary 2015 was an exceptional year across the board and we finished the year with strong momentum for 2016.

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

Mike will go into details of our full year 2016 financial outlook in a moment and I am going to steal some of his thunder and tell you that based on our early momentum and our expectations going into this year we are increasing our 2016 guidance for loans, net interest income, net interest margin and core fee income. Our focus in 2016 will remain on the three key initiatives I told you about last quarter.

First, continuing to enhance our brand and reputation through differentiations, service, added value and our digital client experience. Second, ongoing investment in long-term growth that includes developing and hiring the right talent and ensuring we have the systems, solutions and infrastructure to support scalable growth. And third, continued strong risk management, which includes a focus on stable credit quality and enhancement of our risk management and compliance infrastructure as we grow towards $50 billion.

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

In closing, we are optimistic about the year ahead based on the performance we've seen from our clients and their industries and our expectations that we'll continue to execute on our strategy. Our innovation clients continue to drive their business forward regardless of the Unicorn flu that has been going around. Our long experience, relationships and insights into the markets we serve gives us access to many of the best companies and investors and enables us to deliver strong growth without compromising on quality.

Our unique culture and place in innovation economy enable us to attract and retain the best employees, whose primary focus is increasing our clients' probability of success. We've consistently demonstrated our ability to execute effectively under a variety of market conditions and regardless of market conditions we believe that the innovation space, as the engine that drives the broader economy, is the best possible place to be for the long-term. Thank you.

And now I'll turn the call over to our CFO, Mike Descheneaux.

Mike Descheneaux

Good afternoon, everyone. As Greg commented, we had a strong quarter marked by continued healthy balance sheet growth, strong core fee income and stable credit quality. The fourth quarter capped off a year where we continue to hit all time highs in most financial metrics and we believe we're well positioned for 2016. I would like to highlight a few items in my comments today, which I'll cover in detail shortly.

First, exceptional loan growth. Second, strong growth in total client funds, both on and off balance sheet. Third, higher net interest income and a slightly higher net interest margin. Fourth, stable credit quality as we expected. Fifth, higher core fee income with continued momentum in foreign exchange and credit cards and payments. And sixth, higher expenses, primarily due to higher incentive compensation given our strong performance. Additionally, I'll discuss our capital levels, asset growth and provide details and updates on our full outlook for 2016.

Let us start with loans. Average loans grew by $829 million or 5.6% to $15.7 billion. Growth was driven primarily by capital call lines, to establish private equity clients although we saw healthy growth across the portfolio among new and existing clients. Period-end loans grew by $1.4 billion to $16.7 billion, primarily due to significant year end activity among our private equity clients, much of which occurred in the last month of the quarter. This provides us with a strong start to the year in terms of average balances. Although we could see some run off of period-end balances in the first half of the year as we did in 2015. As always we remain focused on high quality, smart loan growth with appropriate pricing, size and structure relative to our risk appetite and cost of capital. Nevertheless the strong activity we're seeing from high quality private equity clients and across our portfolio is providing upside to our targeted average loan growth range of $1.5 billion to $2 billion annually as well as to our original 2016 loan outlook which I will discuss shortly.

Now let us move to total client funds, that is combined on-balance sheet deposits and off-balance sheet client investment funds. Average total client funds grew by $3 billion or 3.8% to $82.3 billion, driven equally by deposits and client investment funds and marked by a significant increase in client activity during December. Growth in both deposits and off-balance sheet client investment funds was driven by end of year activity among venture capital and private equity funds related to distributions, new funding rounds for early stage clients and new client acquisitions.

Average on-balance sheet deposits grew by $1.5 billion or 4.1% to $38.9 billion and off-balance sheet client investment funds grew by $1.5 billion or 3.5% to $43.4 billion. Period-end total client funds grew by $2.5 billion or 3.1%, reflecting deposit growth of $2.1 billion or 5.7% and growth in client investment funds of $425 million or 1% to $44 billion.

