SVB Financial Group Q4 2007 Earnings Call Transcript

Feb.18.08 | About: SVB Financial (SIVB)

SVB Financial Group (NASDAQ:SIVB)

Q4 2007 Earnings Call

January 24, 2008 5:00 pm ET


Meghan O’Leary - Investor Relations

Ken Wilcox - President and Chief Executive Officer

Michael Descheneaux - Chief Financial Officer

Dave Jones, Chief Credit Officer

Greg Becker - Chief Operating Officer, Silicon Valley Bank

Marc Verissimo - Chief Strategy Officer


Joe Morford -RBC Capital Markets

Erika Penala - Merrill Lynch

Andrea Jao - Lehman Brothers

Christopher Nolan - Oppenheimer

Fred Cannon - KBW


I would like to welcome everyone to the SVB Financial Group’s fourth quarter 2007 earnings conference call. (Operator Instructions) Ms O’Leary, you may begin your conference.

Meghan O’Leary

Today, Ken Wilcox, our President and CEO and Michael Descheneaux, our Chief Financial Officer, will discuss SVB Financial Group’s fourth quarter and year-end 2007 performance and financial results. Following this presentation, members of our management team will be available to take your questions. I’d like to start the meeting by reading the Safe Harbor disclosure.

This presentation contains forward-looking statements within the meaning of the federal securities laws including, without limitation, financial guidance for the first quarter and full year 2008. Forward-looking statements are just statements that are not historical facts. Such statements are just predictions and actual events or results may differ materially.

The information about factors that could cause actual results to differ materially from those contained in our forward-looking statements is provided in our press release and our last filed Form 10-Q. The forward-looking statements are made as of the date of broadcast and the company undertakes no obligation to update such forward-looking statements.

This presentation may also contain references to non-GAAP financial measures. The presentation of and reconciliation to the most directly comparable GAAP financial measure can be found in our press release. Now I’d like to turn the call over to Ken Wilcox.

Ken Wilcox

Thank you, Meghan. Good afternoon to all and thank you all for joining us. By now you should have seen the press release and as you can see we had another excellent quarter to cap off an outstanding year. Not many banks can say that about 2007.

We delivered strong earnings per share of $0.96 for the quarter and $3.37 for the year. That’s an increase of 42% over 2006. We realized net income of $34.3 million in the fourth quarter and $123.6 million for the full year 2007. That’s a 38% increase over 2006.

Our performance on the metrics by which we have guided you throughout 2007 has been exactly on target in most cases. Most notably we met our targets for loan growth in excess of 20% and client investment fund growth in the high teens. We expected flat deposit levels and did far better than our expectations.

We maintained high credit quality, saw solid fee income growth, and achieved a net interest margin that, while somewhat lower than in 2006, is still more than double that of most banks. And while non-interest expense was somewhat higher in 2007 than our target owing in large part to better-than-expected performance, we have nonetheless instituted meaningful discipline around expense control and improved our operating leverage.

We’ve had a number of other successes in the past year and I want to touch on just a few of them. We introduced two new products that garnered over $400 million in new deposits. We closed two new investment funds including one in India, growing our family of funds by over $300 million.

We built our fledgling valuation services company, SVB Analytics, into the de facto leader in that growing industry. And we successfully launched an initiative to increase the business we do with larger companies and private equity firms, capitalizing on the enhancements we’ve made to our product offering in recent years to drive revenue growth. We accomplished all of this and we did it during one of the worst years the financial services industry has had in recent times.

This was no accident. Our performance in 2007 was a result of our deliberate intention and discipline as embodied by five factors: one, people; two, the strength of the innovations sector; three, our growing fee-based business; four, a solid and strengthening expense culture, and five, our well-established culture of credit discipline.

Let’s start with people, specifically, the right people. We have taken pains in recent years to develop and recruit the very best people to assume key sales, support, and leadership roles across the company. The team we have at SVB today is the strongest team we’ve ever had and their efforts and abilities are what enable us to succeed.

Another factor in our success is the strength of the markets we serve, collectively known as the innovations sector. The innovations sector has shown itself over time to be strongly resilient to negative market conditions. In fact, although the US economy ended 2007 on the verge of a recession, venture investment in the US grew 8% during that time to $30 billion, despite turmoil in the markets.

