SVB Financial Group (SIVB) 2005 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's call is the Silicon Valley Bancshares first quarter conference call hosted by Ms. Lisa Bertolet. I would like to turn the call over at this time. Please begin.

Thank you. This is Lisa Bertolet, Investor Relations Manager for Silicon Valley Bank. . Today Ken Wilcox, our President and Chief Executive Officer, and Jack Jenkins-Stark, our Chief Financial Officer, will discuss our financial results. Following their presentation, Ken and Jack, along with Marc Verissimo, our Chief Strategy and Risk Management Officer, and Dave Jones, our Chief Credit Officer, will be available to answer your questions.

I would like to start the meeting by reading the Safe Harbor disclosure. This presentation may contain projections for 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 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 16, 2005. 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'll turn the call over to Ken.

Thank you, Lisa. Good afternoon and thank you for joining us today. I'm pleased to tell you that we've had another good quarter, one in which our long-term investments in diversifying our service offerings, increasing our global presence it's building a seasoned management team, are paying off. Our global financial services team is building its visibility and our international offices are gaining traction. We are gaining momentum in our commercial, investment banking and fund management businesses, and the growth we're seeing in yields from our loan and client investment portfolios is something we expect to maintain.

As a result of this growth and of our management of factors contributing to credit quality this quarter exceeded our original guidance of $048 to $0.52 per share, delivering earnings per share of $0.62, up from $0.51 last quarter. Net income and net interest margin both increased significantly, as Jack will tell you in more detail in a moment. We also set a new historic high for average quarterly loans.

We're generating more activity and new revenues in key areas of our business. We're adding new products and services for later stage companies, and while deposit growth was relatively flat this quarter, we've grown quarterly average loans to 2.2 billion, their highest level in our history. The demand for working capital financing among companies, which is driving this loan growth, is a very good sign for us, for our clients and for the industry as a whole. We continue to bank the lion's share of venture-backed companies, 44% according to the most recent numbers from Venture 1. As part of our strategy to meet the needs of companies at all stages, we are now able to offer clients access to a greater array of financing options and exit strategies. This added flexibility is a direct result of our partnerships with Partners for Growth and Gold Hill Venture lending, which closed its first $250 million fund in March. Another central component of this strategy is the array of M&A and private placement services we offer through our investment banking subsidiary, SVB Alliant.

Turning for a moment to external factors, we are encouraged by recent government and industry forecasts of meaningful growth and technology spending by corporations in the coming year. Many industry analysts believe that companies are poised in 2005 to make the technology purchases they have been putting off for the past few years. These predictions bode well for our client base and for new company formations, as market opportunities for their products promise to grow. While the NASDAQ continues to be volatile and employment numbers are still lower than anyone would like, we see encouraging signs in other arenas. On the venture capital front, U.S. investments in technologies and life science companies rose by 9% in 2004 to 22.4 billion. And recent reports of venture capital fundraising indicate that there will be ample investment capital available in 2005.

The merger and acquisition market, while experiencing a slower transaction pace in the first quarter, has seen valuations rise, resulting in the aggregate value of completed transactions growing from 4.3 billion last quarter to 7.1 billion in the first quarter of 2005. Evaluations are the highest they have been since the first quarter of 2001. The median valuation for venture-backed companies is also up to $60 million, its highest level since the third quarter of 2000. All of these trends are good news for Silicon Valley Bancshares and for our clients. As we said before, we're poised to take advantage of every market improvement as it comes.

This readiness extends into every part of the organization. Operationally we're firing on all cylinders, and although expense control remains an area of focus, our investment in Sarbanes-Oxley and other regulatory compliance is paying off. In addition to successfully meeting our regulatory obligations and the most recent group of Sarbanes-Oxley deadlines, we have become a better, more analytical and more accountable company. Our transformation from commercial bank to a diversified global financing company is still under way. But we are more the latter than former today. We owe our thanks to the employees of Silicon Valley Bancshares for their tireless efforts in making our collective vision a reality and helping to build a business to meet our clients' needs at any stage in their company's life cycles.

