SVB Financial Group (SIVB) 2006 Q2 法說會逐字稿

Welcome to today's teleconference. At this time all participants are in a listen-only mode. Later there'll be an opportunity to ask questions during our Q&A session. Please note this call may be recorded. I'll now turn the program over to Ms. Lisa Bertolet. Go ahead, please.

Thank you. Good afternoon and welcome to the SVB Financial Group Second Quarter Conference Call. Today Ken Wilcox, our President and CEO. And Jack Jenkins-Stark, our Chief Financial Officer, will discuss SVBs second quarter financial performance and financial results. Following this presentation, Ken and Jack along with Marc Verissimo, our Chief Strategy Officer. And Dave Jones, our Chief Credit Officer will be available to answer questions -- answer your questions -- sorry. I would like to start the meeting by reading the Safe Harbor disclosure.

This presentation contains projections or other forward-looking statements regarding the future events or the future financial performance of the company. Including without limitation financial guidance for the company's third fiscal quarter of 2006. Forward-looking statements are just statements that are not historical facts. We wish to caution you that such statements are just predictions and actual events or results may differ materially. Due to changes in economic, business and regulatory factors and trends.

We also 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-Q. Filed on May 10, 2006. 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.

Thank you, Lisa. Good afternoon and thank you for joining us. I'm pleased to be talking to you today about another fundamentally strong quarter. One in which our strategy of diversifying products and services and expanding geographically to serve a focus set of industries. Has resulted in growth in our core businesses. In the second quarter that growth took the form of new highs in average loans and total client investment funds and deposits. And a higher net interest margin.

These results reflect strong activity across all segments of our client base. In the second quarter, net activity was especially robust among our hardware and life science clients. We see our continued ability to grow in dynamic markets while maintaining consistently strong credit quality. As a direct reflection of the quality of the relationships we've built in the industries we serve. Specifically, our focus on just a few markets allows us to be intimately familiar with the companies and individuals in those markets. As well as the unique dynamics of each.

Our efforts to know our clients almost as well as they know themselves, continually pay off by enabling us to make consistently good decisions about the right deals, the right direction and the right risks to take. This client driven strategy is apparent in our ongoing globalization of the SVB platform. SVB Global continues to play an important role in expanding SVB Financial Group's influence and capabilities in the key markets. Developing relationships with venture capital firms and service providers around the globe. And exploring ways that our U.S. clients can leverage opportunities in those regions. SVB Europe advisors based in London has been spiriting those efforts in Europe for nearly two year now.

And in the second quarter we opened SVB Alliant Europe, bringing M&A and private capital advisory services to our technology, life science and private equity clients in the U.K. The timing is good as European acquisitions of Tech companies recently hit an all time high. We expect these two groups to continue to leverage our cross border relationships. And the SVB platform to identify new ways to help our clients succeed in Europe and around the world. Domestically, we're continually looking for ways to win new clients and better serve our existing clients.

One promising source of new clients is the clean technology space. Although we've worked with company's in this market for years, it is currently enjoying a surge of interest. Additional private equity investment and accelerating company formation. Many of the serial entrepreneurs who've been our clients in technology and life sciences are now in demand to lead emerging companies in this new space. And we hope to benefit from the relationships we have built there.

Our market opportunity for these and other offerings in promising. If the global venture capital and technology industries are any indication. Record amounts of money are being put into venture capital funds worldwide. And the amounts coming out are encouraging. US VC Investing recently hit a five-year high. And Global VC investing is on the rise as well. In addition, the M&A market's recent boom is a sign that ample liquidity opportunities still exist for our clients. Consumer appetite for technology is at an all time high. And middle classes around the world are emerging and growing as a result of the incomes generated by new industries responding to this demand.

While we're excited about these trends, we will continue to approach our lending investment and business development opportunities with appropriate caution. In light of the enormous amounts of funding available from hedge and venture funds, and growing competition among investors and lenders for promising companies. We think it makes sense to be watchful for signs of irrational exuberance. Nevertheless, our potential opportunity to support emerging companies in these industries is significant. And we will continue to leverage our unique expertise and capabilities to take advantage of it.

I feel compelled to point out that we believe our efforts like those of the other 8000 banks in the United States, will continue to be complicated by growing regulatory and compliance related responsibility. It requires us to invest increasing amounts of time and money in activities that address issues identified by governmental agencies responsible for financial services companies. As I noted the last time we met, in response to these requirements, we've been working hard to review and improve certain business processes across the company. Including the way we provide service to our clients.

