SVB Financial Group (SIVB) 2004 Q3 法說會逐字稿

I'd like to welcome everyone to the Silicon Valley Bancshares Third Quarter Financial Results Conference Call. As a reminder, today's conference call is being recorded for instant replay and transcription purposes. Any objections, you may disconnect at any time. As a reminder following today's presentation there will be a question-and-answer session and during that time instructions will be given if anyone has any questions. I'd like to introduce our presenter -- first presenter of today's conference call, Ms. Lisa Bertolet. You may begin when ready.

Thank you. Good afternoon and welcome to the Silicon Valley Bancshares third quarter 2004 financial conference call. I'm Lisa Bertolet, the Investor Relations Manager, and today Ken Wilcox, our President and Chief Executive Officer, and Jack Jenkins-Stark, our Chief Financial Officer will discuss our financial results. Following their presentations, Ken and Jack, along with Marc Verissimo our Chief Strategy and Risk Officer and Dave Jones, our Chief Credit Officer will be available to answer your questions.

I'd 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 the future financial performance of the company. We wish to caution you that such statements are just predictions and 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 on March 10, 2004, and Form 10-Q, filed August 9, 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'd like to turn the call over to Ken.

Good afternoon and thank you for joining us. As some of you may have noticed, our 8-K was issued at 3:30 PM Eastern Time today, a half an hour before close of the market. It is not our practice to file financial documents with the SEC during market hours. And the 8-K was filed earlier than we had planned. While we are still reviewing the matter, at this point it appears that the early release of the document may have been the result of a communication error between our finance group and our financial printer. We do not plan to allow this to happen again.

With that said, we're pleased to be announcing results in excess of our guidance last quarter, results that we find encouraging with regard to our expectations for the longer term. Revenues are growing, thanks in part to higher interest rates, as well as steady increases in average loan balances and consistently strong performance in our loan portfolio. The market continues its slow recovery and, if it is sometimes a little too slow for my purposes, we are nevertheless pleased to see its impact, along with that of the SVB team in meaningful improvements to our business metrics.

Since 2001, we have talked to you consistently about our efforts to invest in the future of Silicon Valley Bancshares by cementing our relationships with clients as they grow, offering them new products, services and capabilities to enhance their chances of success at every stage along the path from start-up to maturity, and beyond. The third quarter was especially important for us in that respect, as it marked our formal entry into a number of arenas that have been growing sources of revenue and networking opportunities for us.

One aspect of our strategic expansion in the new and promising markets is the continued development of our Global Financial Services Group. In September, we opened two international offices, one in London and the other in Bangalore, India to meet the needs of our clients is interested or operating in these markets. These subsidiaries will allow us to scale with the needs of our clients and private equity partners and to act as a gateway to financial services for US businesses interested in exploring critical foreign markets and foreign companies planning US operations.

In just over a month, we have already closed two significant financing agreements with UK technology companies planning to expand to the United States. And we have at least half a dozen similar deals in the review and documentation stages. In India, we have already signed up 10 leading US venture firms for consulting services that will help them and their portfolio companies better leverage the opportunities there.

In order to ensure our Global Financial Services Group has the focused leadership necessary to achieve meaningful results, we recently hired the company's first Head of Global Financial Services, who will join our team in Santa Clara, California on November 2nd and will report directly to me. Part of this person's charter will be to determine the right approach to continuing the momentum we've built in the UK and India and taking advantage of opportunities in China and Israel as well in 2005.

Our efforts to gain a stronger foothold in promising markets are succeeding domestically as well. At our first ever SVB Tech Investors Forum last month, we increased our visibility with larger technology clients and institutional investors by demonstrating both the power of the SVB network and our ability to effectively cross-sell between our commercial and investment banks.

During two days of presentations by 77 large private and small public companies, to over 500 institutional investors, we leveraged the synergies between Silicon Valley Bank and SVB Alliant to form or expand relationships with promising clients. The Tech Investors' Forum increased our visibility, credibility and opportunity with the institutional investment community and larger technology companies. Incidentally, we got so much positive feedback from attendees, we're going to do it again next fall.