Looking at our products, our infrastructure, our people and our networks, our competitive position has never been stronger. Moreover, our reputation is a company that increases our clients' probability of success, its growth. We will continue to leverage these strengths to our advantage and to the advantage of our shareholders. I thank you for joining us today. Now I'd like to turn the call over to Jack.

Thank you, Ken. And thank you all for joining us today. It's a pleasure to be talking to you about another good quarter. As is my practice, I'd like to highlight a few points before I get into the specifics of what the SVB team accomplished this quarter. First, as you all know, we announced last week that we were revising our guidance for the quarter outwards by $0.11 per share. Frankly, coming out of an excellent Q4 last year we didn't expect in Q1 we would hit the top of our internal estimates in so many areas at the same time. In large part, it was the cumulative impact that was unexpected.

Second, as we also reported, our credit risk management continues to exceed our expectations. Third, expenses were in line with our expectations, however there is still work to be done. Fourth, deposit growth, while slower than Q4, was consistent with our expectations. And finally, while we continued repurchasing shares in Q1, it is not easy keeping up with the earning power the organization has delivered this quarter.

With that, let's turn to the results. Earnings per share at $0.62 exceeds the top of our original guidance by $0.10 cents, but we are within the revised guidance we announced last week. This number represents an increase of 22% from the fourth quarter and 63% over the first quarter of 2004. Return on equity in the first quarter was 18.4%, compared to 14.9% in Q4 last year, and 12.2% in the first quarter of 2004. Continually improving yields from our loan and investment securities portfolios due to higher short-term interest rates raised net interest margin to 6.2% in the first quarter, a 23 basis point increase from last quarter and a nearly 100 basis point increase from the first quarter of 2004.

As detailed in the news release, increases in our prime lending rate and growth in our structured lending products were the primary drivers behind a rise in loan portfolio yields from about 8.8% to nearly 9%. A higher yield on our investment securities portfolio from about 4.2% in the fourth quarter of 2005 -- excuse me, 4, to 4.6% this quarter also contributed to the higher net interest margin. Net interest income was up in the first quarter, increasing 2 million, or 3% from last quarter, to nearly $70 million, driven by an increase in income from the loan portfolio.

The rise in loan portfolio income resulted from an increase in average loans and a higher loan yield stemming from two increases in Silicon Valley Bancshares' prime lending rate of 25 basis points each over the last two months. These increases affected approximately 75%, or 1.8 billion of the Company's outstanding loans. Quarterly average loans rose 3.2% to 2.2 billion during the first quarter, the highest average quarterly rate in our history, and more than a 20% increase over the first quarter of 2004. While period-end loans were only up slightly from Q4, it is important to recognize that this result is consistent with our loan growth pattern over the past five years. Quarterly average deposits also rose slightly during the quarter to 4.2 billion, although period-end deposits remained at about 4.2 billion. This end of pattern is also consistent with our deposit experience over the past five years. As we stated in our annual guidance during last quarter's call, we expect quarterly average deposit growth to be slower in 2005 than it was in 2004.

Our client asset management business continues to gain momentum, with quarterly average investment funds within management rising to 11.5 billion in the first quarter from 10.9 billion in the fourth quarter of 2004. With the period end Q1 2005, client investment funds finished at 11.7 billion, up 4% from 11.2 billion last quarter, and up 17% over the first quarter of 2004. Non-interest income at 26.2 billion in the first quarter of 2005 was down by 6% from last quarter, but higher than the first quarter of last year by over 5%. This is consistent with our guidance for 2005. Lower net gains on investments and decreased letter of credit foreign exchange fee income contributed to this decrease, although it was offset in part by a 27% increase in corporate finance fees.

Income from client warrants was also slightly lower this quarter at 1.7 million, compared to 1.8 million in the fourth quarter of 2004. As you know, the timing and amount of income from client warrants typically depends on factors beyond our control, and that income is likely to vary from period to period. In all of 2004 we received warrant income from 64 companies. In the first quarter of 2005 we received warrant income from 24 companies, or 38% of the 2004 total.