This effort is designed to improve our abilities to sell the SVB platform to clients, to improve the efficiency to which we service our clients, and to further refine our regulatory and financial reporting. Our expectation is that these efforts will allow us to keep our primary focus on growing our business and delivering value to our shareholders. Now before I turn things over to Jack, I want to take a moment to talk about SVB Alliant. As you know we recently revised our forecasts for this company based on its recently performance and turnover among its senior staff members.

Those staff departures disrupted the unit sales momentum and we expect it will take time to reestablish that momentum. Given the relationship oriented nature of investment banking. We believe that the changes we've made at SVB Alliant, such as bringing on a new CEO and refocusing the unit sale strategy to better leverage the SVB platform, will all pay off in the long term. Although we have altered our expectations for the business unit, we have not altered our view of what makes it a synergistic fit for SVB Financial Group. We will continue to pursue our strategy and will report back to you on our progress. Thank you, and now I'd like to turn it over to Jack.

Thank you, Ken. In the second quarter of 2006, we continued several positive trends that speak to the health of our core business and the strength of our business model. We reached a new record high in average loans and we improved our net interest margin. Our combined client investment funds and deposits reached a record high. We saw additional growth from our fee-based businesses and we maintained our excellent credit quality. We also had a few challenges during the quarter. One was significantly higher non-interest expenses, a result of noncash charges related to the impairment of goodwill for SVB Alliant. And as we indicated in April, higher costs for compliance related activities.

Let me just briefly cover the impairments since Ken has already addressed the reasons for it. And then I'll move on to our core financials. As you know we announced on July 14th that we would record a noncash pre-tax charge of 18.4 million for impairment of goodwill related to SVB Alliant. We estimate that the impact of the charge on earnings per share was approximately $0.28 net of tax. The impairment followed an annual goodwill analysis and assessment. That assessment led us to lower expectations for SVB Alliant's future revenue streams. After this impairment charge, the remaining goodwill associated with the acquisition of SVB Alliant is approximately $17.2 million.

With the impact of the goodwill impairment charge, earnings per fully diluted share were $0.36 for the second quarter of 2006, compared to $0.58 for the first quarter of 2006. And $0.54 for the second quarter of 2005. Consistent with our expectations, quarterly average loans grew in the second quarter hitting another record high of 2.73 billion, a 2.5% increase over the first quarter of 2006. And an increase of more than 21% from the second quarter of 2005. The increase was driven by growth in our commercial loan portfolio and was funded primarily by increases in short term borrowings. Period end loans net of unearned income also rose from the first quarter by $192 million or 7% to 2.95 billion, an increase of 21.7% from just a year ago.

To more efficiently fund our loan growth we accelerated the cash flow from our investment portfolio, selling about 125 million in investment securities to reduce some short term borrowings. This sale reduced our reported gains on investment securities by approximately 3.2 million. Quarterly average deposits decreased from the first quarter of 2006 by 2.4% to just under 4 billion. This decrease is related to primarily lower money market account balances, which we had been expecting. Net interest income increased by 1.9 million or 2.3% to 85.8 million in the second quarter of 2006. Up from 83.9 million in the first quarter and up over 9 -- 20% from the same period last year. The rise was primarily due to increased income from our loan portfolio driven by higher loan yield, which was partially offset by increases in levels and rates of short term borrowings.

Higher loan yields were fueled by two second quarter increases in our prime rate, which brought it to 8.25% in June 30th, 2006. The increase in yield from our loan portfolio helped bring our net interest margin to 7.3% in the second quarter of 2006, up from 7.25% in the first quarter. And from 6.37% in the second quarter of 2005. Non interest income rose significantly to 41 million in the second quarter of 2006, an increase of over 75% over the first quarter of 2006. And 35% over the second quarter of 2005. This increase stems from higher net gains on derivative instruments and investment securities, as well as an increase in client investment fees.

Client investment fees increased nearly 15% from the first quarter of 2006 and 41% in the second quarter of 2005 to about $11 million. This change stemmed from an increase in average total client investment funds to over 17 billion during the second quarter. A rise of over 10% from the first quarter and nearly 40% from the same period in 2005. Corporate financial fees from SVB Alliant were slightly better in the second quarter of 2006 than the first quarter, up 13.8 % to $2.8 million. Q2 was also an excellent quarter for gains in both our securities and derivatives portfolio.

