SVB Financial Group (SIVB) 2007 Q2 法說會逐字稿

Good afternoon, my name is Jennifer, and will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group second quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS)

Thank you, I would now like to turn the call over to our host, Ms. Meghan O'Leary, Director of Investor Relations.

Thank you. Today Ken Wilcox, our President and CEO, and Michael Descheneaux, our Chief Financial Officer, will discuss SVB's second quarter 2007 performance and financial results. Following this presentation, members of our management team will be available to take your questions.

I would like to start the meeting by reading the Safe Harbor disclosure. This presentation contains forward-looking statements within the meaning of the Federal Securities laws, including without limitation financial guidance for the second quarter and full year 2007, the third quarter and full year 2007.

Forward-looking statements are just statements that are not historical facts. Such statements are just predictions, and actual events or results may differ materially. The information about factors that could cause actual results to differ materially from those contained in our forward-looking statements is provided in our press release, and in our last filed Form 10-Q.

Now I would like to turn the call over to Ken Wilcox.

Thank you, Meghan. Good afternoon and thank you all for joining us today. We have had another solid quarter of strong operating performance and growth in our core business. We realized significant upside from our fund investments during the quarter, as well as quantifiable results from our efficiency efforts.

Our strategic initiatives are falling into place. The work we are doing to build our platform and make it more scalable is paying off, in higher loans, more stable deposits, and progress on containing noninterest expense growth. Our credit quality remains strong, and well within our targeted range. We have also taken a significant step forward in implementing our capital plan, as you can see from our issuance of debt, and the news about our share repurchase.

Before I go into detail about our accomplishments in the second quarter, I want to address our announcement last week, that we would discontinue our investment banking activities and write down the remaining goodwill value of SVB Alliant. We acquired SVB Alliant because we believed in the potential synergies between the two companies, and we were able to realize many of those synergies in the cross-selling relationships we developed between SVB Alliant and our other business units.

Unfortunately we were not able to overcome certain business model differences to the extent that we could translate those synergies into a positive impact on the bottom line. Nor were we able to come to an agreement on a more beneficial ownership arrangement with the company. As difficult as it was, we made the decision to refocus our efforts and resources on increasing shareholder value.

With that focus in mind, let me move on to the quarter. As I said, the core business remains strong. Loans continued to grow in Q2 to reach another high of $3.4 billion in average loans for the quarter. Although on balance sheet deposits were flat vis-a-vis the first quarter, continued growth in our average broker dealer cash management balances, added to our fee income for the quarter. We saw strong returns from our investment activities, both from warrants and our funds business, and we continue to view this side of our business as a differentiator.

Now I want to give you an update on our strategic initiatives. To refresh your memories, those are as follows: First, efficiency through performance improvement and expense control. Second, upstream expansion to private equity and later stage firms. And third, targeted development of our global presence and capabilities. We are seeing encouraging results from our focus on efficiency and expense control.

Back in February, we said we would limit our expense growth in 2007 to 5%, and for the longer term, we would focus on increasing our operating leverage. Excluding the impact of goodwill, our near-term efforts toward expense control are gaining traction. They include a higher threshold for justifying expenses, more efficient vendor management, and general belt-tightening across the board. We have also shifted our reliance on IT consultants in the United States, to IT consultants in India, a move with immediate cost benefits that will also allow us to grow more efficiently.

For the long-term, we are evaluating our systems and processes, and eliminating redundancies and manual processes, which will also support efficient growth. In the future, we will invest in systems to drive efficiency and effectiveness, and we are continuing to explore further opportunities for additional outsourcing, especially in lower cost environments. We expect our growth to come in part from what we refer to as our upstream expansion into private equity firms and later stage companies, which contributed to second quarter loan growth.

On that front in the second quarter, we closed two significant debt deals, and we are getting a positive reception in a very targeted sector of this competitive market. Our loan growth and the quality of our loan portfolio continue to be highlights of our performance. We have doubled average loans in the last three years, and nonperforming loans and net chargeoffs remain very low relative to our overall portfolio.

With that said, we had a larger than usual provision in the second quarter, and I would like to comment on that. About 40% of this provision was simply due to having a bigger book of loans. The rest stemmed from modestly higher gross chargeoffs in the second quarter, a phenomenon that has occurred every four or five quarters in the past several years, and which we view as part of a normal pattern. Net chargeoffs were also lower because we have done so well in both minimizing chargeoffs and completing recoveries in recent years, that there are very few potential recoveries to offset our gross chargeoffs.

Moving on to deposits, our objectives are to ensure a stable low cost source of funds for future loan growth, and maintain a stable balance between loans and deposits. That will require us to grow deposits. We have had some good initial results from our new on balance sheet deposit product, which we introduced in the middle of the quarter. And we expect even more results over time from additional deposit products that we have in the pipeline.

We are striving for a better mix of on balance sheet and other deposits. Fortunately for us, our clients, unlike those of most other banks, are generating significant deposits. Our challenge is to attract more of them on to the balance sheet. At this point, we are addressing the situation proactively, and we expect this trend of new on balance sheet deposits to continue.

