SVB Financial Group (SIVB) 2004 Q2 法說會逐字稿

Welcome to the Silicon Valley Bancshares second-quarter financial results conference call. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce the host for today's conference, Ms. Lisa Bertolet. Ma'am, you may begin.

Good afternoon and welcome to the Silicon Valley Bancshares second-quarter financial conference call. Today Ken Wilcox, our President and Chief Executive Officer, Marc Verissimo, our Chief Strategy Officer, and Jack Jenkins-Stark, our Chief Financial Officer, will discuss our financial results. Following our presentation Ken, Marc, Jack, along with Dave Jones, our Chief Credit Officer, will be available to answer you questions.

I would like to start the meeting by reading the Safe Harbor disclosure. This presentation may contain projections or other forward-looking statements regarding the future events or future financial performance of the Company. We wish to caution you that such statements are just predictions and that actual events or results may differ materially.

We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's last filed Form 10-K filed March 10, 2004. These documents contain and identify important risk factors that could cause the Company's actual results to differ materially from those contained in our projections or other forward-looking statements. Now I would like to turn the call over to Ken Wilcox.

Good afternoon, and thank you for joining us. I am pleased to be here today, not only because we have good news to report but because we're beginning to see sustained evidence that the tide is turning for the economy, for Silicon Valley Bancshares and for our clients.

We're going to do something a little different today. After I give a brief overview of where we are and where we're going, Marc Verissimo, our Chief Strategy and Risk Management Officer, will speak for a few minutes about the market and risk management efforts that there are so central to our long-term strategy. Then Jack Jenkins-Stark, our Chief Financial Officer, will give you the details of our performance so far. I would like to take this moment to welcome Jack to the Company. We will try to accomplish all of this within the normal time allotted, and afterwards we will open the line for questions as usual.

As Jack will tell you in greater detail, earnings per share in ROE this quarter are better than we expected, buoyed by higher revenues from deposits, loans, client funds management, and fee income. Interest margins are stable, and our credit quality continues to be outstanding. If we're not yet seeing a decisive economic recovery, we're nevertheless enjoining greater momentum than we have seen in some time, and we're feeling encouraged.

Our client account continues to grow, not just in technology and life sciences, but in private equity services and premium wine as well. The improvements we're seeing are a result of the monumental efforts of Silicon Valley Bancshares employees. In the last three years I have seen a new dimension to the dedication I have come to associate with this Company. During this time of crushing recession, historically low interest rates, and widespread uncertainty in nearly every economic sector, our employees have continued to amaze me with their creativity, enthusiasm and focus on meeting our corporate objectives.

Through their efforts we have continued to expand our products and services, improve awareness of our relevance to the industries we serve, and establish new avenues of influence and thought leadership.

On the products and services front, in April we formalized our global financial services initiative, announcing an array of new international commercial banking services designed to support the unique needs of technology and life sciences companies doing business globally.

Our investment in these products and services has helped us to expand and lengthen our relationships with clients of all sizes. In May we launched a successful regional advertising campaign aimed at larger companies to update perceptions of our brand in the marketplace. That campaign has elicited lots of positive attention and comment from clients and prospective clients.

We have also been laying the groundwork for our first investors conference, the SVB Tech Investors Inforum, to be held April 8th and 9th of this year in San Francisco. This event will bring together small cap investors and fast growth technology companies in a one-of-a-kind independent forum. So far we have had great success attracting the caliber of speakers and attendees that promise to put this event on a par with the early investment conferences that define this category.

In June we took a delegation of leading venture capitalists on a milestone trip to China. This trip allowed us to leverage our unique network of relationships with venture capitalists and entrepreneurs around the world to introduce some of the most influential people in the the United States to some of the most powerful people in China. We expect the introductions we facilitated there to promote cross-border partnerships and investments in both directions between the U.S. and China. This trip, like the one we lead to India last fall, is further evidence of our growing reach and relevance to the global technology community.