Gains on investment securities, in part related to our SVB Capital business, increased by approximately 4.1 million compared to the first quarter. This increase is due to increased distributions from our venture fund and sponsored fund investments. As well as gains on exercises of warrants related to our typical lending activities. In our derivative portfolio, we also saw strong gains related primarily to upward valuations of warrants held directly by SVB. As well as warrants held by partners for growth, a special situations debt fund in which we hold a 50% ownership position.

Much of the valuation increase in Q2 was due to three warrant positions whose value changed by a total of 7.6 million owing to recent M&A and IPO activity. Turning to a fairly technical issue for a moment. As you may recall, in the prior quarter we discussed a change in the accounting for the fixed variable interest rate swap related to our 50 million subordinated debt, which was issued in October of 2003. In the first quarter, we were required to record the cumulative fair value on the swap without reference to any change in the fair value of the subordinated debt. Which resulted in a noncash loss of 2.9 million.

Subsequently, we implemented hedge accounting on the combined transactions, with the expectation that the movement and fair values of both the swap and the debt would offset each other overtime. And have limited impact on our bottom line. While we would still expect that to be the case overtime, it was not the case in Q2. In the second quarter, the changes in fair value of the swap and the debt resulted in a noncash loss of 1.6 million, which is reflected in the directive schemes in losses line of the income statement.

Moving on to expenses, with the impact of the impairment, non-interest expense rose 32% from the first quarter of 2006. And 40% from the second quarter of 2005, to 93.6 million. Absent the impact of the impairment, non-interest expense rose 6% from the first quarter and 13% over the second quarter of 2005. It's important to not that this rise included a charge of 1.8 million in connection with the expected settlement of a litigation matter. And over 10 million of professional services cost of which compliance related expenses were a significant part. As we have indicated in previous calls, we expect continued high compliance costs moving forward.

Credit quality remained strong in the second quarter with non-performing loan at 0.25% of total gross loans as of June 30th, 2006. Down from 0.65% at June 30th 2005. The allowance for loan losses was 1.8 -- 1.28% of total gross loans at June 30th, compared to 1.5% at June 30th 2005. In the second quarter we recognized a net loan charge off of 2.7 million compared to a net loan recovery of 1.6 million in the first quarter. A net loan charge loss of 0.3 million in the second quarter of 2005. We recorded a provision for loan losses of 4.6 million in the second quarter of 2006 compared to a recovery of loan losses or a negative provision of 2.5 million in the first quarter of 2006. In the second quarter of 2005 we recorded a provision of less than 1 million.

Looking ahead to the third quarter of 2006 we expect earnings to be between $0.66 and 0.72 per diluted common share. This estimate reflects the full effect of the most recent FED funds rate increase announced on June 29th, 2006. A comparable amount of provision for loan loss and unfounded credit commitments on a combined basis and non interest expense excluding the 18.4 million impairment charge and the 1.8 million litigation expense, comparable to what we saw in Q -- in the first quarter.

We expect average loans to grow at somewhat more than twice the rate they did in the second quarter, a higher net interest margin, modest growth in total client funds and lower non interest income related to net derivative gains compared to this second quarter. We do not expect FAS 128R to become final and effective in the third quarter and as a result do not anticipate any EPS impact from our convertible debt. Our effective tax rate is projected to be somewhat higher than the second quarter but we don't expect it to be higher than the first quarter of 2006.

Despite a number of items this quarter that impacted EPS and our net interest margin, our core financials indicate that we are doing the most important things right. We have steady and strong loan growth and higher yields on those loans. Our client funds have grown dramatically as have fees from that business and we expect they will continue to grow although more modestly. And our net interest [margin] continues to rise. These results indicate to us that we are executing effectively and that our long-term prospects for growth and profitability remain strong. Thank you.

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

[OPERATOR INSTRUCTIONS]

We'll take our first question from the side of Joe Morford with RBC Capital Markets. Go ahead please.

Thanks. Good afternoon everyone. Jack I wanted to -- maybe at the start you could talk a little bit about the margin flows quarter to quarter. In the first quarter you saw almost a 50 basis point increase and then this quarter it was 5 basis points and kind of the different factors in that and then a little more color on your expectation going forward there.

Sure, as I think I mentioned on the April call in response to a question as to margin sensitivity. I think I might have. I think I recall saying something like anywhere from 5 to 20 basis points on 25, and I think that's a reflection of the fact that in any given quarter we are seeing a fair amount of variability in the margin and it is of course a reflection of both the loan growth deposit balances, the type of loans lending that we're doing, the mix of lending, in other words.

