SVB Financial Group (SIVB) 2005 Q3 法說會逐字稿

Thank you. (Operator Instructions). And our first question comes from Joe Morford of RBC Capital Markets.

Hi, good afternoon, everyone. I don't know, maybe Dave Jones is there, or Jack, maybe you can handle it. But I was curious to just get a little more color on what is driving this kind of surge in loan growth over the past quarter and going forward too. Talk a little bit about the mix so I was curious more by niche and stage. And given that dynamic and that the prospects of the two rate hikes you talked about, what are your margin expectations going forward?

Hi, Joe, this is Dave Jones. Let me at least start in the response to your question. So the niche that generated the greater proportion of the growth was in our private equity space, the lending that we do to private equity firms and venture firms. And I think what's going on there is a trend for the venture capitalists to be going, in some cases, to the middle and later-stage companies and investing larger dollars.

Thus they are drawing incrementally larger sums on the available lines of credit that we give them. We also experienced good growth with the middle and later-stage companies where we can have a more meaningful impact on the outstandings. We are seeing great growth in the early stage, but as you all know, that business for us on the loan side is very granular and it takes an awful lot of business to reflect in our numbers.

And it sounds like from Jack's comments just to lessen this kind of structured product, the high yielding product that you saw, say, late last year or early this year.

We've seen good growth in both our specialty finance groups during the year, but in the third quarter the growth wasn't quite as great as it had been in the first half of the year. But we see a lot of opportunity there, and we are confident that our numbers into the future will reflect that opportunity.

Okay. Great. Jack, any comments on the margin expectations?

Well, we expect it will be higher, particularly because of the loan growth and the interest rate growth or the increased interest rates. I --probably a little premature for us to say that it's going to be a specific number, but I think we're -- I think it's fair to say that it will be comparable to the growth that we saw in Q3.

Okay. Thanks very much.

You bet.

Our next question comes from Fred Cannon of KBW.

Good afternoon. I was trying to work through this Rubik Cube of financials that you've given us and I have a question. Would you, I mean, you didn't actually tell us a provision, is that correct for the quarter? A loan loss provision?

Right.

Are you going to disclose that?

Are we going to disclose that? Eventually, yes.

Yes.

But you're not now.

No.

Okay. Well, I have a question, then. If I assume that the -- your loan loss allowance and your allowance for loan loss contingencies stayed stable during the quarter?

Yes.

But you charged off $3 million?

That's a good calculation, Fred.

Okay. But if I was -- I can't exactly say that your provision would be $3 billion -- $3 million because you also took $1.5 million of expense on the provision of unfunded credit through your non-interest expense, correct?

Right. So the total was for both funded and unfunded commitments, I believe, the total calculation. So I think you can get to it through the calculation you just did.

Using all four of those pieces or whatever many of those pieces, correct?

Correct.

Okay, okay. This is kind of fun.

Well, it's about time.

We have to do the work, right? The other question I had relative to this was investment gains or losses which is usually part of your non-interest income. You didn't disclose that. Were there any of this during the third quarter?

There were investment gains and losses in the third quarter, Fred.

Okay. But you're not disclosing even directionally what they might have been or similar to previous quarter or anything like that?

No. But that has typically been relatively modest.

Right.

And I think that's a good assumption.

Okay. Okay.

Are we still having fun?

Oh, yes. Okay. I think those are -- and I got a little different margin than you said when I just took your net interest income and divided by your average earning assets, Jack. Did I -- and then upped it by the -- averaged did, I got like 6.8 instead of your 6.6. Is that something maybe I'm doing wrong or the 6.6 is based on the $79.3 million income?

It is based on the $79.3.

Okay. So that's just 10 basis points up from the previous quarter, is that right?

Yes.

Okay.

Just one thing, Fred. It's not that we're being cute on that securities gains or loss. I want to get back to that. But that is a line item where warrant changes will ultimately flow through, and so as a result, because we do not have that calculation for Q3, we can't report that line item under GAAP. So that's why we have to be -- I'm not trying to be cute, it's just something we can't report --

Okay.

-- to show up there.

All right. And then, are you still shooting for the November 30th date? Is that still a date that you're comfortable with in terms of getting everything filed?

I would say we're not comfortable with that date. But we're hoping to get it done before the end of the year.

Okay.

One of the reasons --

It could be longer?

As I mentioned in the -- in my prepared remarks, we have take -- had to take a fair amount of time and are just finishing up a fairly lengthy FIN 46 analysis that has kind of waylaid some of the progress on the restatement. But we're going to get back to it and sort of do our best to get the 10-K out as soon as possible.

Okay. All right. Well, good luck with that. Thanks very much.

Thanks.

Thank you.