That’s because venture capital firms are investing with a return horizon of eight to ten years so they are not necessarily inhibited by negative market cycles, especially in the short term. What’s more, venture firms raised far more money last year than they invested. As a result of this dynamic, we at SVB have typically had a steady stream of new clients and ready access to new client funds. Moving into 2008, we have that as well as the reassurance of ample dry powder.

Over the last few years we have parlayed this steady stream of emerging company clients and the changing needs of larger companies into a new, diversified income stream that constitutes an ever larger share of our revenues. That’s been another factor in our success. That preparation allowed us to grow volumes strongly across multiple business lines during the year that for most financial services companies was consumed with subprime issues.

And while Mike will give you the specifics on our outlook for 2008, I’ll tell you that we are forecasting continued volume growth in all the areas over which we have control; that is loans, deposits, and fee income.

As we’ve grown our income streams on both the non-interest and interest sides, we have also begun to improve our operating leverage through more effective expense control. We are justifiably proud of what we’ve accomplished here. In less than a year we’ve gone from having very few meaningful expense controls to creating a culture of cost control and efficiency.

Through our five initiatives of process improvement, a universal banking system, vendor management, multi-sourcing, and continual optimistic expense cutting, we’ve made tremendous progress toward our goal of reducing expense growth by half. We plan to maintain our focus on this goal in 2008.

Our credit culture is the last factor in our success I’d like to touch on. It’s a discipline we’ve built over time and our approach can be summed up in a few sentences. We lend to industries we know well. We have a deep understanding of the business models of our clients and the factors that drive their behavior.

We focused exclusively on a small number of industries and a large number of the people we work with we’ve worked with before. Our long experience through market cycles in our target markets allows us to differentiate between real and perceived risk. It’s a discipline, one we’ve learned the hard way and from which we do not deviate no matter how exciting the markets get.

And as our credit quality over the last decade demonstrates, this approach works. I know many of you were skeptical in February when we said we’d cut expense growth, increase deposits, and set and meet specifics performance metrics. But we did that and more in 2007.

Moving into 2008, we expect to continue to meet the commitments we’ve made to our stockholders, especially with regard to volume growth and operating leverage. We feel confident in our ability to do this because we have served our core industries for 25 years.

We’ve weathered market cycles with our venture and technology clients. And we’ve applied the lessons we learned from that experience to improving our focus and discipline and to being better at serving the innovations sector than any other company out there. And while other banks are distracted by credit quality issues, as we move into 2008, we are focused on growth and creating shareholder value.

We are in a strong position. We know exactly what we need to do in the coming year to accomplish our goals. From a broad economic perspective, the year ahead may be a difficult one for many people but we expect it will also be another good year for SVB. Thank you.

And now I will turn the call over to our Chief Financial Officer, Mike Descheneaux, who will discuss our fourth quarter and our 2007 results.

Michael Descheneaux

Thank you, Ken, and thank you everyone for joining us today as we discuss our fourth quarter and full year 2007 financial results and our outlook for 2008.

Despite challenges in the broader economy and significant interest rate cuts by the Federal Reserve, our earnings remain strong. As Ken noted we delivered diluted earnings per share of $0.96 and net income of $34.3 million in the fourth quarter.

For the full year 2007, diluted earnings per share were $3.37 and net income was $123.6 million, which includes a pre-tax charge of $17.2 million related to goodwill impairment in the third quarter. This represents an increase of $0.99 or 42% in earnings per share and $34.2 million or 38% in net income over 2006. We believe it is safe to say that very few financial institutions achieved such impressive results in 2007.

Overall our results for the fourth quarter in 2007 demonstrate the strength of our core markets. There are five areas I would like to highlight with respect to our fourth quarter 2007 results.

First, loans, we grew our average loan balances in Q4 3.8% or 16.1% annualized to $3.8 billion. For the full year 2007 we grew our average loan balances 22%. You’ll also note that our Q4 period end balances grew $330 million to $4.1 billion from Q3 levels.

Second, deposits, deposits were strong in Q4. We grew average deposits 6.9% or 30.6% annualized in Q4 to $4.2 billion. This increase resulted from elevated end-of-year activity among our private equity clients and the impact of two new deposit products we introduced in mid to late 2007. Our period end deposit balances at Q4 also increased significantly to $4.6 billion from $4 billion at the end of Q3.

Third, non-interest income, non-interest income remained at solid levels in Q4. We had great Q4 growth of $3.1 million or 11.7% in our core, fee-based products, which includes client investment fees, foreign exchange fees, deposit services, charges and letter of credit income.