We're seeing that [NIM] reflect early pay offs, fee income related both to traditional fees as well as warrant activity. And so, as a result, I would say our ability from a prediction standpoint in any given quarter, the rule of thumb that I gave is probably reasonable in any given quarter, but of course it's a wide range. In Q2 we saw a fairly strong margin growth, but it offset by fairly significantly short term borrowings, and so I think the 5 basis point increase is a reflection probably more related to the increase in short term borrowings that we saw in Q2 than changes -- dramatic changes on the lending side.

On the lending side we saw sort of a traditional or typical level - well, the growth that we had had expected and the underlying loan to - relatively across the board growth and no particular early payoffs or impact of early pay offs or fee related activity. So I think that's what's going on. In terms of looking forward we are expecting to see much stronger loan growth in Q3. And as I said, my prepared comments, we're expecting loan growth to be more than double the growth rate we saw in Q2. And -- and so I think with that said I think our current believe is that you will see somewhat stronger growth in the NIM as well in Q3.

As -- are you going to continue to fund with short term borrowings or further security sales or what's the thought on that?

Well good question. I don't anticipate any further security sales at this time. I think we are going to be doing our funding with short-term borrowings and like other financial institutions; we have several initiatives to strengthen the level of our deposit base as well.

Okay. And then lastly, the -- you talked about the third quarter kind of a comparable level of expenses backing out the -- some of the non-recurring this quarter. Does it sound like then, just in general your expectation is for kind of flatter expense growth in the second half or start to plateau a little more.

I certainly hope so. I mean obviously Q2 had a lot of noise on the expense front, whether it's the impairment of the litigation issue or fairly substantial compliance related activity. I would say Q3 is going to lose at least two of those and -- although the compensation -- or excuse me, the compliance related activity will continue. I also think though you're going to see somewhat lower compensation expense in Q3 than you saw in Q2 and probably something that's a little higher but more comparable to what you saw in Q1. A lot of that of course depends on SVB Alliant activity.

Right. Okay. Thanks, Jack.

Thank you. We'll take our next question from the side of [Fred Ganling] with KBW. Go ahead please.

Right. Good afternoon. Just had a question for Ken on SVB Alliant. Ken, it seems like this has been the outcomes have been subpar on SVB Alliant, it seems like in some ways it creates bad choices and the concern I think I have is that by continuing to chase the investment banking is there a risk that you're essentially throwing good money after bad at this point in time and why should we be comfortable with the continued focus to grow that? Especially while -- and the question is, from a strategic standpoint do you see it as a need to have or a nice to have kind of adjunct to your business?

That it?

That's my first question for you -- yes, for Ken.

Okay. Certainly a reasonable question. Having said that, we have come to the conclusion that this is a good business for us both from a strategic point of view and from an economic point of view at least we believe that that's the case.

The -- in terms of nice to have, or need to have. I don't imagine that anything is an absolute need to have. But I think this goes beyond nice to have in the sense that its our belief based on analyzing pipelines in all of our various business units that SVB Alliant has actually added to the revenues that we have in the commercial bank. In other words, absent SVB Alliant, we believe that the commercial bank would not have done -- in some, perhaps not large, but yet least measurable way as well as it has done. So is that a nice to have? I'd say more than a nice to have. Is it a need to have? Obviously it's not a need to have.

We also think that we have cracked the code so to speak. And I will admit with some chagrin that it's taken a long time. And - but I think that we have to look at this from a -- I think we have to look at this from a [thunk] cost point of view at this point. In other words, the point is, starting on this day, is it worth our investment and our effort and we believe that that's the case.

Okay. Okay. That's on cost point of view. That's helpful. Thank you. Jack, I just had a couple questions. I think you said that you took a 3.2 million securities loss, I mean a loss on sale of securities. What line item did that go through?

It went through gains and losses on investment securities.

Okay. And so, ex that loss, then you did make on your other investments, there was a positive even if we take out the minority interest loss in the core.

That's correct.

Okay. Second question is on the [COCO], it looks like the costs, if we do get the accounting changes coming down a bit I think in the - you said its $0.03 - would have been $0.03 in the second quarter. Is there - is it coming down because your stock price has been coming down or is there other reasons why that may be falling?

Let me think. No, it's not due to the stock price. Actually the stock price has an impact through the treasury method calculation and so as the stock price goes up it actually does increase additional dilution. Or increases dilution, provides for additional dilution or increases the number of shares if you will. So, I think what you're seeing there -- I'd have to back and look. I'm not entirely sure why it came down a little bit. But the lower stock price is not the reason.