Internally, we strengthened our leadership team with the addition of Lynda Ward Pierce as Head of Human Resources and a member of our corporate steering committee. Lynda will take over leadership of the existing HR Team from our Interim Head of HR and General Counsel Derek Witte. Lynda is also responsible for overseeing development and recruitment programs that will further support our ability to provide diversified financial services on a global scale.

Our board of directors will also benefit from a stronger roster of leaders. Today, we announced the election of three new directors to the board. David Clapper, Roger Dunbar and Joel Friedman. David Clapper spent much of his career with Johnson and Johnson and was most recently President and CEO of Novacept, Inc. Roger Dunbar has served as a member of our advisory board since 2001 and recently retired as Global Vice Chairmen of Ernst and Young.

Joel Friedman is the President of Accenture's Business Process Outsourcing Organization as well as a member of its Board of Directors, and a member of the Dean's advisory council for the Stanford Graduate School of Business. The combined experience of these accomplished professionals in the areas of globalization, life sciences, technology and private equity will be invaluable to Silicon Valley Bancshares as we pursue our strategy of global growth within targeted industries.

We are pleased with the many important milestones we've been able to achieve in the last quarter. But we still have challenges. In particular, those of growing earnings and controlling expenses. While we are seeing some positive effects on our business, such as better loan growth and higher average deposits, as a result of the improving economy, other parts of the revenue stream, such as corporate finance fees and warrant income are experiencing a more gradual and less consistent recovery cycle.

None of this is unexpected and our strategy of diversification over the last five years has prepared us for the current economic situation. But we are still focused on what we can do to improve our business every step of the way.

We continue to look hard at our balance sheet, and we're making meaningful progress on expense control. It's a high priority for us. And Jack will talk about it in more detail. We still have more to do to get our efficiency ratio down to a level we feel is acceptable and sustainable. The imminent impact of stock option expensing promises only to intensify this challenge, and we believe it is in the best interests of our shareholders to prepare for the inevitable. As a result, we are making significant and necessary changes to our equity compensation structure designed to lessen the financial impact of options grants on our bottom-line.

As I look around at the dedication and hard work of the employees of Silicon Valley Bancshares, I am inspired by their willingness to continually meet the challenge of providing the most innovative products and services to the world's best companies. Their efforts have allowed us 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. Through their efforts, we are methodically building our foundation of growth and leadership in the years to come.

There will always be challenges, we know. But venture capital investments are up worldwide as are mergers and acquisitions. Technology spending is showing signs of stability, which is good for our clients. The market is slowly returning and Silicon Valley Bancshares is ideally positioned to take advantage of it. . Thank you. Now I'd like to turn the call over to Jack Jenkins-Stark, our Chief Financial Officer for an update on our financial performance this quarter.

Thank you, Ken. Before I go into the specifics about the quarter, let me touch on the larger picture for a moment. In Q3, we saw more of the promising trends we saw in the second quarter and a few new trends as well. On the positive side, we had better than expected earnings per share, excellent loan growth and higher net interest margin, lower expenses and continued outstanding credit quality.

On the flip side, we saw somewhat lower corporate finance fees than we had expected, warrant income consistent with our expectations but lower than in the second quarter, and the recognition of a relatively modest discharge related to the carrying value of our affiliate inside the asset management.

Now let's talk about the specifics. As in the second quarter, we exceeded our previous guidance by $0.02 , recording earnings per share of $0.43 for the quarter. Return on average equity at 13% was down slightly from last quarter's 13.5%, largely due to higher retained earnings and a change in unrealized gains in our investment portfolio. Return on average equity was up significantly for the same nine-month period last year to 12.9% from 7.2%. As I said last quarter, we believe these numbers reflect our underlying business trends and we are pleased with the picture they paint.