Turning to net interest income and our net interest margin. Net interest income increased by $14.4 million or 5.6% to $269 million in the fourth quarter. This increase was due primarily to higher loan growth. Interest income from loans increased by $10.4 million due to higher average loan balances. Loan yields increased modestly by 2 basis points to 4.67% primarily due to fees from early loan payoffs in the fourth quarter. Average fixed income securities increased by $621 million or 2.7% to $23.5 billion due to strong deposit growth. Yields on the overall portfolio increased by 1 basis point to 1.55% primarily as a result of lower premium amortization expense during the quarter due to higher market rates.

New purchases of fixed income securities which totaled $2.5 billion overall were primarily in U.S. Treasury and Ginnie Mae securities with an overall average blended yield of 1.52%. Approximately $800 million of purchases were the result of portfolio cash flow reinvestments during the quarter. Portfolio duration in the fourth quarter remained consistent at 3.7 years. Our net interest margin increased by 4 basis points to 2.54% primarily due to growth in loans.

Now let us move to credit quality. Our credit quality remained stable overall and is performing as expected. Here are the highlights. We recorded a loan loss provision of $31.3 million in the fourth quarter compared to $33.4 million in the third quarter. This amount reflected $13.1 million due to loan growth, $9.7 million related to charge-offs and $6.2 million of additional specific reserves on non-accrual loans. Non-performing loans increased by $7.9 million to $123.4 million driven primarily by one software loan. However, non-performing loans as a percentage of total loans decreased by 2 basis points to 73 basis points. Criticized loan balances remained consistent at 5.5% of total gross loans and remain below our 5 year average.

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

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

Core fee income was $72.7 million, an increase of $4.3 million or 6.3% over Q3. This increase was driven by record high foreign exchange revenues of $24 million compared to $23 million in Q3, reflecting higher volumes, and record high credit card and payment revenues of $15.8 million compared to $14.5 million in Q3, reflecting the ongoing implementation of our payment strategy. We had warrant gains of $16.4 million compared to $10.7 million in the third quarter, primarily driven by evaluation gains related to follow on funding rounds. Private equity and venture capital related investment gains net of non-controlling interest were $9.6 million compared to $12.7 million in the third quarter. These gains reflect the slower pace of exits during the quarter and included $6.5 million of gains in our strategic and other investments portfolio and $2.2 million of valuation gains from our managed funds of funds.

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

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

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

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

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

We are raising our preliminary net interest margin outlook by 10 basis points to a range of between 2.5% and 2.7%, again this reflects the impact of the rate hike in December. We expect credit quality to remain comparable to 2015 levels, specifically we expect net loan charge offs of between 30 basis points and 50 basis points of average total gross loans. We expect non-performing loans of between 60 basis points and 100 basis points of total gross loans. And we expect our allowance for loan losses for performing loans to be comparable to 2015 levels.

We expect core fee income to increase at a percentage rate in the mid 20s, an increase from our preliminary outlook of mid teens growth. This primarily reflects the impact of December's rate increase on our client investment fees and our improved outlook for foreign exchange and card fees. We expect noninterest expense to increase at a percentage rate in the high single digits consistent with our preliminary outlook. Keep in mind that if we outperformed on our financial metrics we could see higher incentive compensation, which would drive higher expense growth.

Finally, while we do not provide an outlook for warrants and investment gains, venture investment levels, trends and funding amounts and the pace of M&A and IPOs in 2016 will all remain key factors to our overall earnings performance.

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

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

Question-and-Answer Session

Operator

Thank you. Will now began the question-and-answer session. [Operator Instructions] And we have a question from Ken Zerbe from Morgan Stanley. Please go ahead.

Ken Zerbe

Excellent. Good afternoon, guys. My first question, I was hoping to talk a little bit more about the loan growth outlook or more specifically what has changed in the outlook? Just looking at your preliminary guidance it seems that there is a lot of competition, you were seeing the right pricing. Why is your loan growth outlook stronger now than it was say a couple of months ago?