Okay. And finally, your tax rate has been a bit volatile in recent quarters and I think it -- about 40% versus 43 in the first quarter and you said it would going up to somewhere kind of in between there. Could you talk about the - what's going on with the tax rate on an ongoing basis?

Sure, I think its fair to say that the Q2 is a reflection of the effective tax rate effects of the much lower income we reported in Q2 and as a result a much higher percentage of nontaxable investments as their income represented as a portion of the total. So we don't expect that to be repeated. It's more a reflection of the impairment if you will.

But we did indicate, I think at the end of Q1 that we were -- that this tax rate in Q1 was higher than we had anticipated but that we did expect it to decline in Q -- through the remainder of the year and so we do expect it to be somewhat lower in Q2 -- or excuse me, Q3. Where it's going to settle out. I think it's reasonable to expect it to average somewhere in that sort of the 41.5 to 42 range, but that's just a best estimate at this point.

Great. All right thank you. And its great to see such strong fundamental growth especially in the loans and the outlook moving forward.

Yes and the outlook is very - appears to be very good and very strong fundamental growth on our investment portfolios.

Great. Congratulations.

Thank you. We'll take our next question from the side of [Andrea Jowl] with Lehman Brothers. Go ahead please.

Good afternoon.

Good afternoon.

It's been a long earnings season and I need some help getting to a core number. When I take securities gains -- and I heard what you said earlier, there was a loss as well as increased distributions and warrant exercises. If I take securities gains, [derivative] gains, and just the entire minority interest. This bring me to $0.20 net. So - how do I get to like a core number for results? That's my first questions. If I'm doing something wrong, how should I look at it?

My second question is, how do I think of these line items going forward? Does minority interest come back down, what's a good - is it even possible to say what a good run rate is for gains and derivative gains?

Yes. Well, you're questions a good one Andrea. Its not easy in some sense because there was a great -- there was a great many things going on in Q2 and of course Q3 is uncertain at this point. But it could be equally as complicated if you will. So lets try to break it up a little bit. There's two areas that I think you may want to focus on. One is the gains or losses on investment securities line. The second is the gains or losses on derivative instruments and lets just sort of recap a little bit what those represent.

The gains and losses in investment securities are really three things going on. One is, as you've mentioned, and as we've mentioned just a second ago. One is the loss on a sale of some of our investment securities of 3.2 million. So that's an element that's landing in that line. The second is that we are also recording gains related to our venture funds but our sponsored fund activity and managed fund activity. And that's showing on that line, a large part of that of course is ultimately reduced by minority interest.

The third thing is you're looking at exercises on warrants related to our bank lending activities as well. And that portion or that component is not impacted as much, or at all, or very little I might add, I might say by minority interest. So that's what's going on in that line. The second line that I mentioned to focus on is derivative instruments - gains and losses on derivatives instruments and of course as you know, since the change in counting on warrants, this line is made incredibly clear what was obscure before.

And through the implementation of good accounting and there's several things going on in that line. One that we should carve out right away is of course the -- our foreign exchange activity related to customers and there you're seeing -- you should see an exhibit that illustrates how much of that 12.7 million is related to foreign currency exchange rate activity.

The remainder is of course related to marks on our portfolio and our portfolio this time is expanded a little bit. In a descriptive or management sense in that we had a -- what can only be described as an incredible quarter related to one of our investments in special situations debt fund. That we own about 50% of that debt fund and that debt fund had a very strong core with gains on warrants that they had taken as part of their lending activity and at least one case we did also lend into that situation as part of our normal bank activity and so that number is - does reflect both marks on our portfolio but also marks on a small portfolio warrants that this special situation debt fund has. That too ultimately gets removed and -- or a portion of it, 50% of it gets removed to minority interest.

So there is a lot going on here and I haven't even gotten to sort of even the things like on the expense side related to the litigation item etc in terms of core earnings. I haven't really sat down and tried to -- there's a lot of different ways to calculate core earnings, I haven't really sat down to try to calculate it the way I would do it, but I'd be happy to go over how to - sort of in more detail how you might want to do it, if you'd like, in a separate call. But those are the things going on in those lines that I think are important to try to get a handle on, better understand and help you get a better perspective about what actually occurred in Q2.

Okay. That helps. One smaller question. The 1.8 million in settlement. Is that in the other expense line item?

It, it is.

Okay. Cool and I'll talk to you later. Thank you.

Thank you. We'll take our next question from the side of [John Pinkard] with JP Morgan. Go ahead please.

Good afternoon.

Hi.