Average loans grew 7% in the third quarter, a strong showing with which we're very pleased, especially considering that loans are still less than half of our total interest earning assets. In part, this growth stems from our continued efforts to win new larger clients and to grow our structured loan and factoring business, while maintaining our strong position among early stage companies. Also, as a result of this focus, our structured financing products have grown to constitute nearly 20% of our loan portfolio.

Average deposits continue to grow in Q3 and were up nearly 18% over the same period last year. As we've said before, we take a multi-quarter view of our progress and we do not see any change in our long-term momentum. Average client investment funds, which excludes deposits, grew strongly compared to the second quarter and at the end of the quarter were up 27% over the same period last year. As a result, client fees were 7 million in the third quarter, up nearly 9% from the second quarter, and up nearly 20% from the same period last year. We're more than satisfied with our progress.

We had strong growth in our net interest margin, which increased approximately 38 basis points over the second quarter. The first significant factor in this rise was that we increased our prime rate three times this quarter corresponding to increases in the Fed Funds rate totaling 75 basis points. Second, as I mentioned earlier, we saw a positive contribution from an increase in our loan portfolio, along with a move toward higher yielding structured products and factoring.

Lastly, before you conclude that our asset sensitivity is higher than what we have indicated in the past, the third major contributor to higher net interest margin was a relatively large loan that returned to accrual status during the quarter bringing along with it approximately 500,000 of unexpected interest income during the quarter. We still see our net interest margin picking up approximately 30 to 40 basis points for every 100 basis point increase in the prime rate.

SVB Alliant had a modest quarter with revenues of 3.2 million. While this is down from their exceptional second quarter, it's typical the ebb and flow of the M&A market. That said, we continue to see stable results from our private equity funds management and direct investment activity.

Looking at year-to-date numbers and setting aside SVB Alliant and investment securities results, all other components of our non-interest income are up approximately 25% compared to the first nine months of 2003, an impressive effort and result. As we anticipated in our last earnings call, income from plant warrants was down from last quarter, at 1.2 million, reflecting the continued modest pace of client IPO and merger and acquisition activity.

Our credit quality continues to be outstanding. Non-performing loans remained well within our target range at 15 million. This level of credit quality continues to reinforce the value of our strategic commitment and focus on the technology, life science, wine and private equity industries. The loan loss reserve remains very strong in comparison with gross loans and non-performing loans. In line with our expectations, we've reduced the allowance for loan losses slightly this quarter to 2.6% of gross loans.

We achieved lower expenses this quarter, primarily as a result of lower compensation accrual. In addition, we recently negotiated a new operating lease agreement for identical square footage at our Santa Clara headquarters. The new lease results in an average quarterly rent reduction of $0.5 million and the agreement guarantees lower rent for 10 years, while providing approximately 7 million in improvements to the campus.

During the third quarter of 2004, the economy recognized 1.9 million, non-cash impairment of goodwill charges as a result of continuing as part of continuing operations related to Woodside Asset Management Inc, our private investment advisory arm. The review, which is required annually under FAS No. 142 was based primarily on a forecasted discounted cash flow analysis and indicated that our current carrying value was in excess of that supported in the analysis. The charge totaled 1.1 million or $0.03 per diluted common share on an after-tax basis.

In two final notes, we made an adjustment to our state tax accrual related to a statute of limitation expiring, which reduced our effective tax rate and contributed approximately 1 cent per diluted common share in Q3 results. In addition, we made no further repurchases of stock in the third quarter.

Looking forward, we expect fourth quarter earnings to be between $0.44 and $0.48 per share. In determining this range, we assumed a 25 basis point increase in market interest rates in November 2004, continued strong credit quality, a small increase in average investment securities and higher average loans. We also assumed non-interest income slightly higher than third quarter levels, relatively flat non-interest expenses, no dilution from the zero coupon convertible debt, no further share repurchases, somewhat higher rates paid on deposits and a stable economic environment.