Fourth, non-interest expense, our better than expected financial performance and unfunded loan growth caused non-interest expenses to be higher than expected in Q4. Specifically, we had higher than expected incentive compensation expenses and an increased provision for unfunded credit commitments related to strong growth.

Although we exceeded our 5% expense growth goal for the year, we are pleased that we improved our operating leverage from 61.6% in 2006 to 56.2% in 2007. We are committed to continued expense control and it will remain a high priority in 2008.

Fifth, credit quality, credit quality remained excellent Q4. We experienced low levels of net charge-offs, which totaled $2.9 million in Q4, comparable to Q3 levels. Our loan provision increased by $2.8 million compared to Q3 due to the increase in the size of our loan portfolio, not as a result of any credit issues.

Let’s discuss some specifics regarding our fourth quarter results. We increased our net interest income to $97.3 million in the fourth quarter compared to $95.7 million in the third quarter of 2007 despite the effect of the 100 basis point decrease in the Fed funds rate in 2007.

The rise in net interest income was primarily due to increased average loan balances, which we grew by $138 million during the fourth quarter. This growth was driven primarily by loans to our technology clients. Additionally, we benefited from an increase in loan prepayments in Q4 which added $2.3 million in loan fee income.

Our success in growing deposits also added to net interest income in Q4 by increasing short-term investment income and reducing our short-term borrowing needs and costs. Our net interest margin was 7.04% in the fourth quarter compared to 7.18% in the third quarter. Although our net interest margin is still roughly twice that of the average bank in the United States, we expect lower interest rates to reduce our net interest margin moving forward.

Let us turn our attention to deposits. We continue to make significant progress in growing our deposits. We grew average deposits by $270 million in the fourth quarter to $4.2 billion, which as I pointed out, reflects an increase of 6.9% or 30.6% annualized.

This increase reflects the impact of the money market deposit account for early stage companies we introduced in May and the Eurodollar Sweep product we rolled out at the end of October. Together, those two products added $190 million to average deposit balances in the fourth quarter.

Demand deposit balances also grew in the fourth quarter by $73 million or 2.6%, which represents annualized growth of 10.8%. For the entire year, average demand deposits grew $78 million or 2.8%. We are pleased with the success we have had in attracting new deposits to the balance sheet and look to further increases in 2008. Additionally, we expect to introduce at least two more new deposit products in 2008 to help us grow our deposit base.

Non-interest income decreased in the fourth quarter by $11.8 million to $53.2 million. At first glance this decrease may seem significant but when you consider non-interest income net of minority interest, you see that our non-interest income remained strong in the fourth quarter.

Although they are non-GAAP measures, we believe non-interest income net of minority interests and gains on investment securities, net of minority interests, are relevant to the understanding our results attributable to our ownership percentages.

As some of you may know, we recognize income and losses from funds where we own significantly less than 100%, usually between 5% and 10%. However, GAAP requires us to consolidate 100% of the funds results regardless of the size of our ownership. As a result, we have added disclosures in our press release that present non-interest income net of minority interests and gains on investment securities net of minority interests.

With this in mind, let us take a look at non-interest income net of minority interest, which is a substantial part of our earnings base. For the year 2007, we grew non-interest income, net of minority interest, including carried interest, by $52.1 million or 40% due to strong gains from warrants and investment securities and from our four remaining core, fee-based products, which grew by $18.7 million or 22%.

For the fourth quarter, non-interest income, net of minority interest, decreased $3.3 million to $49 million compared to $52.3 million in Q3. The decrease was due primarily to two items, a decrease in corporate finance fees, and a decrease in gains on investment securities net of minority interests.

Additionally, we had some notable increases in our fee-based products. First let me address the decreases. Corporate finance fees decreased $2.5 million in Q4 due primarily to the winding down of SVB Alliant activities. We expect to close all remaining SVB Alliant transactions in the first quarter of 2008. We expect activities related to winding down SVB Alliant to have a neutral to slightly positive impact on our net income in Q1 2008.

Gains on investment securities, net of minority interests, including carried interest, decreased $0.6 million in Q4 to $2.2 million compared to $2.8 million in Q3. Despite this decrease, it is important to note that we recorded net gains in six out of eight funds in Q4.