Greg Becker

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

Ken Zerbe

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

Greg Becker

This is Greg again. First of all it has been a short period of time and I'll give you a couple of data points right. So just over the last week as this volatility has been obviously very active and we have also experienced it, the number of rounds that we have seen closed that have been in the $25 million to $50 million to $75 million levels of activity, actually is consistent with what we saw in the third quarter and the fourth quarter of last year, although it's just a much very short time period. So that's a very recent data point kind of to give you an example. We haven't seen any slowdown, that's number one. Number two is, as we spend time talking to investors and to capitalists, they have raised funds. But last year was a good fund raising year and money is coming in from a variety of different areas and the number of innovation companies is very broad. So we do still see that the activity levels although they might slow down are still going to be very healthy, that's kind of a broad umbrella. The second piece is a lot of the rounds that were the big fundings last year were to these larger and later stage companies. And these are companies that historically we would have seen working capital borrowings, we would have seen acquisition financing, we would have seen other sort of borrowings that we didn't see because there was so much equity capital going in. So from that standpoint we believe utilization could actually increase in some of the working capital facilities, as these companies get closer to profitability and are doing traditional working capital financing and not relying on equity. So those are kind of the reasons that we look at why we are still optimistic about loan growth in 2016.

Ken Zerbe

Great. All right, thank you very much.

Operator

The next question comes from Ebrahim Poonawalla from Merrill Lynch. Please go ahead.

Ebrahim Poonawalla

I think the first question is going to Mike's comments on capital. If you can sort of help us think about within the capital stack where your preference is within the common equity in '14, assuming that last year, if you do decide to raise some capital, if there is a preference common versus debt or preferred?

Mike Descheneaux

I think which you are referring to is that our Tier 1 leverage ratio is getting closer to the lower end of our range and whether or not we are contemplating to raise capital or not and so let me just first fill it out. Our intensions right now are to do everything we can to avoid going to the capital markets. But as you know our deposit franchise is extremely strong and if it continues to grow, yes we may have to consider that. The answer to your question about whether it's a common or whether it's a preferred or whether it's debt, I mean obviously it just depends on the stage of the market when you go to. But generally I would probably say if we had to hypothetically and it's a big hypothetical would probably be -- as you have seen we have already demonstrated typically common but certainly the preferreds are always open. The route for debt is certainly available but not necessary to the certain extent because you are always mindful of your double leverage ratio between the whole co and the bank co again. That's based on the presumption, again big presumption that we would raise debt at whole co and [down, come] to the bank to increase the capital ratios. But again, Ebrahim, even with all of this is hypothetical they are still a number of levers that we are focused on to making sure our clients are getting their deposit into the right off-balance sheet products. There is also the potential with the recent rate increase and also potential profits going forward in the rate increases that could perhaps make those discussions much easier to actually have the clients to get them more interested. That, hey, look you can actually get a more appropriate yield off of the balance sheet which again is where your deposit probably should be in the first place. So there are still a number of things we would do before we would do that capital markets route.

Ebrahim Poonawalla

Very clear. And in spite of that did I hear you correctly that as you get closer to $50 billion mix you passively could potentially hit at in the 2016, would you look to manage the asset growth to sort of delay crossing the $50 billion mark?

Mike Descheneaux

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

Greg Becker

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

Ebrahim Poonawalla

Understood. And if I could ask a second question just in terms of your NPA guidance. You are at 75 basis points given the range of 0.75% to 1%. I mean from the outside it seems like there has been a lot of weakness going back to some your response on loan growth over the last six to nine months, when I look at some of those VC funding in fourth quarter, tech IPOs. What gives you confidence and I recognize Greg you are one of the first guys to talk about potential bubble in some of the private markets. But what gives you confidence that charge off and NPAs will be manageable despite really potentially some more weakness as we go through the next few months?

Greg Becker

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

Marc Cadieux

The only thing I would add to that is in addition to credit quality being stable throughout '15 and in the second half of the year. One of the things that we did not see was anything out of pattern in connection with investor behavior. But we did see one thing that was encouraging in terms of the companies themselves and that was so to speak, an increasing number of companies starting to prioritize positive cash flow over cash burn for revenue growth. Putting back together with what on average in our borrowing client base would be a fairly robust balance sheet liquidity. The combination of prioritizing positive cash flow and having more cash on the balance sheet than usual given the fund raising environment, yes, I think helps give me some comfort that we're not going to see anything that would hopefully impact or change our guidance for credit quality. And then I think just going back to buyouts, because that really was the source of the non-performing loan increase in the main in 2015. Again we didn't add anything new there in the fourth quarter and credit quality in that segment of the portfolio looked stable overall.