I'm immensely proud of what we have accomplished this quarter and I'm excited about the quarter ahead. We know we have some work to do. The technology market is still in recovery and nothing is certain. Our expenses reflect continuous and necessary investment in our business. And we need to do a better job of communicating the link between that investment and our long-term strategy. We also need to do more to build awareness of who we are and what we do. But we're steady on the beam, executing on our objectives and making meaningful progress toward our long-term goals.

Thank you. And now Marc Verissimo is going to talk to you about the market environment and our enterprise risk management.

I want to thank all of you for joining us today. I want to talk about the market as we see it, and then take just a minute to touch on what we're doing to meet the challenges of risk management today and in the future. Let's start with the market.

We're pleased with the improvements of venture capital funding. The venture capital investment in technology and life science companies totaled 5 billion, up in the first quarter of the year, and up from the 4.6 billion in the first quarter of 2003 according to Venture Economics. A little over a third of those investments are going to later stage portfolio companies. Corporate venture capital funding of start ups also rose higher in the first quarter than in any quarter since late 2002. Well-established technology companies are also acquiring more start ups to fill in product gaps, having slashed R&D budgets in recent years, therefore, liquidity across the board is improving.

For the first six months of 2004 there have been 39 public offerings of venture capital-backed technology and life science companies. 24 of those occurred in the second quarter, exceeding all the IPOs for all of the year 2003. Valuations are up from their recent lows, and the NASDAQ is slowly recovering.

At Silicon Valley Bancshares we're continuing to increase our client count and market share among Series A and venture capital-backed companies, as well as larger established companies. In fact, we have more clients today than we have ever had in our 21 year history.

Ken talked about our global financial services initiative, which has expanded the array of products and services available to our clients. That effort, along with our ad campaign targeted at larger more established companies, has contributed significantly to our bottom line, with one affecting the addition of 26 new larger clients this year. We succeeded in winning many of those companies away from Money Center and large regional banks. That is a testament to the power of our market strategy.

Mergers and acquisitions now make up a greater portion of the liquidity market, upwards of 90 percent according to some sources, and that creates investment banking opportunities for us. Merger and acquisition activity was also up from the fourth quarter 2003 to the first quarter of 2004, from 3.5 billion to 5.3 billion. That represents an increase of almost 2 billion over the first quarter of a year ago.

All in all, the health of the overall market is improving. Our strategic decision several years ago to diversify into complementary products and services puts us in an ideal position to take advantage of incremental improvements across the board.

I would like to touch on the wine industry and particularly the market segment we serve, the premium wine or wines priced above $15 a bottle. That market is improving. This segment has consistently shown growth even in the difficult economic times of the past several years. With the improvement in the overall economy, sales growth should be in double digits this year, with some shortages of select varietals in the Napa/Sonoma areas occurring.

In the past few years you have heard us talk about credit quality as a key metric of our ability to manage risk. Our process for ensuring the quality of loans we make to our clients allowed us to avoid the boom to bust disaster that many technology lenders face. That process continues to work remarkably well for us. And it is just part of our overall enterprise risk management. I want to say a few words about that and specifically Sarbanes-Oxley compliance.

The complexity of our market environment has increased dramatically, shaped by constantly morphing accounting regulations, more complex financial instruments, and more rigorous compliance requirements. The challenge of adapting to these changes are underscored by harsher penalties for noncompliance. This has resulted in an environment in which a company's reputation is much at stake as its bottom line when its risk management efforts fall short of the mark.

To protect ourselves, our clients and our shareholders from this possibility, we have invested considerable time and resources and created a comprehensive system for enterprise risk management. One of the functions of this system today is to help us meet the requirements of Sarbanes-Oxley.

As many of you know, enterprise risk management is an enormously complex and critical process. We have seen over time that a significant investment in and a serious approach to this area are worthwhile. In support of this we recently hired a new Chief Information Officer, David Webb. He was most recently with Goldman Sachs. He is charged with integrating our information technology efforts with our business strategy, and will report to Ken Wilcox.