Turning to expenses, non-interest expense was down from the fourth quarter 2004 to the first quarter of 2005 by 3.8 million, or almost 6%. This decrease was primarily attributable to lower variable compensation expenses, as well as our continued focus on cost control. As was the case with other publicly traded companies, costs related to Sarbanes-Oxley compliance had a higher than expected impact on our expenses in Q1, and some of these costs are likely to continue through the remainder of the year, a comment that you are probably hearing from other companies as well. We are working with our auditors to achieve some efficiencies, moving forward. Unlike some other institutions, we achieved a critical outcomes of filing our 10-K on time, and we had no material weakness, results of which we are understandably proud.

What more can you say about credit quality at Silicon Valley Bancshares? Non-performing loans, or NPL's, in the first quarter were almost 60 basis points of total gross loans, compared to 64 basis points of gross loans last quarter and 70 basis points in the first quarter of 2004. We secured 2 million in net recoveries in the first quarter, compared to net charge-offs of 2.5 million in the fourth quarter of 2004. As a result of these recoveries and our strong credit profile, we recorded a provision -- a recovery of provision for loan and lease losses of 3.8 million in the first quarter, compared to recovery of 3.4 million last quarter. Even so, the allowance to cover potential loan and lease losses was at 256% of NPL's at March 31, compared to 251% last quarter.

I'd like to reiterate a point we made last quarter regarding a change in our accounting disclosure to the way we segment our allowance for loan lease losses, or our ALLL reserve. Previously our ALLL balance included reserve for potential losses in both our funded loan portfolio and our unfunded commitments. Beginning in Q4 last year, we started it reflect our reserves in two places on the balance sheet. Our reserve related to funded loans is reflected in the ALLL and our reserve related to unfunded commitments is shown under allowance for loan loss contingency. This change is consistent with the treatment other banks have applied to this matter.

Going forward, to get a full measure of funds set aside for potential losses related to loans and un-funded commitments, one must look both at the asset side of the balance sheet and the liability side. As indicated in our press release, this change had no impact on our results of operations, stockholder's equity or capital ratios. Silicon Valley Bancshares repurchased more than 760,000 shares of common stock in the first quarter of 2005 under the terms of our stock repurchase program. During the first quarter the Company also put into place a 10(b)51 plan which allows us to automatically repurchase a predetermined number of shares per day during the company's quiet period.

Looking forward to the second quarter of 2005, we expect earnings to be between $0.54 and $0.58 per share. This assumes a 25 basis point increase in the Fed Funds rate during the quarter, a modest provision, continued focus on the expense management fund, somewhat stronger loan and deposit growth in Q2 compared to Q1, stronger warrant income, and non-interest consistent with the first quarter. For the remainder of the year we expect increases in short-term interest rates consistent with what the forward curve is showing - loan growth exceeds deposit growth, a modest provision for loan losses and non-interest income that is consistent with 2004.

On the expense front, while we are working hard, we may see somewhat higher than expected expenses related to two factors. First, it is clear from our experience in this past quarter the continuing efforts to respond to Sarbanes 404 will cost more than we might have thought just three months ago. Second, as you know in anticipation of the advent of options expensing, we revised our equity compensation program late last year to reduce the total number of options granted and to include the use of both restricted stock units and other types of equity awards, or combination awards, as well as more traditional options. As a result the cost of REFU's will be reflected in our income statements this year even though the cost of options will not, based on the actions of the SEC this past week.

To wrap up, we are continuing to focus on revenue growth and expense management and improving certain of our business processes. Positive trends we're seeing across all segments of our business are encouraging and we have every reason to expect that momentum to continue. Thank you.

We'd like to open it up for questions now, please.

[OPERATOR INSTRUCTIONS] One moment please for the first question. Brian Conn, your line is open.

Thank you. Good afternoon, everyone.

Hello.

Hi.

Congratulations on another good quarter.

Thank you.

Wanted to hit two things. First on the margin, the prime rate was up roughly 50 basis points on average in the first quarter, and your margin was up roughly 25 basis points. We've already started the second quarter, the average being 30 basis points higher. It seems like over the last couple quarters you've enjoyed a higher benefit than sort of what was estimated, either through the K or through the conversations on the call. Is that something we can expect to continue or should we see it top out?