Overall. it was another strong quarter. It was a quarter that the whole SVB team contributed to and one for which they can be quite proud. We're making good progress on growing revenues while managing our expenses. The market conditions remain favorable. All of which means that I look forward to our earnings call in January. Thank you.

Thanks, Jack. We'd like to open it up for questions and answers now.

Thank you. If you would like to ask a question, please do so by pressing, "*" "1" on your touchtone telephone, using speakerphone, please pick your handset prior to pressing "*" "1." Anytime you wish to answer a question, you can do so by pressing "*" "2." Once again it is "*" "1" if you have a question and "*" "2" to cancel. One moment while the questions are registered. First question comes from Joe Morford from RBC Capital Markets.

Thanks. Good afternoon, everyone. I have a couple of questions. First, just wanted to see if you could comment on deposit growth a little bit. Seemed to have slowed this quarter, at least looking at average balances compared to the last -- when you see significant increases the last two or three-quarters. A little slow this quarter and off balance sheet funds were actually down on an end of period basis. And then doesn't seem to quite jibe with what we've been hearing about increased investment activity by the debenture funds and stuff . So just any kind of comment you're seeing on that?

Joe, this is Marc Verissimo. When I look at the third quarter, what I see was that there very well could have been a pause for that quarter, and I think partially it comes due to the fact that private equity folks wanted to get better acquainted with their families during the summer months. So, I do think there was, there seemed to be a pause. Now the numbers will come out in a couple weeks.

But we still feel very comfortable from what we're seeing anecdotally; talking to the community that the investment pace is strong. And we do expect the investments to be in the $22 to $23 billion range. As counted by venture economics, which is up approximately 15 percentish over what it was last year. So I think as Jack mentioned in his comments, we sort of look at this multi-quarter. The averages are looking very nice. That the end of quarter sometimes can get a little squishy, but we don't sense any slowdown out there.

OK. And then just a couple of clarifications or follow-up questions. Jack, I wonder if you could tell us how the margin was on a core basis, excluding maybe this accrual in the month of September. And then also when you talk about flattish expenses in the fourth quarter, is that compared to total expenses in Q3 or does that exclude the -- or expenses excluding the goodwill charge?

Thanks, Joe. Good clarification. Let me hit the latter one first. That would be expenses excluding the goodwill charge, I believe. And then the first one, your first question, the accrual actually only contributed about five basis points roughly to the net interest margin. And so it wasn't the major contributor. The major contributors were the magnitude of the loan volumes, the types of loans and then the performance in our securities portfolio, which was up -- the securities portfolio was, did very well in Q3 relative to Q2 and probably contributed another 17 basis points.

OK. So did you, in September, you much about this kind of 555 or 550-core number for the quarter?

Let me make sure I understand your question. In September were we much above -

Like for, if you're looking at the margin kind of on a monthly basis, kind of where you ended the quarter was it much above the average for the quarter? Kind of giving us more of an indication where we may be kind of going in the fourth quarter and forward?

Yes, -- one, I don't have that specific statistic in front of me, but I think, I could say that I would not necessarily extrapolate that rate of increase into the fourth quarter. That rate of increase was due in part to the interest rate pickup but also in part to loan volume and the type of loan...

Right.

as well as our securities portfolio. So, in part, I don't think you're going to see the kind of pick up we saw in the securities portfolio in Q4 that we saw in Q3.

Fair enough. Thanks so much.

Thank you. Your next question comes from Charlotte Chamberlain of Jefferies & Co. And if you're using speaker equipment, please lift your handset.

Hi. Can you hear me now? Hello, can you hear me now?

Yes, we can.

OK. Great. Good afternoon. With respect to your contingent convertible debt and also the options expense, as I understand it, next quarter you have to report going back the whole year as if those -- convertible debt, those shares were part of fully diluted. And I assume that starting next year, you're going to have to, as Ken mentioned, you're going to have to report your earnings with the FAS 123 dilution for options. And I was wondering if you could give us some sense of where this quarter would be in terms of fully diluted share count and fully diluted EPS if both of those changes had been already implemented.