We see no shortage of market opportunities for Silicon Valley Bancshares. And we believe we have set ourselves up to manage and grow effectively in a very complex environment. We're extremely confident in the capabilities of the systems and the structures we have developed.

Thank you. Now I would like to turn the call over to Jack for a discussion of our results this quarter and year to date.

Good afternoon. Let me start by saying how pleased I am to be part of the Silicon Valley Bancshares team. My interactions with employees over the past 90 days confirm what I observed as a former customer of the bank, that SVB has the smartest, most creative and entrepreneurial employees of any bank in the country. It is a great Company with a great franchise. And as our Q2 results indicate, it is a great time to be a part of those results.

Turning to our Q2 results, I was struck by 5 trends. I will go into more detail in a moment, but those trends include greater than expected EPS and ROE, strong deposit loan and client funds growth, consistent interest margins, and in this quarter relatively exciting fee income, outstanding credit quality, and expenses that were likely higher than you expected.

Now let's talk about some specifics, where we're doing well and what we think -- and where we think more work is needed. EPS/ROE. We are reporting 43 cents in EPS for the second quarter, exceeding our previous guidance by 2 cents. Return on average equity at 13.5 percent was up from about 12 percent in Q1. We're both pleased with these quarterly numbers and encouraged because we believe they reflect positive longer-term underlying business trends.

Our average deposits at nearly 3.9 billion grew almost 8 percent or 280 million in Q2 compared to Q1. At period end deposits exceeded $4 billion with nearly 60 percent of that amount in non-interest-bearing accounts. Loans grew 4 percent quarter over quarter, averaging approximately 1.9 billion in Q2. As Marc indicated, we continue to build our customer base, and by our estimates to capture nearly 40 percent market share of Series A funded companies.

In addition to growth in deposits and loans, the SVB team delivered on the client investment funds front as well. Total client investment funds grew to nearly $11 billion, a 9 percent increase over Q1. Client investments under management almost doubled to over 2 billion for the first time in our history. Combined with our deposits, the base on which we either earn a return or a fee, climbed to $15 billion, approaching the highest number in the bank's history. Primarily every metric this quarter reflects an outstanding effort by the employees of Silicon Valley Bancshares.

On the interest income and fees front we had a significant contribution from our investment portfolio which held net interest margin flat Q1 at about 5.2 percent. That, combined with the strong growth in the balance sheet -- that, combined with the strong growth in the balance sheet pushed net interest income up by about 4 million relative to Q1, and over $10 million when comparing our year-to-date performance to the same 6 month period last year. As a quick reminder, the recent rise in the Fed funds rate and the corresponding increases in the bank's prime rate did not have an impact on our Q2 results.

Non interest income increased 6.6 million or 27 percent due largely to an outstanding quarter at SVB Alliant, which rested primarily on a single large transaction. While we're gratified by SVB Alliant's performance this quarter we want to reiterate that we continue to measure their success over a much longer term than 1 quarter. And that we don't expect a repeat of that exceptional Q2 results in Q3.

In addition to SVB Alliant, we continue to see stable results from our private equity funds management and direct investment activity. Looking at our year-to-date numbers, and setting aside SVB Alliant for a moment, all other components of non interest income are up approximately 25 percent compared to the first 6 months of 2003, an impressive effort and result.

Our credit quality continues to be outstanding. Nonperforming loans inched lower to 12.6 million. At 62 basis points, the nonperforming loans to gross loan ratio is a historical low for the bank. The reduction in nonperforming loans is reflective of the improved economic conditions experienced by our clients, as well as the bank's strategic decision to focus on the technology, life science, wine, and private equity industries.

The loan loss reserve remains very strong in comparison with gross loans and our nonperforming loans. The allowance for loan losses is 2.9 percent compared with gross loans, and 493 percent of nonperforming loans.

Turning to our expenses, clearly we saw a spike in expenses this quarter. However, there are good reasons for that spike. Let's talk about compensation expenses first. Total compensation costs increased approximately $7 million in Q2 compared to Q1.