Good question. We still believe that -- and we've tried to make very clear -- that as far as interest rates go alone, we're still seeing, or expecting to see, somewhere between 30 and 35 basis points per 100 basis point increase in the short-term rate to get our margin. What you are also seeing, or what is being reflected in our results, is the higher loan growth. So you have more higher yielding assets and a shift, a modest shift this quarter, in higher yielding products within the loan portfolio, and then finally, some additional moves we made this quarter to move some of our short-term investments into longer term, higher yielding products. So just strictly speaking on the interest rate front, we still believe 30 to 35 basis points is the correct metric. But why you're seeing and we're seeing the higher net interest margin of -- in the example you are using nearly the equivalent of 50 basis points on 100 is related to the other three factors.

And secondly I know on Alliant, the goal was to get it to break even or profitable this year. I just wanted to know what revenue number that would equate to to break even. And then it seems like M&A activity in the first quarter, at least announced M&A activity among VC-backed companies I think hit like a three or four year high. Should we start seeing some benefit in that in the second and third quarters?.

Well, I'll speak to the first one and I'll encourage anyone else here to chime in on the second one. On the first one, we -- I think we have been reluctant, given the progress we're making and the changes at Alliant, to give you some estimate of what we think the annual break- even number is. However, you can see in our segment reporting information , you can see some indication of that. But it's going to change and it is related to a lot of factors that we just simply are not going to give you a firm estimate on that number at this point.

On the M&A front, I think we are seeing a lot more activity. I think in Q1 it was actually down, in large part I think because of Sarbanes. And speaking from our own experience, what we were seeing is a lack of interest by the accounting firms in providing comfort letters on annual result that would allow someone to consummate a transaction in Q1. They simply wanted to wait, or require the company to wait, until the 10-K was out and the Sarbanes review was completed. So, we believe that there is a lot of activity in the M&A market. We are seeing a lot of activity. We think Q1 was a time for, say, more engagement letters and that kind of thing than it was for a consummated transactions.

And Brian, this is Marc Verissimo. I would add that we do think that Sarbanes will increase the M&A activity in the middle market. And it will be -- it will increase it because the cost and the burden of going public has risen a fair amount. So companies are now looking to the M&A exit, rather than an IPO, which they might have done a few years ago.

How long is the lag typically between engagement and consummation of the transaction?

I would -- you know, generally it can range anywhere from six to eight months. And the average it is probably closer to eight.

Okay. Thanks, guys.

Our next question comes from Gary Townsend, Friedman, Billings Ramsey. You may ask your question.

Thanks very much. Good afternoon. Ken, you talked about expense control and how it's a focus. Can you give us some forward-looking color with respect to what you're doing and when we might see more in the way of just a reduction in the expenses and the expense growth?

Yes, I would give you some indication of what we are doing. Giving you forward-looking color is obviously a more difficult thing to do. Let me focus on what we're doing a little bit. And if Jack feels like giving you forward-looking color, I guess I would encourage him to do it.

I'm not sure I would recognize it if I saw it either. But anyway --.

In terms of what we're doing, there are a couple of areas and a couple of initiatives that I could reference here. One of them would be that our lease expense is in an overall sense lower because of the fact that some of our leases have run their course and we have been in a position to renegotiate. And that, of course, is very, very helpful. A second thing that I would mention is that we are absolutely determined and believe that we're making good progress in terms of growing revenues faster than the -- than head count proportionate to the way that we may have in earlier years and earlier quarters.

A third thing would be that we are -- we're doing our absolute best to focus on what I think of as automating repeatable acts so that, to the assistant that things can be accomplished through technology, as opposed to necessarily through some of the more labor-intensive approaches that we may have taken historically, we are attempting to do that. One good example would be our workflow automation product,called Turbo Car, which in effect enables us to a certain extent automate production of what we call CAR's, credit action requests. And that of course is very, very helpful to us, not only in terms of making it easier for people to dupe things, but also as a side benefit, it helps us in data collection, which ultimately it makes it easier for us to look at trends in our portfolio, which of course then ultimately has a lot of different benefits that I'm sure you could imagine.