Well, that's a long question and probably a long answer. First of all, just a clarification. If we are caught up in EITF 048 we would not have a quote "restatement". We would just issue our filings with recalculation, if you will, of past year.

But it's important to note that while we believe based on the most recent pronouncement that our convertible debt is impacted by the pronouncement, how it is covered under the pronouncement, that the terms of our convertible debt, we believe and will allow us to essentially avoid the as-if converted method that the EITF would call for. And the reason is -- there's a couple of factors here.

One is we have indicated in our SEC documents that we do intend to settle in cash and our indenture allows us the option, gives the company the option to settle either in cash or in stock. So unlike some convertible debt offerings out there that do not have that option, may have to modify their indenture to acquire that option, we already have that option and have indicated that we intend to. We're currently working with underwriter counsel to take steps necessary to modify our indenture or, if necessary. We're not even -- it's not even clear to us that we will need to do that. But we are working with outside counsel to determine what steps are required for us to not have the security be covered under EITF 048 that in a way that would require us to use the as-if converted method.

OK.

Now, to get to your hypothetical, if we did not have that option, if our indenture was not structured the way it is, if we did not make modifications as we believe is possible, then you would have approximately 4.4 million new shares and about 11% dilution.

OK. And would that be on top of what I calculated to be about 11% dilution from options?

Well, we haven't made the calculation as to, you know, the pro forma of options impact, options expense impact in Q3. We typically do it, and publish it in our 10-Q. Last quarter, as I recall, it was about 10 cents a share. I suspect this quarter it will be a similar number.

OK. So those are separate but in worst case we'd have 10 cents per share from options and then I guess, for this quarter roughly I guess 5 cents from COCO.

Yes, although I mean we can conjure up all sorts of worst cases here.

Is there something worse than 15 cents?

My point is that I don't think it's yet appropriate to throw the convertible debt into that calculation.

OK. But there's nothing worse than the 15 cents, is there?

No, I just don't think -- I'm just not convinced that your hypothetical is a relevant one to our Q4 -- '04 results.

OK. One other question. By my calculations, in the past, as I remember, you actually calculated efficiency for us. And that seems to be missing this quarter. By my very rough calculations, and I don't have the ability to figure out what the capital contribution to goodwill is and all that. But my calculation would say something like 68% efficiency ratio this quarter without the goodwill charge. Is that about right?

That's about right.

OK. And then the final thing, forgive my phrasing of this, but can you give us some assurance that we're not going to have another plop, plop with Woodside the way we did with Alliant, in other words, this thing, the first is the last in terms of the charge-off of goodwill.

As of September 30, there is no more goodwill on our balance sheet related to Woodside Asset Management.

That's good to hear. Thanks so much.

Thank you. Our next question comes from Gary Townsend of Friedman Billings.

Good afternoon, everyone. Ken, perhaps you alluded to changes in how you'll do share base comp. Are you able to provide any details on that yet? Are you still waiting to discuss that with employees?

I would say the latter, Gary. You can be assured that we're making changes, but I would appreciate the opportunity to flush that out and then communicate it to the employee base first.

Is that likely to be announced sometime this quarter, then? Is that reasonable or --

That's reasonable.

And in terms of what you are looking to, perhaps Jack could discuss what kind of look-back that would have in terms of impacting your historical financials and prospectively, too.

Well, I'm not sure what you mean by look-back, Gary. What the direction we're headed with under the options expensing rules we would be, if they continue to be in effect in July of next year, whatever unvested options that exist at that time would go into the expensing calculation. And so what we're doing is taking some proactive steps early to reduce that number in incremental options that we issue.

OK. And finally with respect to impairments. I would assume that as part of the third quarter review for impairment with the charge on Woodside that there's also been a review of Alliant and that that came out OK.