That increase is the result of two major factors. First, in mid Q2 we put into place our combined retention and performance plan at SVB Alliant. That plan provided for retention bonuses to be paid later in 2004 and in 2005. These bonuses are designed to preserve SVB Alliant's momentum by keeping that team in place.

The performance plan component formalized the tying of incentive compensation levels directly to financial performance, and that too had an impact, given SVB Alliant's exceptional quarter. In addition, this performance component was retroactive to Q1, meaning that we were required to book additional compensation expense in Q2. We estimate that the total impact on compensation expenses for SVB Alliant in Q2 was just under $2 million.

Another consideration is that substantially improved performance in this division requires us to accrue additional variable comp for the team delivering those results. We estimate that change from Q1 at about $3.4 million.

The rest of our employees also have a component of their variable compensation that is tied to the Company's financial performance. And due to better than budgeted financial results, we accrued additional incentive compensation expenses for them as well.

While we're on the subject of performance-based compensation, I want to say one more word about our credit quality. We believe that you get what you pay for. And we think it is worthwhile to consider the correlation between our usually good credit performance and our commitment to compensation models that allow us to attract and retain the best professionals in all aspects of our business.

Our non compensation costs were up approximately 3.5 million in Q2 versus Q1. And several factors impacted those results. First, as we mentioned on our April call, planned marketing expenditures contributed about $770,000 to expenses this quarter versus Q1.

I know the bank's marketing team would be disappointed if I didn't ask whether you had seen our "We Know People" advertising campaign, which has appeared in regional and national publications over the past several months. In our opinion it has been an unqualified success, and we have received enormously positive feedback from clients, partners and shareholders.

In other expense categories, professional services these were up $1.5 million this quarter due to legal costs associated with higher deal volume, as well as higher legal fees for other activities at the bank such as the opening of the UK and India offices.

Lastly, our ongoing compliance efforts are also having an impact on professional services expense, especially those pertaining to compliance with Sarbanes-Oxley 404. To address these requirements we have invested in the development of documentation and additional operational controls that will ensure appropriate implementation of Sarbox with minimum disruption to business. We expect this Sarbox overhang to settle down considerably in Q3 as we will migrate from reliance on third parties to getting more work done by our employees.

Although we view our higher expenses this quarter as a reflection of increases in revenue and regulatory requirements, we continue to focus on controlling expenses in general. For the rest of 2004 and throughout 2005, we will look for opportunities to reduce those costs. For example, we are looking hard at our occupancy costs to reduce them substantially. With that said, it is important to understand that our business is highly dependent on personal relationships, cultivation of talent, and retention of human assets, and that simply won't change. In a final note we made no further repurchases of stock in the second quarter.

Looking forward, we expect third quarter earnings to be between 37 cents and 41 cents per share. In determining this range we assume no change in market interest rates from the recent 25 basis points increased by the Fed late in June, continued strong credit quality, an increase in average investment securities and growth in average loans. We also assumed lower non interest income in second-quarter levels due to lower warrant income and lower corporate finance fees, lower non interest expenses, a stable economic environment, no further dilution from the zero coupon convertible debt, and no further share repurchase.

Overall, we like these results a lot. We know we have worked to do with regard to expenses. And we also know we have to keep our focus on showing consistent revenue growth. That said, it is nice to see the benefits of the recovering economy, of our own focus on the fundamentals, and of the hard work of 991 SVB employees. Thank you.

We would like to open it up for questions now.

(OPERATOR INSTRUCTIONS). Campbell Chaney with Sanders Morris and Harris.

I have a couple of questions. On your client fees from your private label, can you give us an idea of what kind of commissions you are going to be charging and reaping from that, just for our modeling purposes?

As we mentioned over time, we were anticipating that fees from there would remain fairly constant, i.e., we were getting higher volumes but we have noticed, and there has been continuing some degradation in the average fee that we get per account.

Think the range of fees, depending on the product is somewhere between 21 and 61 basis points. And the fees we generate from that activities will in part reflect the aggregate amount under, or held with us, but also the particular product mix that we manage. So that can change over time.