I was just wondering if we could get some -- a little bit more color here on your buy back. It looks like you both -- you buyback stepped up a bit this quarter from last quarter and I just want to get an idea of what your expectations are for going forward for buy back.

Sure. We were active repurchasers in Q2 just as we were in Q1. We -- you might also have noticed that as part of the press release we filed in 8-K that the board had authorized an additional 70 million of repurchased capability. In terms of what we're going to do, we're going to do pretty much what we've done in past quarters which is not make a commitment to do a specific number of shares or a specific dollar volume but our plan is to do, as I say, what we've done in the past is to be in the market from tine to time as we think makes sense given the other demands on capital at the bank. Whether it will be to the banks to [decide] in Q2 I just don't know at this point.

Okay. Separately, can you give us more color around the deposit efforts? I know you mentioned that in addition to utilizing short-term borrowings here you're certainly going to be focusing on deposit growth. I just wanted to see if you could give us some more detail on what you're doing on that side.

Sure. There's a couple of things that are sort of -- I'll put them in the easy to do category. Or maybe easy to do isn't the right phrase. Maybe it's more within our control to do. A couple of things have to do with just the way we allow customers to move funds and we're looking hard at that. For example the way customers are allowed to sweep funds to the earnings credit that we give to customers. We are looking at all of that kind of activity to make sure that we are competitive and we're doing it in a way that makes sense.

In addition we will of course look at whether there are targeted types of deposit accounts where we may pay a somewhat higher interest rates on clearly not the kind of rates that you'd pay on a short term borrowing but we'll be looking at that kind of activity as well. But I -- that's no different than any other bank out there probably in some respects. But the first two I think are more unique to us.

And can - well, they wont yield wholesale changes in deposits, we don't need really wholesale changes in deposits. We just need, and I think would like to achieve marginal changes in our deposit base. So those are three things that we are looking at and there's probably, by the end of our effort there will probably be a couple more added to that list.

Right. Okay. And lastly, do you have I guess an update on our outlook for credit quality? Are you seeing any changes in terms of the credit standing of some of your borrowers just given the rate environment and everything, just wanted to see what your latest --

Sure.

latest outlook is there.

Sure, well we're fortunate we've got Dave Jones here today, off from vacation I might add. So I'll let Dave answer that.

All right. Thank you Jack. The short answer is no. We don't really see the interest rate environment impacting our client base given the nature of our client's technology, life sciences based. Obviously what they are interested in is growing their markets and the capital cost of borrowing money in the short term is insignificant to the upside of investing those resources. So haven't historically seen a consequence of higher or lower interest rate and don't expect it in the future.

And how about just in general, any changes on the credit front in terms of the credit standing of some of your borrowers?

No, nothing of any significance at any level of our organization.

Okay. And then lastly, I have one more thing here, just want to see if we can get a latest assessment of the VC investment activity from a macro point of view.

This is Marc Verissimo. Well, as Ken mentioned his comments, on the investing side. We haven't seen a quarter like this since the first quarter of 2002. So it's a very strong quarter and we're predicting actually the strongest investing for the full year to be the best in five years. On the fund raising sides that's money coming into the industry to be invested. They also had the highest quarter since the first quarter of 2001. They raised over $11 billion.

So the fundamentals are very strong domestically and then when you go internationally, again as Ken pointed out, in China the first six months of this year there was almost $800 million invested which is double the amount of what happened last year in India. And unfortunately there I only have private, total private equity, which venture capital is some of that. But they raised 3.5 -- or invested 3.5 billion the first six months of the year. That's up from 2.2 billion the first half of 2005. So again, we're seeing not only domestically but most particularly internationally a strong both fund raising and investing.

Great. That's very helpful. Thank you. Good quarter.

Thank you. We'll take our next question from the side of James Abbot with Friedman, Billing, Ramsey. Go ahead please.

Hi, good afternoon. Very quick question on the yield on loans that most of the other questions have been addressed, but they were up 24 basis points sequentially. Last quarter they were up 47 basis points. Can you go over any items that might be affecting that as far as amortization expenses and things like that to try to help normalize that yield or that adjustment if you would?

I'm trying to look at some information right now James to give some perspective on that. I don't have anything in front of me that would give you perhaps more information to give you a sense of -- or give you a better sense of that. The only thing I have suggests that -- let me take a look here, that we might have seen a little bit fewer or a little bit less impact than we had in the past on the fee income and on the early payment side, pay off side. But I don't have a good answer on that.

Okay, well maybe another way of approaching it is - was, were the types of loans that were developed or produced during the quarter -- did they carry a lower interest rate than some of the other product that you've historically done or etc. If its not an accounting issue, maybe it's a product mix.