Yes, we look at all our intangible assets on our balance sheet quarterly to see if there's been any, some significant event to suggest or otherwise indicate that we should conduct a more in-depth review. At the end of Q3, we did not believe that that was appropriate for Alliant. Whether that is also the case at Q4 or Q1 or Q2 of next year, it remains to be seen. But at this point, we did not believe that it was appropriate in Q3.

Even with the change in the compensation structure there, you didn't feel it was required or necessary?

Well, we took a hard look at it earlier in the year. In fact, we took a hard look at Alliant twice earlier this year. Once before the compensation structure -- one after the compensation structure. So there was nothing new about the compensation structure as far as we were concerned in Q3.

OK. Thank you.

Thank you. Our next question comes from Andrea Jao from Lehman Brothers.

Good afternoon.

Good afternoon.

I was hoping you could give us a bit more detail about the margin drivers, we should be mindful of as we look into this quarter and into 2005.

Sure. I mean some of the obvious things are changes in the Fed Funds rate and the prime rate. So to the extent that you have a perspective there, that will drive our margin as we go into Q4 and Q5 and into 2005. We're going to give you additional information on our 10-Q related to the mix of our loan products and to the extent you believe and as we do that you're going to see somewhat more emphasis in that mix related to structured financing and factoring, that will tend to drive our margin, because they tend to be higher yielding products.

Third, the pace of our loan growth will have a impact on that margin. And to the extent you believe that the pace of our loan growth is likely to be higher due to overall activity in our marketplace versus another perspective, then you're going to see a stronger growth there.

In our securities portfolio, we've made some significant changes really in the makeup of the securities portfolio. It's really staged over the last 15 to, you know, over the last 15 months, and I would say that the last major modification in terms of moving the duration of that portfolio toward a three-year marker occurred in the second half of Q2 and in the first half of Q3. And so the securities portfolio had a -- did provide a significant pick up in margin, Q3 over Q2. I would not expect to see that have the same impact going forward as I mentioned earlier.

And then, of course, our total on the deposit growth. To the extent that our deposit growth exceeds loan growth, that gives us more money to invest that -- in a risk free rate of return, and as you know the cost of our funds is significantly below that of the US treasury.

Great. Could you add a bit more detail in terms of deposit pricing as well as much how much your loan book remains on floors(ph)?

Sure. I'll do my best there. In terms of the loan book that remains at floors I think it's down to zero.

Right.

So, all of the book to the extent it floats is floating. And as you may recall, our book of loans is about 75, 80% floating. The second factor that you brought up was deposit pricing. I think, well let me just say that we have now increased our prime rate about 75 basis points, and we have not really adjusted our deposit pricing appreciably. We think that that's probably not sustainable in Q4 and therefore we're assuming some modest increases in deposit pricing, somewhere on the order of perhaps 10 to 20 basis points in aggregate. But not a lot. We continue to have you know sticky, if you will, deposits in our interest-bearing accounts.

Great. Thank you.

Thank you. Our next question comes from Fred Cannon of KBW.

Good afternoon. Two questions. The first one on expenses. It was nice to see the expenses come down more or less in line with some of the decline that we saw in the market-related income. And I was wondering if you could give us some guidance, Ken, in terms of the relationship between growth or lack of growth in the Alliant fees vis-à-vis expense growth. You gave us some good guidance last quarter in terms of kind of a relationship there. If we see growth there, kind of the question is how much can we expect to flow to the bottom line?

Let me take a partial stab at that. You know we report setting aside the goodwill category we report 10 items of non-interest expense, excuse me, 12 items of non-interest expense. I think we are down to 10. I don't necessarily consider that indicative of what you'll see in Q4. But we are pleased with it. You know, the relationship at Alliant for Alliant revenue, as with most investment banking firms, is that you get to use, borrow a phrase, eat what you kill. And as a result, compensation flows directly with the deals and the transactions.