(indiscernible) the fees structures of the prior quarters are going to be somewhat off a little bit in future quarters? Did I hear that right?

I'm not sure I understood that last comment.

The fees schedules that we have seen in prior quarters, is that going to remain pretty much intact going forward?

Yes.

On the 61 20 (indiscernible) to 61 basis points?

Yes.

And one other questions with regards to the provision for loan losses and credit costs. I think you said in your guidance that that is going to remain low. Can you give us an idea of is it going to a zero provision do you think, or is it a slight provision and possibly a negative provision?

We don't know for certain, and Dave Jones is here and I know he -- I received e-mail from him as recently as this morning about his look at the coming quarter, and that is going to be subject to change. I think last quarter we gave guidance that Q2 would have about a zero provision, or we thought it was headed in that direction. I think we do continue to see strong credit quality, but our ability to forecast that provision at this point is limited.

And then the final question, and I'll pass it on, is the margin going forward. I think you said 80 or so percent of your loans are variable rate, and 60 percent of your deposits are non-interest-bearing. So can you give us an idea if there is another 25 basis point Fed hike, what that would do to your margin?

Sure. There is a couple of ways we look at it. One is just in terms of dollars. We estimate that another 25 basis points of short-term rate will probably generate somewhere between 270 and $300,000. Another way of thinking about it -- a second way of thinking about it, we should be able to capture about half of that rate increase in the margin.

So 270 to 300,000 is that per quarter or per month?

I'm sorry, per month.

Per month. Okay.

Before we do any further -- this is Ken Wilcox -- before we go any further I want to make a correction. I have been told that I somehow had said April 8th and 9th with respect to our SVB Tech Investors Forum, our conference. And I clearly meant September 8th and 9th, which is now only a couple of months away, and filling up quickly.

Brian Harvey with Fox-Pitt Kelton.

Just had a couple of questions. First, on the expenses, I am just trying to get a better handle on the payment that you made this quarter, or the accrual that you made for Alliant. And if that is sort of recurring in nature? You indicated a $2 million payment and another 3.4. So how do we think about that on a go forward basis?

Sure. You could think about the 3.4 as variable and directly related to performance. And the 2 million that I referenced is really – there are two components there. And about 60 percent of that is really a catch-up from Q1. And the remainder is something you will see in Q3, but it begins to tail off in Q4 and then tail off in '05.

And how do we think about the pay out in that business on the fees that they are booking, and also think about that relative to the warrant income generated as well and the compensations?

Well, the warrant income is entirely separate from that. Are you talking about Alliant now?

Yes, I'm talking about Alliant and the sort of payout that they would get on the business that they generate. And then separately, on the warrant income as well, how do we think about the pay out that employees received on that as well?

We have a business model or a -- we treat Alliant like I think most investment banks, and the business model is very similar. And I think it is fair to think about that business as roughly 50 percent of revenue is going to end up being compensation related in some fashion.

On the warrants that is a different matter altogether. And probably at the end of the day you could expect to see about 20 percent of warrant income be -- come back to be employees in the form of retention award programs.

Charlotte Chamberlain with Jefferies & Co.

With respect to just the Alliant part of the bonuses, did you say that was 50 percent of their revenues goes to employees?

On average over, say, a long period of time the business model is constructed similar to other investment banks where about 50 percent of revenue goes to employees -- after a reduction in some of the cost of sure, I might add.

The other question is cocoa bonds. You seem to -- at least I thought I heard you basically say that you don't think that you're going to get cocoa bonds dilution. But if the Emerging Issues Task Force of the FASB in fact does implement their change to require that you count into fully diluted income the shares that would be issued under your version of the cocoa bond -- how what that work? And I know that you tried to deseed (ph) it already, or there was kind of a (indiscernible) mechanism put into place. And I was just wondering if -- how that would work as well?

Cocoa bonds has become a fairly interesting topic recently with the EITF exposure draft -- EITF exposure draft. By the way, I was told I should say this is Jack talking. So this is Jack talking.