Now let us look at the positive results in non-interest income in Q4. Net gains on derivative instruments remained strong at $8.4 million in Q4 comparable to Q3 levels. Warrant gains were the largest component and were driven by strong M&A activity. Client investment fees increased by $900,000 to $14 million, and average client investment funds for the first time exceeded the $21 billion mark in the fourth quarter.

For the entire year 2007, client investment fees totaled $51.8 million representing growth of $7.4 million or 16.8%. This business has almost doubled in three years. Foreign exchange fees increased by $1.3 million to $8 million, thanks to continued demand from clients across the board.

Moving on to non-interest expense, non-interest expense increased slightly to $83.5 million in the fourth quarter from $83 million in the third quarter. As with non-interest income, an understanding of minority interest is important to assessing non-interest expense trends. Although we have funds in which we own significantly less than 100%, we are required to consolidate 100% of the expenses.

Let me reiterate that this is a non-GAAP measure. With that in mind in 2007 non-interest expense, net of minority interest, grew by $19.2 million to $335.8 million compared to $316.6 million in 2006. If you also exclude goodwill, the increase was $20.4 million or 6.8%.

In the fourth quarter, non-interest expense, net of minority interest, increased $700,000 to $81 million compared to $80.3 million in Q3. The increase in Q4, in part, reflects the costs of building new revenue streams and the systems investment required to improve our efficiency. It is also a result of our strong unfunded credit commitments.

There were three notable items in Q4. First, we recorded a provision for unfunded credit commitments of $1.6 million in Q4 compared to a reduction of $1 million in Q3. This represents an increase in expense of $2.6 million in Q4 and reflects growth of our unfunded credit commitments of $470 million. It does not have anything to do with credit-related issues.

Second, we had decreases in compensation and benefits costs of $4.3 million in Q4, largely due to reductions of headcount at SVB Alliant and lower incentive compensation costs, owing to our better than expecting performance.

Third, professional services expenses, and business development and travel cost increased by $2.4 million as a result of our continued expansion and fund raising activities, both domestically and globally. Additionally, we increased our activities related to our performance-improvement initiatives.

As you know, it is a balancing act to grow a business while limiting expense growth. We expect this process to be somewhat lumpy from time to time and that is what we saw in the fourth quarter.

Nevertheless, expense control and efficiency are top of mind as a result of our efforts in the past year. We are very pleased with our progress on the efficiency front so far and we will continue to focus on cost management as a means of increasing our operating leverage in 2008.

Next up is credit quality. We continue to maintain excellent credit quality and our low levels of net charge-offs reflect this. Net charge-offs increased only slightly in Q4 and represented only 28 basis points of total gross loans annualized compared to 24 basis points in Q3. Fourth-quarter gross charge-offs of $4.7 million were just slightly higher than third quarter charge-offs at $4.1 million. This level of gross charge-offs is well within our comfort zone.

Our total provision for loan losses of $6 million in Q4 reflects $3.1 million of provision primarily related to loan growth. In Q3, we recognize only $900,000 related to loan growth. As we said on our last conference call, we view non-performing loans as a meaningful indicator of credit quality. Non-performing loans at the end of the fourth quarter were $7.6 million compared to $9.9 million in the third quarter.

Now I’d like to move onto capital management, specifically share repurchases. We repurchased nearly one million shares of common stock during the fourth quarter, keeping up the high repurchase pace we set the third quarter. The aggregate cost of fourth quarter repurchases was $49.4 million. That brought us to a total of almost three million shares repurchased during 2007, at an aggregate cost of $147 million.

I would like to point out that this is the largest number of shares SVB has repurchased in one year since 2003 when we bought back shares in conjunction with the issuance of our contingently convertible debt.

Our ratio of tangible common equity to tangible assets currently stands at 10.1% and we are working to achieve our long-term target ratio of 8.5%. With respect to timing, we are targeting a ratio of 9% by the end of 2008. This of course is dependent on the state of the US and world economies. We will continue to work towards this goal taking into account the stability of the capital markets, the needs of the business, and the appropriate use of financial instruments at our disposal.

Let us turn to our outlook for 2008. As in 2007, our 2008 outlook reflects our expectations for the full year 2008 versus the full year 2007. Although we will revisit and update our outlook as appropriate in our upcoming quarterly conference calls, it is an annual outlook.

For the year ending December 31, 2008, we expect that average loan balances will increase at a percentage rate in the low to mid-teens. Average deposit balances will grow at a low double-digit percentage rate with a majority of the growth coming from interest-bearing deposits.