Our next question comes from John Pancari of JP Morgan.

Hi guys.

Good afternoon.

Hi.

I want to just confirm one comment regarding the FIN-46 issue. Can you just clarify that you don't expect a material impact -- I know you mentioned on the income statement or anything, but how about on the balance sheet in terms of a potential capital hit if you have to consolidate?

Well, in our case, the analysis that's being conducted has the potential actually to deconsolidate entities, not consolidate them. There is one entity that is subject perhaps to some consolidation, but -- now we don't think as it stands today we are reasonably comfortable saying it will not have a material impact on the balance sheet. It certainly will not impact the income and the income statement.

Okay. And separately, if you can just give us a little bit of color on the increase in charge- offs in the quarter.

I'll turn that over to Dave.

Sure. So an increase in charge off to be sure but to a very acceptable level of $4.5 million of gross charge-offs. The accounts that contributed the majority of that would be in our early stage technology side. But again, it's a very acceptable level of both gross and net charge-offs for us.

Okay. All right. And lastly, did -- would your change in your expectation in terms of the timing of your filings here, just given the FIN 46 issue, does that bring into question again this whole NASDAQ issue in terms of your potential de-listing?

We don't believe so. We are still awaiting an indication of -- from NASDAQ of where our -- where the issue stands with them. And I'm going to actually ask our general counsel to speak to it, Derek Witte?

Yes. Last -- three weeks ago we attended a hearing with NASDAQ and requested an extension out past the November 30 date, which they've not responded to this point, but we are hopeful that the date that they would give us would correspond with the date within which we can get these filings done and that -- not threaten us with any kind of de-listing action.

Okay. All right. Great. Thank you.

Our next question comes from Andrea Jao of Lehman Brothers.

Good afternoon, gentlemen. Good afternoon, Lisa.

Thank you.

Given loan growth is strong and given your -- given that you expect venture capitalists will be investing in early stage companies in '06, could you talk more about venture risk and credit risk, and how quickly do you think these translate into a ramp-up in credit costs looking into 2006?

All right. This is Dave Jones. And we are seeing a nice uptick in venture investing, which is funding new companies, and we are experiencing a very satisfactory level of client acquisition through that business. The process of making commitments and seeing the dollars fund is a lagging one, and we will see more dollars funded into that sector over the next three to six months and then long or as long as the venture capital funding continues to hold up.

We will see an increase relative to some recent trends, but my belief is that the third quarter level of charge-off and credit costs, as I think you mean the question, is something that I regard to be in a historical norm for the bank. So I'm not sure that I anticipate anything materially different.

Okay.

Andrea, This is Marc Verissimo. I would add that when we look at the venture capital marketplace, as Ken mentioned during his comments, I think there's still adequate liquidity -- actually more than adequate liquidity -- there's still a -- much more money that wants to get in to this space than have a place to be. And when you look at the investing over the first nine months of the year, it's slightly off of last year, but not a lot. And the investing pace is fairly stable.

So for us, as far as credit risk, you look at it and say our credit risk is probably very manageable because what we look at is sort of a consistent pattern, venture capitalist funding both new companies and also funding existing. And I would add that those numbers that I was mentioning were only domestically if you do add what activities is happening in India and China, and to some extent Israel and Europe, that there is a nice increase year-to-year in venture capital investment.

Great. If I can have a follow-up question, given you expect -- the equity line to increase after your statements are, all done, have you had a chance yet to think about, strategies to return equity to shareholders?

Well, as you -- Andrea, as you may recall, prior to the advent of the restatement process, we were a fairly active re-purchaser of common equity. And, in fact, I think in this press release we also indicate that we've re-purchased a little bit in Q3 related to a 10b-5 program we had in place. So our strategy, fundamentally is, is that if unless we can identify a way to use that equity that delivers shareholder value, we intend to return it. And that's what we did in the case earlier this year and hope to get back to soon -- as soon as we get our filings back in compliance.

Okay. Thank you. Last question. Folks who start incorporating option expensing into their '06 estimates, anything you can share with us at this point with respect to option expensing in '06?

Yes. Not much yet. And we will -- I know I actually promised to try and do more of that. We will do our best to do more of that as we approach the end of the year.

Okay. Thank you very much.

Our next question comes from Gary Townsend of FBR

Good afternoon, gentlemen.

Good afternoon.

I was interested, Jack, I think it was your comment with regard to an increase in sophistication or aggressiveness on the part of your clients with regard to their management of their own funding, which seems to be a change from the past that could have important implications for your financial performance. And I was hoping you would expand on that.