So quick, I'm going to ask Dave to respond too, but I just did some more looking. And if you took out the fee component, which was a little less than had had been in prior quarters, our yield would have been up closer to 40 basis points on the quarter. So it was, there was a fee element -- there is a fee element to your answer. But we'll let Dave talk about the loan mix answer.

Sure and as indicated, we have had good growth across the portfolio that would include all of the niches and stages of companies. There are two types of lending that we do that just have more impact because the risk is less and we do more of it and that is with the venture capital lending that we do there is slightly less risk. We had good growth in venture capital private equity lending.

Second, with some of our later stage companies, the quality is greater. Thus the interest rate that we are able to obtain on those is somewhat less and the consequence of booking a larger later stage company. Can be pretty significant to long growth.

Okay. That was -- those were the types of answers I was looking for. Thank you very much.

Thank you. We'll take our next question from the side of Kathy Steinbrecher with Wedbush Morgan Securities. Go ahead please.

Hi, good afternoon. Most of my questions have been answered but just to follow up from the last question. I think you had mentioned that you expected loan growth to be two times what it was in the quarter. Is that average loan growth that you're looking at or net loan growth?

Good clarification Kathy. Definitely average. Our focus tens to be on average growth is a - is probably the best metric of sort of where things are headed directionally and at what pace. End of period can be -- can be, not always but can be sometimes volatile due to some end of period window dressing that some of our customers engage in. but we tend to focus on average growth. So my comment was intended to reflect average loan growth.

Okay great. And then it seems as though you're trying to develop new products and services to keep your customers longer so they don't go to more of the mainstream banks, and it seems as though that's what you mentioned in the [quarter]. I wonder if you could go in more detail in terms of are you seeing that trend continue and how different is it from say six months ago, the percentage of your balance sheet or customers, however you want to look at that that are remaining with the bane for a longer period of time.

Kathy, this is Ken. Let me take a shot at that and perhaps Dave or Mark or Jack would want to add to it. The -- I've been at the bank now for -- this is my 17th year and I've seen a lot of change over that time period. It wasn't that many years ago that companies, often, when they got into the $7500 million in sales range would begin thinking about moving on to a "bigger" bank. That's always been the case and continues today to be the case.

The vast majority of our clients begin working with us at the point of their first equity infusion or even before and that hasn't changed. But in these past five years or so, our product set - actually even prior to that our product set had grown to the extent that companies could comfortably stay with us into the hundreds of millions of dollars in sales range. And in point of fact, the largest company in our portfolio is a billion dollars in annual sales and as I like to say, they're with us voluntarily. And they - we bank - we do all of their banking of them and they're not --they're a fairly large and complex company.

So I'm comfortable in asserting to prospects that we can satisfy banking needs across the board, all the way up to a billion in sales. Is there something magic about a billion, no except that we haven't proven that yet because we don't have anybody bigger than that in the portfolio? And in point of fact. Domestically there are only a couple hundred technology companies that are in excess of a billion dollars in sales annually.

The other thing that I would say is that there - the efforts that we've undertaken in these past several years now to make it possible to deliver as much as is possible or our product set globally as opposed to simply domestically really and truly has enabled us to keep clients longer for the simple reason that even the "big banks" are largely incapable of offering the level of assistance that we can. India by way of example or in China by way of example.

So our ability to assist our US based clients as they attempt to establish themselves or figure out what would - what options they have available to them and what kind of leverage they could get out of being physically present or in some way active in say an India or a China. That's something that's very difficult for even the so-called "big banks" to replicate and that has really helped us to keep clients happier longer.

Right. That's some good detail. Thank you.

Dave would like to add something to that Kathy. If you --

Okay, and then I also have an additional question on that too.

So I -- I just wanted to add to ken's comments. In terms of things that we're looking to do to the later - for the later stage company. So as Ken indicated the international aspect of our larger clients is increasingly important and trying to make sure that we have a viable product for our foreign exchange clients that we've introduced the ability to be able to do limited multi-currency transactions for the first time for our clients.

The ability and the ease of doing business electronically with Silicon Valley Bank is an important aspect of the latter stage client. So we have spent considerable human resources and investment dollars trying to build that out. And then I'd add to Ken's earlier comments about [Alliant] and say that Alliant too is an important part of providing services to later stage clients.

So during the quarter, the loan growth that you experience and the loan growth you are looking at for the remainder of the year. How important are these later stage clients versus your historical or traditional clients of these early stage?