Ebrahim Poonawalla

Got it. Thanks for taking my questions.

Operator

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

Steven Alexopoulos

Just on credit first. With the handful of charge offs in the early stage portfolio, can you give us color in terms of what you're seeing on the funding side and the ability to really [stage] clients to go out and get that next round to pay off the loan?

Greg Becker

This is Greg. I'll start and then again Mike will add to it. You could look at the venture capital numbers in the fourth quarter, roughly $11 billion, depends on what data source you look from. The number was $58 billion for the year, the $44 billion annualized level, we look at that and that's a more normal level. I wouldn't be surprised, if you kind of see that number carry forward into 2016 on a quarterly basis. So that's still a healthy number, number one. Number two, let's remember there is other sources of capital and there is still a lot of money around looking for the innovation autonomy. There is still more corporate venturing than we've ever had and I believe this time, I have spent the time with several of them. And they are not -- their approach isn't a short-term from my standpoint, go in and try to make some money, it's more strategic and here is what's different about it this time compared to last time. Companies have to look at investing in new disruptive technologies to protect their business and to grow their business more than ever. And so therefore it's not -- and from my view its optional as it was historically whether they invest or not in innovation and new technologies. That's a very different set of circumstances than we had before when you look at the Asia market. So there is a broader source of capital than we had before, still a healthy number in the fourth quarter of venture capital. There was a strong year of fund raising last year for venture capital firms. And then last point, which is your first question is, did we see any change in behavior in the fourth quarter and the answer was no we didn't.

Steven Alexopoulos

All right, that's very helpful, appreciate that. Just to change gears for a second on off balance sheet client funds. Can you give us a sense how much did your revenue from your off balance sheet funds increase by or what should have increased by tied to the December hike? I imagine they was a little bit more there. And in terms of the [rate field] alternatives that you are now able to offer does that change enough to make it easier for you guys to redirect funds off balance sheet?

Greg Becker

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

Steven Alexopoulos

Okay that's helpful. I hope you don't mind, I am going to try and sneak one more in. This is the valuation we have, we don't see that often for your stock right. Will you guys consider using any cash at the holding company to buy back stock here?

Mike Descheneaux

We've been talking about the Tier 1 leverage ratio, albeit at the bank level at the holding company and as we've talked about at least to the bank level we want to tell you that's 7% to 8% and similarly if you can kind of a corresponding proportion for the holding companies as well too. I just don't think we are in a position right now that we would do that and despite the fact that we all believe our stock price looks attractive. We continue to have strong growth that we got to continue to redeploy our growth in capital, redeploy the backend and investing into the bank to continue to grow. So at this time I don't think we would be in a position to do that.

Steven Alexopoulos

Okay. Thanks for all the color guys.

Operator

The next question comes from Jared Shaw from Wells Fargo. Please go ahead.

Jared Shaw

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

Mike Descheneaux

Yes. I mean, generally as you probably heard us talk about really the next which in dates would be in 2017 ourselves, so there is obviously some time left. We here now have stopped making any new commitments into that area. So what's -- over time you are going to see those balances to continue to come down. Now when we get to 2017 depending on where our levels at we would we still need to bring down those levels over the investments, we would look to certainly request for an extension but again at this point we still have some time away before that time comes.

Jared Shaw

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

Marc Cadieux

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

Jared Shaw

Okay. So there wasn't any real big move in that as you went through the fourth quarter?

Mike Descheneaux

Generally using wide percentage ranges generally no.

Jared Shaw

Okay, great. Thank you.

Operator

And the next question comes from Aaron Deer from Sandler O'Neill. Please go ahead.

Aaron Deer

Hi. Good afternoon everyone. You guys are obviously disinclined to give a guidance on the warrant and equity gains or potential for those in a way. But I guess for those [listening] outside, you guys have the best visibility in terms of what your holdings are and are seeing in a very current activity in terms of up and down rounds in funding. Is there any way that just to help to give us something that work with? You can give us a sense also in terms of the direction and magnitude of what you would expect for equity market gains in 2016?