Average off balance sheet client fund balances will grow at a percentage rate in the low-teens. Net interest margin will decline in 2008 based on expected decreases in Federal Reserve rates as well as recent decreases totaling 175 basis points. Our rate outlook is based on the Federal funds 30-day forward curve.

Fees or deposit services, letters of credit, and foreign exchange and aggregate will grow at a percentage rate in the mid-teens. Client investment fees will grow at a percentage rate in the low-teens. The allowance for loan losses as a percentage of gross loans will remain at about the same percentage rate for 2007. Finally non-interest expense excluding expenses related to minority interest and goodwill impairment will increase at a mid-single-digit percentage rate.

Before moving to the question-and-answer session I would like to reiterate the following points. Our business remains strong. As we have said before and I believe it bears repeating, our business model and credit discipline have protected us thus far from any direct exposure to credit problems associated with subprime loans, or the housing industry.

We have a strong management team focused on growing our business. The absence in our portfolio of the kinds of credit issues that affect other banks has allowed us to continue serving our clients, developing new products, and delivering strong financial performance. We intend to continue that focus.

Our non-interest income revenue streams are robust. While interest rate cuts affect net interest income, they do not take away our ability to maintain strong non-interest revenue streams and create new ones. We continue to benefit from healthy non-interest income, which helps to lessen the impact of rate cuts on net income.

Finally, I speak for the entire management team at SVB when I say that the efforts of SVB employees are wholly responsible for the outstanding year we have had in 2007. I want to thank them for their continued and successful efforts on behalf of SVB.

This concludes the review of our 2007 fourth-quarter and full-year results. With that, I would like to ask the operator to open the call for questions. Thank you.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Joe Morford -RBC Capital Markets.

Joe Morford -RBC Capital Markets

Loan growth has been pretty broad-based and strong in the low 20% range on average last couple quarters and the guidance is for kind of low to mid-teens. And I was just curious, what the kind of thought process is behind that? Is it just kind of growing off of a bigger base, taking into account the softening in the economy, just any color you could provide would be helpful?

Dave Jones

Joe, it is a recognition of the law of large numbers and it becomes increasingly difficult to maintain the level of production that we’ve had of recent. It is also a certain amount of conservatism, uncertain about what the market demand for loans will be.

So our interest is great, but our interest may be suppressed by the market demand. And as has been the case in the past, we reserve the right to update our forecast on a quarterly basis going forward if we are presently surprised by the opportunity to increase our loans.

Joe Morford -RBC Capital Markets

You talk about the margin outlook based on your sensitivity and the rate moves. I guess if you could update us as of year-end what the sensitivity to balance sheet was to say a 100 basis point decline in rates and what that would do to net interest income on an annual basis?

Michael Descheneaux

We will certainly be coming out with that in our 10-K. But as we have talked about the past, the general rule of thumb was approximately 50% of a move. So for example, a 25 basis point move by the Fed would affect our NIM let’s say anywhere from say 10 to 12%. And clearly as we grow our loan portfolio or fund it with more variable type instruments then the sensitivity will be coming down. But I think as of now it’s a safe rule of thumb for now.


Your next question comes from the line of Erika Penala - Merrill Lynch.

Erika Penala - Merrill Lynch

On the outlook, Ken, you mention during your prepared remarks that we ended the year 2007 on the verge of a recession. Do you think that the nation is poised to enter one in ’08, and does your outlook incorporate that? And if not, what’s the downside risk to your growth forecasts.

Ken Wilcox

I’m basing my statement that we’re on the verge of a recession on what I read in the newspapers and nothing more. It would appear that the US economy seems to be troubled. We don’t think that’s affecting our sector of the economy, at least not in any observable way so far. And we’re anticipating growth in our sector both in the sector itself and in terms of our business activity levels in the sector.

Erika Penala - Merrill Lynch

And I guess a follow-up question to that is how should we think about losses in ‘08? I don’t know if I missed this during the prepared remarks but it doesn’t appear as that you’ve provided guidance surrounding charge-offs.

Michael Descheneaux

In the Q4 our net charge-offs didn’t really move that significantly as well. And at this point we don’t see any indication of that, at least for the next quarter, changing. So you are correct, we didn’t put any specific number yet on that, just again we’re waiting to see if we have any more transparency. But I would say we don’t see any bogies in the system yet.