We like in that entity like most investment banks have an arrangement that basically allows compensation to accrue at about 50% of incremental revenue. And so to the extent we grow revenue there, we will see increases in compensation. With that said, I want to correct an earlier comment I made. I think it was in response to a question from Joe Morford, when I said expense is flat to Q3. He asked whether it was excluding the Alliant goodwill. No, it should not. My answer was yes. The answer should have been no, and in part that is an expectation around Alliant revenues. I'm sorry, Alliant goodwill I should have said.

Thanks, Jack. One other question on capital. I noticed that your tangible equity to assets climbed to 9.9, I believe, percent by the end of the quarter. You repurchased no shares. Now we have seen some, we have potential dilution from option expensing and maybe or maybe not from the COCO. I was wondering, if you could give us any thoughts in terms of that capital level, it would appear like it's climbed back to a level similar to, where you had thought about repurchasing stock a year or so ago.

I think that's an accurate statement.

OK. Thanks.

Thank you. Our next question comes from Campbell Chaney of Sanders Morris Harris.

Good afternoon. Most of my questions have been answered but let me ask this. I think Jack you mentioned for every 100 basis points move up in the Fed Funds rate you would see a 30, 40 basis point increase in your margin. Would that be on a linear basis, so we could bifurcate it by 25 basis point moves? Would that be fair?

It is fair, but it is important to keep in mind that the nature of a significant part of our business, as I mentioned earlier, is some structured products and factoring, and to the extent -- and just in our basic core traditional loan business, to the extent loans are paid off early, to the extent we have a large fee arrangement related to a specific loan, say in the factoring, we would recognize that kind of income in a bit more lumpy than say a typical three year term debt. So you are going to see some volatility around that, 30 to 40 basis points or as you said linear equivalent of it. And so in any given quarter we could be a little under that or ahead of that depending on these other factors I mentioned.

OK. That's fair enough. And then also on your COCO, you contingent debt, is there a cost associated with modifying these agreements, these indentures?

At this point, we don't believe so. We believe that there will be some legal costs perhaps, some accounting review costs. Let's call them document-related costs but in terms of having to purchase the bondholders approval, we don't believe that's the case yet but we're continuing to look at it.

OK. But it's still too early in the game to decide that.

To know for certain, that's correct.

OK. That helps. Thank you.

Thank you. Our next question comes from Brian Harvey of Fox-Pitt Kelton.

Thank you. Just had a couple of questions, first one was on loan growth, could you sort of quantify, where the growth was coming from this quarter by some of the categories that you mentioned before?

OK. Brian, this is Dave Jones. And let me answer that question, if I may. We had good loan growth across the portfolio. I would say that the larger share of the growth came from our software companies. We also had good growth in the loans that we made directly to the venture capital community, and also in our private client services arena.

And if you could break it between the structured finance factoring, do you have dollar numbers there? How much that was?

We had, in terms of the commercial finance or asset based lending group, we had roughly $25 million, period into -- or average growth. And then in terms of our factoring group, it was also ballpark, $20, $25 million of growth.

OK. The other question I had, Ken, you had mentioned in the beginning that expense control was a very high priority for you this year and next year. Could you maybe share with us some of the thoughts on that or some of the programs maybe that you're looking at?

Sure. In general, we are determined here that we're going to do a better job of controlling our expenses than we have in the past. And you've already seen a touch of that in this first quarter. And we anticipate that we'll be able to make, in relative terms, progress in the coming quarters. When I say in relative terms, obviously our revenues are going to be growing in the coming quarters, too.

So, any improvements using the expense structure would be clearly taking into consideration the improvements that would be inherent to an improvement in the revenue streams calculated on a percentage basis. But there are other opportunities that we're exploring right now and I would prefer to not go into great detail with respect to specifics. I would, however, underscore our determination.

Would you like to share with us maybe a target that you have in some efficiency ratio or some other metric that you think is appropriate?

Well, I can share with you that our intention over the longer haul is to return to the efficiency ratio neighborhood that we were operating in prior to the on et of the decline. And that would have been in the mid to high 50s in a general sense. So, we intend to return to that area over the course of several quarters.

OK. Thank you.