Greg Becker

Aaron. This is Greg. I'll start and so we don't give guidance on it. But let me give you [indiscernible]. One is that, you said that we have a good visibility to up rounds and down rounds and again what we saw through the fourth quarter was no, I'll call meaningful, and I honestly can't even think of any or many down rounds that we saw. Do we think that's going to change, so that's going to change. But when you look at it, the market -- these companies continue to still perform, it's a broad statement, perform at a very high level, number one. Number two, going to back to what Mike said, they're refocusing their efforts on growing and becoming cash flow positive. We think those are good signs and there is availability of capital. So we don't believe it's going to be a complete shrinking of capital in 2016. So that down rounds are going to be the norm but of course it will happen. So we expect it to be lower than last year, absolutely, but we're still feeling okay about the outlook. And the last point I'd make is, one thing I'd pay attention to is when you look at our filings and look at the number of warrants that we actually have. We continue to take warrants actually at a faster pace and it has been that way for the last few years and that gives you a sign and it may not be for this year because that's what difficult to predict. But the trend is that we continue to take warrants and if there are down rounds that's going to be a good opportunity for us to price rounds at warrants at a lower level.

Mike Descheneaux

The one thing Aaron companies don't add on is as you know probably, generally you have to monitor and follow what's the state of the IPO activity or M&A activity. Those two things are continued to be strong going in 2017 particularly M&A then you could likely see some nice gains there. Obviously continue to watch the stock market and the evaluations there as well too, look for tax spending as well too. But sometimes unfortunately we get some bad press or headlines that all the IPO activity has slowed down or ended, but the reality is a lot of the exits from whether its warrants or in investment gains really comes from M&A and again that has demonstrated over the past year that's pretty healthy and is likely probably to continue at least a healthy clip.

Greg Becker

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

Aaron Deer

Thanks for the additional color. And then for my follow-on, I am just curious to know kind of what you've been seeing in the first few weeks of the year in terms of any pay downs? Obviously there is a big run up at the end of the year and have seen any of those pay down early in the first quarter just curious to know what you might have seen there?

Mike Descheneaux

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

Aaron Deer

Great. Thank you.

Operator

The next question comes from Joe Morford from RBC. Please go ahead.

Joe Morford

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

Mike Descheneaux

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

Greg Becker

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

Joe Morford

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

Greg Becker

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

Joe Morford

Okay, thank you so much.

Operator

The next question comes from Juliana Balicka from KBW. Please go ahead.

Juliana Balicka

Good afternoon. I wanted to follow up on a couple of the topics that have been raised. One, Aaron brought up the outflows in terms of the loan, someone has ask about the seasonal [indiscernible] of deposits, what should occur in next quarter given the short-term volumes that you put on the balance sheet at the very end of the quarter, has that already flown out or [indiscernible] timing, should we expecting for that?

Mike Descheneaux

So this is Mike. We don't really see, I'd say characterization of seasonal flow deposits for us. I mean, as you've seen it's pretty much been consistent growth for last several years in deposits, so at this juncture, at this point, we've really don't anticipate any major change in that. Now again as we alluded to, we've talked about how maybe perhaps the higher interest rates might be able to help us move some clients deposit parts to off balance sheet. But in general as Greg was also telling, the company's formation has continued to be healthy and some of the funding rounds were healthy even getting towards the end of December as well too. So we don't really see any sort of pattern at the moment, in terms of deposit outflows related in the seasonal items.

Juliana Balicka

And borrowing that you have after year end on December 31 to short-term volumes that are already gone?

Mike Descheneaux

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

Juliana Balicka

Okay. And then also -- I just want to ask in terms of the capital call on growth that you've been experiencing in a VC, PE lines could you break up between VC and PE for us and also are you seeing an incremental trend in terms of latter stage PEs maybe those are focused on [other trust] companies or anything to comment on the mix between those two?