And a final one would be trying to figure out the the extent to which we can, through segmentation, serve some parts of the market using a technology platform perhaps more efficiently, in other words a lower expense than some of the other parts of the market, which require a more labor-intensive approach but then justify it, of course, because they are of course [inaudible] more profitable from the investor's, meaning your, point of view. And also those would be major initiatives. And in addition to that, we're obviously doing the kinds of things that you would expect every responsible company to do, and that is focusing in on some of our spending patterns along the lines of traveling expense and cell phones and PDA's and that sort of thing. But that -- that is only goode policy through good times and bad, and that's not the kind of thing that yields huge results anyway. It is just a question of forming good habits.

And with that -- oh there is one other thing I might mention, and that would be that hopefully Sarbanes-Oxley is only going to be a huge boon for the accounting profession in the first year. And in subsequent years there will be some benefit to the investment in the first year. And that the bulk of the work may be out of the way. Having said that, I would also argue that, as a regulated institution, the bulk of the work was already, to some extent, out of the way. And we probably engaged in unnecessary duplication in the first year of Sarbanes-Oxley, but that's just me whining.

Well, we can be hopeful. Let me ask just two quick follow-ups. There has been very little pressure on your deposit costs. Do you see any developing in the coming quarters that would be material? And then secondly, you have released a lot of reserves, but you still have a significant [inaudible] allowance for loan losses due to David's good work. Can you discuss the likelihood you might bring that down a little further?

I think we ought to let Dave try his best to answer that one. I will say that that's all dependant, of course, on what kind of credit experience we have going forward, because our ALLL formula is such that it does the absolute best imaginable to predict the future and discount it into the present and make judgments accordingly. So, Dave, do you want to do something with that? And Marc, would you like to talk about deposits?

Yes.

Go ahead.

Thank you, Gary. This is Dave. In terms of the reserve, as Ken mentioned, obviously the big unknown is what our credit quality is going to be, specifically over the next several quarters. Second is loan growth, and what Jack has offered in his comments would be an indication that we don't think there will be material change in our credit quality in the foreseeable future. There could be, and we are endeavoring every day to grow our loan portfolio. So growth will require an increasing reserve, or will decrease the amount of reserve that might otherwise be freed up in the next couple of quarters. So no material changes in the reserve, going forward.

And Gary, this is Marc. To talk about your question about deposits and paying interest on the deposits, one thing that's helping is that the demand deposit is becoming an increasing part of the pool. And as you know, those are zero costs and it is up to about 63%, close to 2/3 of the deposits. We are looking in this upcoming quarter to selectively look at rates and increasing those rates, so we would expect rates to selectively go up as the Fed makes further moves.

Thank you very much.

Our next question comes from Joe Morford with RBC Capital Markets. Your line is open. You may ask your question.

Great. Thanks. Good afternoon, everyone.

Hi, Joe.

Actually I had a couple of questions for Dave. I guess first, just if you could just -- what was the nature of the recoveries that you booked this quarter? And, you know, do you still see some others -- opportunities out there for recoveries?

Thanks, Joe. And, again, this is Dave. In terms of first quarter recoveries, there were two in the 7-figure range, each coming from software companies that had been successfully sold and permitted a, say, full recovery of the prior charge-off. Do I think that there will be other recoveries? Yes, of course there will be other recoveries, the timing and the amount of which obviously is the uncertainty, thus the original charge-off. The inventory, if I may call it that, of prior period charge-offs from which we may realistically expect recoveries has depleted over the years simply due to the lower level of gross charge-offs. So I don't think that for the present inventory of recoveries that there is any possibility at all that we'll see another recovery quarter like the first quart neither the near term.

Okay. And then I guess the other question being, just if you could talk a bit more about the mix of loan growth again this quarter. It sounds like you are still seeing a fare bid in the structured products. And also any color on the niches? And also I guess the guidance was for a little faster loan on deposit growth in the second quarter and to the extent you'd comment on what's driving that, that would be great. Thanks, Dave.

Thank you. And again, Dave to speak to that. Let me answer the second one first in terms of second quarter. The idea would be that the first quarter is affected by the holiday season and the fact of businesses and the venture capital community and so forth would be consumed in the last month of the fourth quarter, thus there is a slow start to the first quarter. Going into the second quarter then, we've have a good solid 90 days productivity and, you know, it's reasonable to assume that that's going result in loan growth. So that's our expectation as far as growth.