One thing you can look towards for example, is that we do have the guidance for the allowance for the loan-loss percentage which we say will remain at fairly consistent amounts with the prior year. So I think that’s how I’d open up with, and I’ll pass it on to Dave to add a little more color.

Dave Jones

I really don’t have much to offer I think that the indication that if we were to have larger losses we would have expected perhaps a change in the reserve and we’re not forecasting that the percent of loan-loss reserves to funded debt will be materially different, if different at all for 2008.

Ken Wilcox

Erika, there’s one other thing I would add to give a more complete answer to the question that you originally posed and that is as we look out into the year and we think about what we think we can accomplish, in terms of rates, we base our expectations totally on the rate curves and so our expectations are directly in line with those of Wall Street in terms of the direction of interest rates. In that sense we defer to the real economists, I guess.

Erika Penala - Merrill Lynch

And in terms of your growth outlook, is it safe to say that your relative optimism for your business vis-à-vis what we’re seeing for your peers is because of the relative insulation that the venture investment community has; is that a fair conclusion to draw?

Ken Wilcox

I think that’s a fair conclusion to draw. The venture portion, or the innovation portion, of the economy obviously doesn’t operate in isolation and yet it’s on a totally different timeframe.

I’ve been doing this now for 25 years. And in each of the downturns in the economy that I’ve observed, we have not seen the same kind of thing taking place in the innovation sector that we’ve seen take place in the economy simply because investors are investing with a long-term horizon. And the level of investment, which is really what drives our business, is dependent on their long-term expectations, not their feelings about the economy as it stands in the moment.

I would invite both Greg and Mark to add that in that they’ve been doing this for a long time, too.

Greg Becker

Just talking about the venture capital industry overall, I think Ken mentioned this in the opening remarks. You can look at how much money was raised last year, how much was invested, and how much was raised. They raised more than they invested last year which I think bodes well for what our outlook is for further investment in 2008 and beyond. So that’s one factor.

The other factor when you look at the overall economy and some of the press about private equity in general private equity versus venture capital. It seems like private equity is more challenged than venture capital and there’s so much more money in private equity. That money has to go somewhere, and at least I believe that that also bodes well for fund-raising opportunities as we look into 2008.

One final point as you talked about the overall economy and that there could be obviously more challenges in 2008. We’re set up for that in a way that other institutions aren’t to be able to weather that. We have in our lending strategy, asset-based lending, and we also have factoring or receivable-based financing. And that also allows us to weather a storm if it does occur over 2008 in a way that other institutions aren’t.

Mark Verissimo

I would just add to that when we look at the investing over 2007, we didn’t notice any difference between the first half of the year and the second half of the year. And clearly the subprime started to hit during the early summer months. In fact the fourth quarter ended up over $7 billion invested for the fourth consecutive quarter, which is the first time since 2001 that they’ve done that.

So there are good investment opportunities. I think investors are seeing good innovation out there, and the structure of venture capital-limited partnership is very different than a hedge fund. In a hedge fund you have the ability to get your money out much sooner. Venture capital-limited partnership, you commit the money, and essentially your commitment is tied up for five to ten years. So these are long-term investors and money that they’ve put out for long-term.


Our next question comes from the line up Andrea Jao - Lehman Brothers.

Andrea Jao - Lehman Brothers

Mike, I was hoping you could talk about capital management, give us an update, given how strong results are. You continue to generate capital quite strongly. Give us an update, and if you have plans that you can share with us regarding how aggressive you’d be? Capital targets, ratio target and if you plan to issue hybrids?

Michael Descheneaux

The target ratio which we’ve commented in the past about the TCE to TA ratio which as you may recall was we said was at 8.5%. As a mentioned a few minutes ago I said that we like to get down to that level around 9% by the end of the year.

And again we’re very cognizant of the economy as well. Even though our business is still robust and strong, we still do need to keep an eye over our shoulders to make sure we are still well capitalized, because we don’t want to be in a position like some other financial institutions where for one reason or another you have to go to raise equity in the markets. So that’s first point.

Second point is clearly to get down to that TCE to TA ratio is going to involve share repurchases. And as far as the next upcoming quarter or two, we would probably be on par with about that same share repurchase pace as well.

Andrea Jao - Lehman Brothers

You meant same pace as 4Q.

Michael Descheneaux

Yes, during the next upcoming quarters or so next Q1 and Q2.

So then your third question with respect to the hybrid capital markets. As I’m sure you’re well aware of, we did mention last year that it was something we were interested in. And we have certainly kept our eye on the markets, but over the last couple of months the price to do anything in that market has just skyrocketed considerably.