Greg Becker

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

Mike Descheneaux

One thing I would add is that our PE clients invest across multiple asset classes. They are actually very few that are focusing on distressed assets.

Juliana Balicka

Thank you very much.

Operator

The next question is comes from John Pancari from Evercore. Please go ahead.

John Pancari

Good afternoon. On credit, can you give us just a little bit more color on the early stage credit that hit NPLs and on that point I think Marc you said that there was one software credit that hit NPLs but I think in Page 5 of your release you indicate that there is two loans one software, one Internet. So I just wanted you to reconcile that as well, thanks.

Mike Descheneaux

So, maybe first starting with the one significant addition to NPLs and what was responsible for the $7.9 million increase, it was actually a later stage software company that's encountered some operating performance challenges. But to your point not related to early stage. And then I think the comment might be in thinking about what was in the release. The charge offs in the fourth quarter, was primarily driven by three loans, all of them early stage, two in the software space, one in life science. Is that you're alluded to?

John Pancari

While I am looking at Page 5, you stated the new nonaccrual loans included $12.5 million from two early stage clients in software and internet loan portfolio.

Greg Becker

So, we're looking at that.

Marc Cadieux

So that references, seem to be related to charge offs but as I mentioned, it says gross loan charge-offs, total $11.6 million including $3.8 million from the two early stage clients that are our software segment as I've mentioned and then $3.1 million early stage loan loss from the life science and healthcare portfolio.

John Pancari

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

Greg Becker

I'm sorry. So there was the first software company that I mentioned, again the one that was big driver. That is one of the drivers of the increase in specific reserves. The other was a early stage loan, similarly in software space. Hoping that answered your question.

John Pancari

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

Marc Cadieux

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

John Pancari

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

Mike Descheneaux

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

John Pancari

Okay. So not materially different.

Mike Descheneaux

That will be directionally consistent. Yes.

John Pancari

And then lastly on the drivers of loan growth, I just wanted if you could kind of give us a bit more color on '16. I mean is it fair to assume that the bulk of the loan growth is totally concentrated in the capital call lines, in terms of how you are expecting it or can you just talk about the distribution across the later stage versus capital call versus early stage and buyout?

Greg Becker

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

John Pancari

Okay. Thank you.

Meghan O'Leary

I am just going to interject here, we're at 4 O'clock but we are going to keep going and get your questions answered, so keep on asking.

Operator

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

Geoffrey Elliott

Hello, thank you for taking the question. How do you stress the portfolio for an environment where financing just dries up for VC companies and what does perhaps stress testing show you?

Greg Becker

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

Geoffrey Elliott

And could you just remind us the kind of breakdown of the portfolio into pre-revenue, pre-profit and then profitable company as well? What does that look like?

Marc Cadieux

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

Geoffrey Elliott

Okay. Thank you very much.

Operator

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

Brett Rabatin

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

Mike Descheneaux

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

Operator

And the next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner

Thanks. Two quick questions. One I just wanted you to tell us what the average new loan yield was for the fourth quarter?

Mike Descheneaux

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

Gary Tenner

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

Greg Becker

This is Greg. There is certainly two aspects of it. One is the last two years in venture capital activity. Although, we've had a robust growth in venture capital activity in the U.S., the growth in venture capital numbers actually is even stronger on a percentage growth in '14 and '15. So as we look at that market we do expect a pull back there, but potentially even greater than what we see in the U.S.. That being said, in the innovation economy, in China continues to be on an uptick. And you think about it, what's happening in China actually ends up not being negative for the innovation economy. So China has got two different markets, they have innovation economy and the old economy. Old economy is one that's struggling and they've got to figure how to balance that. So which means that more than likely, they're going to reemphasize or increase their emphasis on innovation economy which from our standpoint bodes well. And actually would may over time accelerate that. So we feel good about what we're looking at in China about the outlook. But remember as we said in the last call, this is a long-term strategy. So you're not going to see very much change in the next 12 months, 18 months with our financials from any real impact on China.

Gary Tenner

Right. Thanks for the color.

Operator

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

Greg Becker

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

With that have a great 2016. Thanks, everyone.

Operator

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

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