In terms of the components of growth our asset-based lending and our factoring products are continuing to grow, particularly in combination between the two we are growing. And the nice part of that, beyond just loan growth, is that we are able to get a meaningfully higher compensation from those products. In terms of the portfolio and the niches where we've had growth, the hardware section -- sector has been picking up in the last couple quarters nicely. The software area was relatively flat. Our lending into private equity, where it is that specifically we lend to venture capital funds or venture capital firms, has been a nice source of growth and one that is important to us because of the value the venture capitalists bring to our business model.

Okay. That's very helpful. Thanks, Dave.

Our next question comes from Todd Hagerman with Fox- Pitt Kelton. Your line is open. You may ask your question.

Good afternoon, everyone. If I could, Dave or Marc, just follow up on that last question, I was wondering if you could give just a little more color in the context of both the loan portfolio, the growth there, and as well as on the deposit side. But in particular, what changes or mix you guys have seen in terms of if I think about the pre-profit companies or the early stage financing, versus, say, the asset-based or the factoring with, say, the more the middle market kind of oriented or corporate technology lending, what kind of shifts have you seen there over the last 18 months as it relates to both on the loan side as well as on the deposit side, how that is affecting your business?

This is Dave, and let me speak to it from the lending side and Marc may touch on the deposit side. What we have seen in the mix, and I may go back a little bit farther than the 18 months that you indicated. Our business has changed in the 2001, 2002, 2003 timeframe with a decreased level of new company fundings from the venture capital business. We were successful in retaining a lot of these companies, working with them, holding their hand in some cases while they moved into the revenue stage and began to receive accounts receivable. So we moved from the early stage term loan to the accounts receivable supported lines of credit. And some of our clients, we're happy to say, made it into the corporate technology stage where we have a wide variety of credit and non-credit product offerings.

In the last 18 months, the last six or 12 months maybe, we have seen an increased level of Series A funding by the venture capitalists. And we are aggressively seeking out opportunities to make early stage term loans to these companies. However, it is important to recognize that, while we have approved many, we have booked many, we permit these clients a period of time in which to draw. They may have in some cases six months, nine months or 12 months to make their initial draw. So we booked a lot of these. We just haven't started seeing a lot of incremental fundings. We have enjoyed the other revenue from non-credit products. And let me let Marc speak to deposits.

On the deposit side, when we look at the growth in DDA, it has been from two areas. One area is when growth in accounts, so we have more clients than we did, let's say, two years ago. But also and as importantly, maybe more importantly, we have seen the average DDA per account go up. And that is a reflection to me as sort of the economic vitality.

And, you know, when we look at CFO's, what they tend to do is say say, "Geez, I've got - I want to keep 60 days worth of payables, 90 days worth of payables in my checking account. And, as activity goes up, there is more in payroll, there's more in payables and they tend to keep more money there. If you look at our deposits on our balance sheet, our CD's are all literally entirely driven by credit. So there is some sort of credit component to the certificate of deposit. It could be backing up a standby letter of credit for a real estate lease. And then the money market accounts that we have tend to be -- a lot of them are smaller companies they have a little bit of excess money. On our CD securities, we have seen some very good growth there. And there, I think it's us doing a better job penetrating the larger companies, so the bigger companies, and coming out with additional products such as our advisory services which has allowed us to capture significant market share.

That's very helpful. And if I could just follow up, one, on the lending side, Dave, you mentioned with an increase in the Series A funding, there seems, as you mentioned, kind of six to nine month draw period. There seems to be more of a lag. If I look at the statistics in terms of VC activity, you are seemingly only now starting to see more of a pickup, particularly with that early stage funding. But then on the deposit side, it just -- with the slowdown that I have seen, just trying to reconcile again the VC activity and how that's been translating into, say, the mix, the deposit mix shift.

This is Dave again and you're right. We're just beginning to see the activity on that Series A. Again, we have been booking the commitments over the last three quarters maybe since that activity started picking up. And soon enough we will start to see the incremental fundings on the debt side.

On the deposit side, you mentioned a slowing in venture.

No, just in terms -- if I just look at the period-end balances how they're down.

Oh.

Just a slowdown. Again, just kind of wondering how the VC activity is potentially influencing those balances, if at all.