Well, and this is Dave. It's hard for me to say that they are more important. I don't know that they are more important. One aspect of it is that because the risk of the later stage client can tend to be less than we're willing to consider doing noire or larger facilities with them and the consequence of one transaction with the later stage company versus one transaction with an early stage company is quite different. Having said that, the largest loan commitments in the bank have not really grown disproportionately with all of our other lending in the bank, so we're not becoming particularly top heavy in that aspect.

Okay.

Kathy?

Yes?

This is, Mark. One other aspect that when you're looking at loan growth or expectations in the future is when - domestically when we look at the pharma market, which is venture capital backed. If you look at the number of early stage companies that were funded this quarter, you're seeing quarter after quarter increase in that and in a sense that's an increase in our future clients. Both clients today but also clients that will perceive the middle stage in larger companies. So, like Dave, I think the growth is going to come across the board because I do think there's more companies being funded today than there were two years ago which means more potential clients for the bank to do business with.

Okay, and my last question. Can you provide a -- the loan break out for this quarter?

In what sense because there's a lot of different ways to break out loan --

In core commercial asset base, accounts receivable, real estate.

No real estate.

Yes, I -- we - Dave can give you a sense of the growth but we haven't -- typically got - in fact I don't even know that we have that data in front of us right now.

You know again, the growth is across the board. 60% of our business is between software, hardware, and life sciences. And then the other 40% is pretty much evenly split between the businesses we do with the executives, the private client services area, the venture equity side of the business, and then lastly, but not leastly is the premium wine business. Rounds out the 100%.

Okay, great.

One of the -- just Kathy, one of the reasons we fret a little bit with that question is there's a lot of ways to divvy up our loans. As Dave went through you could divvy it up based on the market niche. There's technology, life science, etc. You could deal with it - divvy it up in terms of early stage or later stage. You could divvy it up between sort of statistics we've previously presented in 10-Ks and 10-Qs of core commercial structured finance etc. So, there's a lot of ways to break it up and I'm not sure exactly what you're --

I was just looking at --

Which would be more meaningful to you.

I was looking at the 10-Q and comparing it to the previous quarter's to see what the change was.

Okay.

But I can always get that off line as well.

Yes.

Thank you for the detail.

You're welcome.

Thank you. And due to time constraints, we'll be taking our last question from the side of Brent Christ with Fox-Pitt. Go ahead please.

Good evening. Couple quick questions. Just a follow up on your funding strategy. You mentioned targeting certain types of deposit accounts where you may be paying a little bit more. Has there been any thought to try to maybe keep a little bit more in terms of the deposits on balance sheet as opposed to moving them off balance sheet, given that might be a little bit cheaper of a funding source than wholesale borrowings.

Well, in a sense all three strategies sort of attempt to do that. What we find is that a lot of our clients will -- if they get large fundings they will initially put it on balance sheet and then move it -- move a significant portion of it off balance sheet. So the strategies -- the three that I mentioned, which are just a sampling of a change in the earnings credit rate or a change in the way we allow sweep to occur or a change in targeted interest rates for certain deposit accounts. In a sense they're all sort of attempting to do, or targeted to do what you describe which is bring a little bit of that off balance sheet money back on the balance sheet.

Okay got you. And just a follow up, in terms of a loan to deposit ration, it moved up pretty significantly this quarter, almost 900 basis points. Is there a level where you're uncomfortable with that going above?

Well, if there is we're sort of a long ways from it. I would say once you get in the 90 to 100% range you start to think about -- really hard about new funding strategies and how high you want it to go but of course a lot of banks will exist at more than 100 - do quite fine at over 100 basis points. I think, again, most of our deposits are in DDA accounts. What we want to do of course is grow new customers and grow those DDA accounts as well as the things I mentioned so that we can maintain a - what I'll call a comfortable progression towards 100 on the loan to deposit ratio.

On that same topic, is there still any intention of using liquidity from the securities portfolio to fund some of the growth?

Not at this time.

Okay. And then lastly, just in terms of the outlook for expenses. As I recall correctly last quarter I thought you guys indicated there might be a little bit of relief off a second quarter levels. Is there anything that's changed that?

Yes. That's a good memory and I would say that my recollection of the discussion was that we expected compliance costs to be increased in Q2 and that we expected that to trail off somewhat in Q3 and then again in Q4. I would say that our expectation has changed a little bit around the edges. That we don't expect those additional compliance costs to trail off from Q2 to Q3. We still expect them to trail off a little bit in Q4.

Okay. Thanks a lot, its helpful.

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