In addition to our efforts to grow loans and deposits, we are laying the groundwork for growth in our other business units. SVB Capital closed two funds in the second quarter, a $256 million fund to fund, as well as a $54 million India co-investment fund, both of which were oversubscribed. You will see when Mike takes you through the numbers, that we experienced significant upside during the quarter, from annual management fees related to those closes. Another of our businesses, SVB Analytics has been very well-received by clients, and is fast becoming the de facto standard for private company valuations in this emerging industry. We are setting the stage for growth in our global initiatives as well. We continue to build our networks and capabilities in China, India, Europe, and Israel.

Our long-term goal remains to offer actual banking products in these foreign markets, in which we currently operate, primarily on an advisory basis. We are sowing the seeds now, so that when the time is right, we will be ready. The last commitment we made was to improve our balance sheet leverage in capital mix, and to do a better job of more consistently returning unused capital to our shareholders. Our recent debt issuance was a significant milestone for us. And we are putting a plan in place, that we believe will allow us to achieve an optimal capital structure for the long-term. Mike will tell you more about that in a minute.

Overall, we are very pleased with the quarter, and with our long-term performance and prospects. We are making progress on our key initiatives and delivering on our commitments. The markets we serve appear to be poised to offer us ample opportunity for growth. Venture capital fund raising circumpassed the $7 billion point in the second quarter, and private equity fund raising is reaching record highs.

The IPO market is enjoying its best year since 2000, and mergers and acquisitions topped the $1 trillion point in the first half of the year. While overall economic growth is still moderate, technology spending remains strong, and it appears the interest rates will remain stable for the near term. These are all good things for SVB and for our shareholders.

And now, I will turn the call over to our CFO, Mike Descheneaux, who will give you more color on our results for the second quarter.

Thank you, Ken. And thank you everyone for joining us today, as we discuss our announcement of a new share repurchase program, our second quarter financial results, and our outlook for the remainder of 2007. As you will note in today's press release, our Board of Directors authorized a stock repurchase program that enables us to purchase up to $250 million of our common stock. This program expires on July 31st, 2008, and replaces the outstanding share repurchase program that we currently have in place. Clearly this is an important step as we move towards optimizing our capital structure, which I will discuss shortly.

Let's shift our focus towards our second quarter earnings. There are four areas that I would like to highlight with respect to our second quarter earnings. The first area is our core earnings. Core earnings remain strong, particularly our loan growth, which grew at an annualized rate of 22.5%. The second area is credit quality. Our provision for loan losses was 8.1 million, which was composed of 5.1 million of net chargeoffs, and 3 million of provision related to loan growth.

The third area is noninterest income. We had nice gains from warrants directly held by us, and gains on investment securities from our fund activities. Together, these gains accounted for approximately $0.12 per diluted common share. These gains were largely a result of a healthy IPO market during the quarter. The fourth area is more effective expense management, particularly professional services fees.

With regard to noninterest expense, let me just touch on Alliant for a moment, and reiterate our prior announcement that we wrote down the remaining goodwill on that business in the second quarter, which had a significant impact on noninterest expense. Excluding the Alliant charge, noninterest expense was lower in comparison to the first quarter. These factors translated into earnings per share, excluding the impact of goodwill, that exceeded our previous guidance of $0.70 to $0.76 per share. Our GAAP diluted earnings per share were $0.61, and GAAP net income was 22.9 million.

Non-GAAP earnings per share, that is the numbers excluding the impact of the SVB Alliant goodwill impairment were $0.88 per diluted common share, while non-GAAP net income was $33.1 million. This represents a $0.12 per share increase in comparison to our first quarter results. As we announced on July 18th, the after tax goodwill impairment was $0.27 per share.

Net interest income rose to 94.6 million in the second quarter, compared to 93.4 million in the first quarter of 2007. This rise was primarily due to increased average loan balances, which grew at a 22.5% annualized rate, or $170 million from the first quarter of 2007.

At this point, we believe we will exceed our loan growth target for 2007, and have in fact, increased our outlook for the year, which I will cover later. We experienced growth in all core industry segments during the second quarter, with private equity capital call loans making up a large part of the growth. We view this growth as a reflection of the overall health of the technology, life science, venture capital, and private equity sectors.

We are also on-track with respect to our deposit goals. Average deposits were flat at 3.9 billion in the second quarter, while end of period deposits rose 531 million, or 14% from the first quarter. We are pleased with the performance to-date of a new money market deposit product for early stage companies, which we introduced in the middle of the quarter. This is the first of two new interest-bearing products we expect to introduce in 2007, both designed to attract deposits to the balance sheet. These products are an example of levers we have at our disposal to grow deposits.

During the quarter, we issued 500 million of long-term debt to support our loan growth. The proceeds were used to pay down our short-term borrowings. The debt was issued at a fixed rate, and was swapped out for a variable rate. While the interest expense associated with that debt lowered NAM somewhat, our solid loan growth still kept NAM at a high level of 7.39%.