Well, I'll take a stab at it. I think -- if Mark or Dave have anything to add, please weigh in. In some ways I may have been a little exuberant in that I don't think fundamentally the clients have changed as much as our policies with regard to our clients have changed, and there are two that I think are noteworthy and that we have mentioned to the investment community in the past. Number one is that we have been very careful about raising our deposit rates.

And as you know, there have been about 11 moves on the part of the FED over the last year and a half, and I think there's probably been one move on our part. So that in and of itself has a certain dynamic. It's not that our customer is typically sensitive. In fact, I would say they're not sensitive. But clearly there's got to be something attributable to that behavior.

The second and, perhaps, more importantly is that we have been very active with our customers and in -- our sales team has been in front of our customers to ensure that they make the choices that are most appropriate for their situation, i.e., is their situation conducive to one where they can be in our off-balance sheet money management business, or would they rather stay on the deposit -- in the on-balance sheet deposit or money market business that we have in -- our deposit rates that we offer.

So we've been pretty active with our customers to make absolutely sure they understand what we offer, if they remain on-balance sheet and what we offer in our off-balance sheet products. And I think that's part of the reason you're seeing incremental growth there rather than incremental growth on balance sheet. So I would say -- as I say, I might have been a little exuberant in describing our customers and it's probably a greater function of specific actions that we've taken over the past -- really over the past six months to work with our customers proactively. Anything you want to add, Marc?

No, I would support what Jack said. And there could be some changes in the market behavior, but I would again caution that because we also went out there proactively to our clients to encourage them to manage their money in a prudent manner, given the fact that there had been a lot of interest rate moves, and we've been more cautious raising them. So I wouldn't necessarily extrapolate that out. The good news, though, is because we have been proactive in terms of encouraging our clients to optimize the value of their funds, we don't really -- we're not particularly vulnerable to any increase in that behavior.

It would strike me, however, that it is a factor I guess, whatever the cause that will tend to limit what we would expect in terms of deposit growth on an ongoing basis, it might explain why 2005 deposit growth is less robust than what we saw in the last year.

Well, in the short run that maybe July in the long-run therefore is your look at our balance sheet today, it consists primarily of non-interest bearing accounts which has to be there in order to fund payables. And then the other major portion would be CD's that are held as collateral in support of LC's, which in turn are in support of landlord leases, and the result is that there's not much else that could disappear if people were to manage their funds more carefully. Because the collateral has to be there and they have to have the non-interest bearing accounts in order to fund their payables.

And as client count grows on the one hand, certainly DDA or non-interest bearing accounts will grow. And on the other hand, as burn rates increase because, remember, balances -- average balances -- excuse me, balances in checking accounts are a function of two things, one being number of clients and the other one being average burn rate. The higher the average burn rate, the bigger the average balance in a DDA. As the economy becomes more exuberant and average burn rates increase, it will increase in that regard, too. What you're seeing in the short run is simply the offset of some of the quote-unquote, bonus money market accounts dissipating, which is something we've encouraged in order to make ourselves less vulnerable in the future.

And Gary, I would add and just anecdotal evidence, I've been doing this for 24 years and been through quite a few interest rate cycles that -- there was a time when prime was probably 12% or 13%, certainly much higher than today. And I had a client of mine keep $9 million net free, so after all expenses in their DDA for over a year. And that was despite me talking to them every month, trying to encourage them to move money. And I look at that experience and that probably goes back 20 years, where we are today, and say that the company -- the dynamics are still the same. Companies are still having to do a lot with minimal personnel, and then when you stack onto a lot of these companies who are now having to spend their efforts, figuring out either their in Sarb-Ox or trying to get ready for Sarb-Ox, you would almost argue that the analyst have less time to do this. So I do think the fundamentals haven't changed over the last 20, 25 years.

Ken, you mentioned your client count. How has that changed in the past year?

It's grown. Are we disclosing the extent to which it's grown?

Yes. I don't know if we have that.

On an annualized basis, I believe it's up about 8% in these first three quarters. Yes, Gary, the ideal balance sheet, in my view, would for Silicon valley bank would be one that consisted on the right-hand side of almost exclusively DDA, and collateral accounts. That way if people manage their funds carefully, you're not at all vulnerable, because there's nothing that they would want to take off. They have to have the DDA in order to fund their payables. And they have to have the collateral accounts in order to support their LC's. So that would be the ideal balance sheet. Furthermore, it would result in the absolute lowest cost of funds.

I think you're right.

And that's what we're gravitating towards.

Well, thanks.

I'm actually kind of pleased with it.

Okay. That seems right to me. Thanks very much. Good day.

It appears we have no further questions.

Thank you all for joining us today. A replay of the call is available starting this afternoon. And it will be also posted on our Web site. Thank you.

Thank you for participating in today's conference and have a great day.