So with that exposure draft we've gotten a number of calls about our convertible debt. Let me say first -- couple of things first of all and I just need to bend a little bit. I think this is got to be one of the more silly exposure drafts recently issued, although certainly accounting has seen more than its fair share in recent years.

Second, is keep in mind that the underlying economics of the convertible debt that Silicon Valley Bank issues does not change in any way shape or form based on this accounting -- based on the exposure draft.

We have an arrangement in place that ensures that we're not exposed to any sort of conversion under -- or in any way have an economic consequence related to conversions below about $51 a share. So with that said, let's turn to the EITF itself. The EITF and the way it applies to convertible debt at any company will be very substantially affected by the facts and circumstances of the convertible debt. We believe based on our read that this EITF will not spec (ph) our convertible debt. However, there is a FAS 128 exposure draft out that could cause our convertible debt to have a dilutive impact, if you will, on the calculation. And we're reviewing that FAS 128 exposure draft now. But with all that said of course none of this really affects Q3.

I had understood that if the FASB was going to pull the plug -- sort of pull the trigger I guess in this case -- it will be in September and it will be retroactive to the beginning of year. But more importantly, it you think it is FAS 128, can you give us a sense of how much dilution, and where -- would it also be something that would be retroactive to the beginning of year?

My recollection, I could be wrong, but my recollection was effective in '05, but it would require us to recalculate '04.

I'm sorry, you are talking about the cocoa bonds EITF or 128?

Now I'm thinking about the EITF. If you just take it on its face, as I recall the number of shares would be about 4.4 million shares. I'm trying to answer your question directly.

Then would it be the same under 128?

I believe so, yes.

One more question about Alliant. Is there a breakeven level that we should think about with Alliant. In other words, you've got costs -- ongoing costs whether they have been any revenues or not, but basically what is a breakeven level of revenue for Alliant?

We never let the breakeven level be a -- we have always said we want lots and lots more.

Right.

So I can't tell you that I -- I think what we have done is we have not broken that out in the past.

Gary Townsend with Friedman, Billings, Ramsey.

We would like to talk a little bit more accounting, I'm sorry to say. Any of the compensation that has been paid to Alliant, or in this new arrangement need an increase in share-based compensation -- or pro forma cost let's say on an ongoing basis?

No. If there is, it is not meaningful.

And would the share base compensation that we will see in the Q for this quarter be comparable to the 10 cents recorded last quarter?

We have made the calculation yet, but I would be surprised if it is significantly different.

And now you've had a chance to be on board for I guess 90 days or so, is there more guidance that the Company is willing to give us now with regard to how you plan to approach share-based compensation and on a pro forma basis what approach you might take that could reduce what at least seems to be a pretty substantial potential cost as it could be recorded next year and perhaps retroactively applied? And I guess -- let me just ask that question first.

This is Ken. Let me jump in with a quick answer to that question. The answer would be I feel that we have really gone out of our way to be forthright with respect to that in prior calls, and our position is exactly as it was in the last prior call. Even the U.S. government doesn't know where it stands. So I don't think you can reasonably expect that we are going to know exactly what we're going to do and exactly when.

Having said that, it is clear that we're moving directionally toward making less generous use of options, in which case they have been studying all of the alternatives available to us, and we're meticulously working our way through that process. And at the right point in time we will be very clear with respect to our intentions.

There was a recent brief issue that estimated about a 6 percent impact on your EPS. And I was wondering if that was based on some guidance that you have provided or perhaps not?

No.

Andrea Jao with Lehman Brothers.

A quick question on the unrealized gains under other comparative (ph) income. And could you talk a bit more about the swing from positive 17.5 million at the end of March to negative 10.3 at the end of June? Perhaps it's impact on your tangible equity ratios, which could impact your propensity to buy back shares?

First of all, that swing was not unexpected. We are -- we had made a -- our strategy with regard to security investments have been to push our maturities out on the yield curve to pick up additional yield. And we had modeled the impact to the Company of changes in the yield curve. Their change is very similar to one that we experienced in April of Q2.