You know, I think if you go back historically, first quarter is always -- can be a rocky quarter as far as trends because there is so much done in the fourth quarter, both from venture fundings trying to be completed and also companies aggressively dressing up their balance sheet because a majority of them do have fiscal year-end financial statements. So if you go to the first quarter, we tend to have -- you know, we tend to have a little slower growth on the loans and deposits. although we thought we did okay this quarter, I would point out though that's looking at our balance sheet. If you look at total deposits, which includes SEB securities, we did grow them quarter-to-quarter and we feel very good about that.

But, Marc, again, you don't think with, say, the Series A funding increasing, that's not -- is that having any influence, you know, either positive or negative, just in terms of your deposit flows? I'm assuming that would be more of a benefit. You got to see that coming through.

Yes. We do believe that is a benefit coming through. It is just that quarter-to-quarter, again first quarter, I wouldn't look at all the fourth quarters versus first quarters to get a trend line probably go to the second quarter, third quarter. . And we did see a good growth last year, so you look year-to-year, venture investing was up, our deposits were up and we would anticipate that trend continuing.

Thanks very much. Very helpful.

Our next question comes from Andrea How [ph] with Lehman Brothers, your line is open. You may ask your question.

Good afternoon.

Hi, Andrea.

Just wanted to get more of your thoughts on returning capital to shareholders. I know you are repurchasing shares. Are there other venues you are considering? Also, as you do repurchase shares, can you share with us, you know, what metrics you look at? Are there specific ratios that you are managing to and kind of the timeframe -- if you have targets, kind of the timeframe you want to reach certain targets? Thank you.

This is Jack. I'll take a stab at it. Number one is -- what was the first question? I already forgot. I'm on to the second question.

Let me take a stab at the second question instead. And that is, do we have any specific targets. We don't have any specific targets. We so-- we are interested in moving our capital ratios, whether they are tangible equity or risk-based metrics toward a broad-based peer group over time. But we haven't set a specific target, nor have we set a specific goal in terms of the times -- timeframe. In terms of what are we looking at, We're always looking at alternatives. Alternatives could be related to prospects around internal growth. They could be dividends, they could be share repurchases. So we're always looking at those alternatives. But at this point we are -- we in the first quarter, we are in the market repurchasing shares.

Great. Thank you.

Our next question comes from Hai Vu with Jefferies. Your line is open. You may ask your question.

Thanks. Good afternoon. I wanted to flesh out more details from the M&A business. Could you give us the exact revenue from Alliant again for the quarter?

Well, with the corporate finance fee line is essentially Allliant.

About 4.7 million then?

Correct.

And Ken mentioned that valuations are high as they have been since 2001. So does that mean we could possibly expect more signs of life or what's the -- what was the pipeline looking like at the end of the quarter?

Well, let me answer that. You could reasonably expect more signs of life, given the fact that valuations are up. And that in the first quarter, the absolute number of transactions was a little lower because of Sarbanes-Oxley and delays that that caused in the whole process of closing. And that would be not just here at Silicon Valley Bank, but that would be everywhere in the market. So our overall guess with respect to M&A activity in the second quarter across the board would be that it would be moving north because we'll have a combination, we think, of the continuing trend toward higher valuations, combined with activity levels picking up again now that the bulk of the delays due to Sarbanes-Oxley should be probably behind the market instead of in front of it.

Okay. That's good to hear. Thanks.

Our last question comes from Fred Cannon with KBW. Your line is open. You may ask your question.

Great. Good afternoon. Just wanted to ask a question concerning the balance sheet and your thought, moving forward. Your balance sheet was flat during the quarter, but yet could I make a good case that the quality improved in terms of you saw loan growth, but the securities fell off. And while I think, as Marc pointed out, while deposits on the balance sheet didn't grow, you did see continued good customer flows on the off balance sheet. So I guess the question is, moving forward, how important do you feel balance sheet growth is because I can look at this and say one of two things -- oh, they didn't have balance sheet growth which would help them grow. On the other hand, this balance sheet looks like it is more profitable than you have been in the past. And I guess it is kind of a profitability versus growth vis-a-vis the balance sheet question is you do you think about that?