Thank you. Our next question comes from Charlotte Chamberlain of Jeffries & Company.

A couple of kind of cleanups. On corporate governance, with the addition of these three, I assume, totally outside directors, is the board now the majority of the board now outside directors?

Charlotte, the majority of the board has always been outside directors. The only inside directors on the board in these past couple of years have been myself and Harry Kellogg. Unless you have the information with respect to their activities that I don't, I don't know of any others. And these three are certainly in that same tradition.

Were they replacing retired directors or just new?

You may recall that we put into place some years back term limits. And so on average we are having approximately two directors leave the board every year. So, these are replacements for people that have left the board. In some cases, there have been some months that have gone by since they left the board. And we're always in a range between 8 to 12 in total. And that would be 8 and 12 outside directors.

A couple of other things that need to be noted here on the corporate governance side. One is that our -- we have the Chairman and CEO are two separate people. I'm only CEO and not Chairman. And our chairman is indeed an outside director. And secondly, that Harry is actually a director only of the bank and not of the holding company. And I would infer that your interest would be primarily in Silicon Valley Bancshares, the holding company and not the subsidiary, or the bank. So, with respect to the holding company, we have only one inside director and that would be myself.

OK.

And I'm not chairman.

OK. The other thing is most of the companies or most of the financial companies that we've talked to have mentioned rather substantial Sarbanes-Oxley expenses, both this quarter and in fact they anticipate higher ones next quarter. But Jack, I didn't hear anything about that from you. And I was wondering, if -- how those, if you've already charged them off, or you provided for them earlier or what's happening with the Sarbanes-Oxley expenses?

Sure. That's a Good question, Charlotte. Clearly, we're being impacted by Sarbanes-Oxley, as every other public company. We happen to be a - what I would say is a fairly long way down that road. And we did incur significant costs related to Sarbanes-Oxley earlier in this year. It's not to say we're not going to, going to also have cost in Q4 and Q1 but those costs will move from what was a significant investment in the documentation and control and remediation efforts through most of the first 10 months of the year, 9 months of the year toward more costs related to KPMG as they go through with their tests of design and test of operational effectiveness. So, we will see some pick up in cost.

That probably this, there will be a consulting based costs and those consulting based costs will be incurred probably over the period primarily over the period, period November, December, January and February. But they are not going to be, one, they're not going to be entirely lodged in a single quarter, and they are likely to be somewhat less than the costs, we've seen today related to our getting ready for KPMG. That's one last item is that it doesn't include the cost, the significant internal soft dollar costs of commitment of time, and energy, and resources to being responsive on all fronts related to Sarbanes-Oxley, and being successful in that effort.

OK. And then, the final thing, the off balance sheet deposits also went down. Marc, can we just assume that the same comment you made about vacations applies to those deposits as well as the on balance deposits, it's just a pause that refreshes hopefully?

Yes, my comments were regards to the total deposit position of the bank, which moves on and off.

OK. Great. Thanks again.

Thank you. Our final question comes from Andrea Jao of Lehman Brothers.

Hello. Just a follow-up, hoping to share your thoughts on loan loss provisioning, as well as your reserve to loan ratio, as loans grow and certain types of loan grow?

All right. This is Dave Jones. And I will tackle that one. Our expectation is that the reserve will generally come down for the next period of time. Mindful of the fact that what we use is a 12 quarter average, and as you look at our loan loss experience over the last six to eight quarters, we've been very low, bringing the average down. So there are fewer quarters to average down. And I expect that we will continue to have reasonable levels, approximately what we've had the last year or so of charge-offs. So that will drive the reserve down. Partially offset by growth in the loan portfolio. So, we are certainly working to grow the loan portfolio and it will absorb some of what otherwise might be coming down based on our improved loan loss experience.

Great, thank you.

Thank you.

Thank you for joining us today. And we'll talk to you again next quarter.

And thank you. That concludes today's Silicon Valley Bancshares Third Quarter Financial Results Conference Call. At this time all sites may disconnect.