That change, i.e., the yield curve change, with rates to 3, 4, 5 year rates moving up substantially, combined with taking some additional money out of the overnight and securities investments and putting it to work at slightly longer yields, all moved our duration out. And also -- that moved our duration out, but it was really the move in April that contributed to the unrealized gains.

Liquidity is not an issue. We absolutely the roll over this in terms of understanding the implications. And we think it is exactly the right thing to do with a yield curve as steep as it is these days picking up that additional yield.

In terms of looking longer term, in terms of generating loan growth and improving the proportion of loans to your earning assets, could you give us an update in terms of the initiatives there?

This is Marc speaking. As we mentioned in the call we put a concerted effort behind our corporate tech effort, which is going after later stage, more mature technology companies. We have been very successful there. We also put a (technical difficulty) effort behind our asset-based offering, both factoring in commercial finance where we have seen the growth (technical difficulty) our wine portfolio has shown good growth.

So we think we have, particularly the way the market is going, very good programs to increase loan volume. Although we don't need to lend money to make money. I think that is a key distinction. We don't have to stretch or we don't need to stretch to make money. Our investment portfolio is a very profitable part of the business standing alone. So what you're seeing is going after good opportunities within our sectors, the sectors we understand. But you won't see us reaching just because we think we need more loans outstanding.

This is Ken. And I would like to add something to that. And that is today our loan balances are at an all-time high. They are higher than they have ever been in the entire history of the Corporation.

And if we look back over the course of the last five years, there are a couple of interesting things to observe. First of all, in the last five years as we all know the majority of our time we all spent in a recession, and a recession that has been particularly hard-hitting in terms of our primary sector, that being tech and life sciences. That would be one thing.

The second thing to think about is that in that time frame our tech and life sciences loan portfolio has just about doubled. Meaning whereas I said before on the one hand if our loan balances are at an all-time high, on the other hand five years ago only about half of our loan balances were in our cores sectors, tech and life sciences. And today -- and wine -- today almost the entirety of our portfolio is in tech and life sciences and wine. Meaning that interestingly enough during a recession we have doubled our outstandings in our core markets (technical difficulty) credit quality.

Due to time constraints our last question will come from Fred Cannon with KBW.

I just have two quick questions. Most of my questions have been answered. First, Marc, and maybe I missed it, what would be -- did you announce the pro forma dilution from stock options for the second quarter per diluted share like you did for the first quarter? Are you willing to disclose that?

No, we didn't announce that, Fred. This is Jack. We did get the question did we expect it to comparable to Q1, and I said we did expect it to be comparable to Q1, but we have not done the calculation yet.

Second, sorry to harp on expense control, but in the first quarter you earned 38 cents. In the second quarter if I back out the negative provisioning of about 5 cents a share, I get about 38 cents. And you are giving guidance for the third quarter about the same as the second quarter in terms of earnings per share.

And I noted that if you don't account for the negative provisioning your efficiency ratio in the second quarter was about 74 percent. I guess the question is, how are you all thinking about operating leverage moving forward? And when can we expect the very positive things that we're seeing in all the revenue lines flow to the bottom line?

Soon, I hope. I think we're all aware of where that efficiency ratio is. We're also aware of the great things that are happening on the top line and wanting to see more of that flow to the bottom line. On the other hand, we also recognize that interest rates remain very low -- short-term rates remain very low. And our challenge has been, and continues to be, to balance the investment in the basic business and the initiatives while still delivering reasonable returns in a very low interest rate environment.

I think the answer is that as interest rates start to climb, if that ratio -- the efficiency ratio -- does not go down, that would certainly create a great deal of concern in my mind. But right now while we would like to see it lower, we are not going to do anything in a knee-jerk fashion, if you will, just to lower it when we're still at very low interest rates.

At this time we have no further questions.

Thank you very much.

Thank you for participating in today's conference call. If you would like to access the replay for today's conference, you may dial 888-568-0134. (OPERATOR INSTRUCTIONS). Thank you and have a good day.