Well, why don't I respond to a part that and then we'll let Marc respond to the second part. I just would reiterate, Fred, that the Q1 results, you want to be careful in drawing any conclusions about the trends, looking at Q1. And as we said earlier, the trend we saw in Q1 was essentially identical to trends we have seen over the last five years -- essentially fairly good growth in Q4 followed by relatively slower growth in Q1. Yet each year we have seen growth. So, we want to be somewhat careful about drawing any particular trends that -- we certainly are careful about doing that. We still expect both deposit and loans to grow more in Q2 than in Q1. As far as is, is this an optimal balance sheet, it certainly is a profitable one right now. And, Marc, if you want to comment on that.

Yes I would. To your comment, Fred, I guess we want to have both. We'd like to grow the balance sheet, but we want to grow profitably. I guess when f you look at our balance sheet, unlike probably a lot of other institutions, we don't have any pressures to go out and grab deposits because we are, you know, very attractively funded right now, both from a funding size and also a downsize. We are able to make a very good return in our treasury section. And then on day side, on lending side we're able to do prudent risk-taking, and we're not forced to go out and find loans because we need to put all these excess deposits to work because we can't earn enough money. So we're kind of a nice situation. So, do we want balance sheet growth? Yes, we're continuing to look for business out there. But we won't do it to sacrifice profitability because we're not driven to do it.

Okay, so kind of in thinking about balance sheets first, if you can get the core deposits growing, you will obviously grow the balance sheet. And if deposits aren't growing, but loans are, might let the securities portfolio -- if loans were growing faster than deposits, you might continue to let the securities portfolio run off a bit, is is that correct?

That would be correct because . we have, as you know, a fair amount of room between the loan volume getting to a point where we'd have to really look at how we're funding ourselves.

Okay, one just very quick question. I noticed, Jack that the dilution from the COCO's that you have in this press release was less than the dilution that was in the 10-K at the end of the year. I think it said 7.9% or something versus 10%. Is there a reason behind that?

Yes. That, I believe, is referring to the incremental dilution you would see from a fully -- going to as-if converted. And as our stock price gets higher, the treasury method does impact the dilution, or it has an impact on the dilution metric. And going to fully as if converted is then less of an incremental impact.

Oh, okay. Okay. Great. Thank you very much. Great quarter.

Thank you.

We have time for one more question. Todd Hagerman from Fox-=Pitt Kelton, your line is open. You may ask your question.

Thank you. Jack, I just wanted to follow up real quickly, I've had a difficult connection here, but you mentioned you talked a little about the stock option expensing performance-based compensation. Could you just provide to us what the pro forma impact was in the quarter related to that program? And if I -- again I just want to make sure I heard you correctly that you were going to go head, go forward with the options expensing in 05 regardless of the SEC ruling or FASB?

Okay, so let me take a stab at that. First of all, no I did not say we would go forward with option expensing. We will not do option expanding on our income statement until we are required, and that now looks like it will be January of 2006. What we did do is we, last year we revised our option or our equity compensation program considerably but in two significant ways. One is, we reduced the total number of shares or the rate at which we issue option shares. And we continued that reduction this year or that change from past practice this year. Number two is, we implemented restricted stock units, or RSU's as part of the program. What you are going to see in 2005 then is the cost of RSU's reflected on the income statement while the cost of expenses are not reflected on the income statement.

Okay. What's the -- can you give me a rough idea just on the divesting on that, the RSU, how that program is going to work?

Well, the vesting, there's actually a couple of variations. Some of them are time-based vesting over four years, some will be performance-based grants that they vest over a shorter period of time. But I think it is fair to say that net/net, we expect about $900,000 of costs related to restricted stock plans that we're issuing this year to be reflected in our $900,000 per quart that we expect to be reflected in our income statements this year. And that is consistent with the guidance we gave because the guidance we gave was exclusive equity-related compensation expense.

Okay.

In part because we expected those costs to be reflected this year. In fact, options will not be but RSU's will be. I hope that helps.

That was very helpful. Thank you very much.

Thank you for your attendance today. That concludes today's conference call. Today's call was recorded for replay. The replay is available until midnight on May 22nd. To listen to the replay, dial toll-free number 1-866-415-3315. Thank you.