So I think the sensible thing to do right now is wait for a little bit of normalcy to return to the credit markets. And so once we begin to see that, we will certainly reassess and keep everybody up to date on that matter. So those are the three main points.

Andrea Jao - Lehman Brothers

Earlier you mentioned that in the VC segment there may be a potential risks that the segment stations this year. I was hoping to get a little bit more detail on that little bit more color. What you need to keep an eye on.

Greg Becker

I’m optimistic as far as 2008 on the venture capital side and it’s for two reasons. First of all, they raised more money in 2007 than they invested. And 2007 was a great year from an investment perspective so they have that dry powder to invest in ‘08 and 2009, which again bodes well for our business.

The second part is that when you look at the overall market where money exists, hedge funds have had more challenges. Private equity firms have had more challenges, and there is a lot of money still out there looking to find places to be put. And so if you’re going to put money somewhere and you are looking for that sort of alternative asset investment, venture capital, at least I believe, is a good place for that money to go.

So I think those two factors would I would say bode well for the market in venture capital for the coming years.


Your next question comes from the line of Christopher Nolan - Oppenheimer.

Christopher Nolan - Oppenheimer

Is the weak dollar affecting loan demands or possibly your activity in oversea markets?

Dave Jones

Chris, I don’t think that there is anything absolute that I can share that would confirm the point. But my sense of it is that the weak dollar is helping our business in that our technology clients are enjoying a healthy level of international transactions.

That may to some extent be supported by the fact that it’s a little more economical for the foreign companies to be buying it now with the weak dollar. So I think that it is helping our business as opposed to any damage that it may be doing.

Greg Becker

Another benefit to the weak dollar I would say is actually the volatile currency market overall is the demand for FX and the demand for hedging, swaps, etc. So that actually has been beneficial to us, which is what Mike and Ken both described as higher fee income in 2007. And I don’t know what your outlook is but I don’t see that really slowing down a whole lot in 2008.

Christopher Nolan - Oppenheimer

And Ken are you seeing given the difficulty that some larger private equity firms are having given the credit markets, is that impacting any of the business you guys do in terms of doing bridge loans to PE funds while they are raising capital.

Ken Wilcox

No. The short answer is no. We haven’t seen any change in the behavior of private equity firms in terms of the kinds of business that we do with them. Dave might want to add something to that.

Dave Jones

And the only thing that I would add to it is the nature of the business that we do with the private equity, so we’re not in the business of funding a lot of the companies, non-technology companies that they may be investing in. The principal part of our business is a capital call line of credit so that the private equity firms would have already raised their fund and we are just helping them manage their cash through our capital call lines of credit.


Our final question for today comes from the line of Fred Cannon - KBW.

Fred Cannon - KBW

Can you really achieve a lot of your financial goals; your ROE’s at 20%, your earnings growth are at 20%, shut down the SVB Alliant. Given the strength of the company and the capital are you anticipating any new strategic moves in terms of more rapid expansion overseas or anything else or is it pretty much just sticking to the knitting moving forward?

Ken Wilcox

I would say pretty much sticking to the knitting moving forward. We do have a long-term strategy which we’ve articulated publicly on several occasions in the past year and we intend to continue making progress on that ratably over time. So you’ll see us just continuing to forge on ahead with respect to all of our strategic initiatives.

I’m happy to say that not only did we make the numbers that we committed to but we also made progress on each one of our strategic initiatives and exactly the kind of progress that we had anticipated and hoped for at the beginning of 2007. By the end of 2007 we’d accomplished that and so we’re aiming in the same direction again in 2008. And anticipate that by the end of 2008 we’ll be even better positioned with respect to all of these very strategic initiatives.

Fred Cannon - KBW

And finally, Mike, when you’re talking about your capital goals for the year-end, how does that anticipate what happens to the contingent convertible security that I believe is comes due in June?

Michael Descheneaux

That’s good. I mean obviously that’s from more of the debt side, so that certainly does come due in the middle of June. And we would certainly be considering about how we are going to refinance that so that’s still to be determined but we’re definitely looking at that actively.

Fred Cannon - KBW

But no updates on that?

Michael Descheneaux

No updates at this time to tell you, not right now.


That was our final question. Are there any closing remarks?

Meghan O’Leary

Thank you very much for dialing in and that concludes our call.

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