Let us shift our focus to noninterest income. As I mentioned at the outset, noninterest income rose as a result of gains on warrants and investment securities, as well as client investment fees. Specifically, noninterest income increased 17% to 55.7 million. Net gains on warrants were 4.6 million during the second quarter, compared to 1.4 million in the first quarter. The key driver of these gains was the healthy IPO activity within our client portfolio. In particular, we recognized 2.8 million in warrant gains related to two companies that went public during the second quarter, which are now in a 180-day lockup period.

Noninterest income was also helped in the second quarter by higher gross gains on investment securities of 1.4 million for a total of 13.6 million. The lion's share of this 12.1 million came from gains related to net increases in the fair value of two fund investments, held by one of our sponsored debt funds. We are a majority owner of that fund, so the gains have a more beneficial impact on our bottom line.

This is in contrast to last quarter, in which most of our investment security gains came from funds in which we were a minority owner, and a significant portion of those gains went to minority interest. In the second quarter, 7.3 million of investment gains were attributable to minority interests, compared to the first quarter when 11.2 million was attributable to minority interests. We have added a table to our earnings release that summarizes the net impact of minority interest on our results.

Let's move on a large component of noninterest income, which is client investment fees. Client investment fees increased 5.1% to 12.7 million during the second quarter, due to continued growth in our client investment funds. Client investment funds averaged 20 billion in the second quarter, compared to 19.5 billion in the first quarter. Client investment fees increased 15.3% compared to the second quarter of 2006.

Next up is noninterest expense. The goodwill impairment charge drove noninterest expense higher in the second quarter, but our efforts on cost control and efficiency had a measurable impact on our ongoing operational expense. Noninterest expense was 15.8 million higher for the quarter at 97.9 million, but this includes 3 notable items. First off is pretax goodwill impairment charge of 17.2 million. Number two is higher net occupancy expense of 1.5 million from lease exit costs, and number three, was a 1.4 million loss on the sale of a foreclosed OREO property, which was recorded in other noninterest expense.

Cumulatively, these three notable items accounted for 20.1 million of noninterest expense in the second quarter. Those items notwithstanding our noninterest expense number reflects some early success with our efficiency initiatives, which resulted in a decrease of 2.5 million in professional services expense, due to lower consulting costs.

Moving on to credit quality, I would like to give you some context around the loan loss provision in our second quarter chargeoff experience. We recorded a provision for loan losses of 8.1 million for the second quarter of 2007, which can be separated into two components. One component is net chargeoffs of 5.1 million for the quarter, and the other component is a 3 million provision related to our loan growth.

At first glance, our net chargeoff of 5.1 million may seem high compared to the net chargeoff experience of recent quarters. But at 53 basis points, it is well within our targeted range. It is also partially a result of our successful recovery history. We have had extraordinary low gross chargeoffs in the last few years, an average of 14 million per year, and since recoveries tend to follow chargeoffs in a 3-year cycle, we expect net recoveries to remain low for the coming quarters. Naturally, this impacts our net chargeoffs.

Before I comment on capital management, I will address SVB Alliant, and our expectations of its impact on our income statement for the second half of the year. While we have not yet finalized a cost of winding down operations at Alliant, we anticipate that we will be able to realize additional revenues from that business, and that the net impact of ceasing operations will not negatively affect second half earnings. We will have more information for you on this topic at a future date.

Now I would like to talk briefly about our capital management and funding activities, to which Ken referred earlier. Our capital management goal is to take full advantage of the range of financial instruments and activities to optimize our capital structure. While ensuring that our overall capital levels are in-line with expectations of rating agencies, regulators, and shareholders. We do not expect to achieve our objective overnight, and of course to an extent, it is a moving target.

However, we do expect to achieve an optimal capital structure in part through more long-term debt, alternative capital instruments, and additional share repurchases. Share repurchases had historically been a key element of our capital management program. As mentioned at the outset, our newly announced stock repurchase program is an important step to optimizing our capital structure. During the second quarter, we repurchased $20.2 million of SVB stock, or 388,000 shares. Despite this activity, you will note that our diluted share count increased during the second quarter, primarily due to the impact of our convertible debt as a result of our higher share price.

I will now focus on our outlook for the remaining of 2007. Last quarter, we noted that we would no longer provide EPS guidance, but would provide our outlook for 2007 of key drivers of our business. This quarter, we have updated our outlook for 2007 which we have provided in April. Furthermore, we have added a new metric, which is our 2007 outlook for noninterest expense. For the year ending December 31st, 2007, we expect that average loans will increase at a percentage rate in the low 20s. This represents an increase from our previous outlook, which was growth in the high teens.

Our outlook for average deposits remains unchanged. We expect them to be flat to slightly down compared to 2006 averages. Our outlook for average off balance sheet client funds remains unchanged. Expect them to grow at a percentage rate in the high teens.

Our outlook for our net interest margin also remains unchanged. We expect it will remain at about the same level as in 2006. Also unchanged is our outlook for aggregate fees for deposit services, letters of credit, foreign exchange, and other services. We expect those fees to grow at a percentage rate in the mid teens.

We have updated our outlook for the provision for loan losses, which will be impacted by net chargeoffs and loan growth. And we anticipate that net chargeoffs in the remaining quarters of 2007 will be lower than in the second quarter. Our new metric, noninterest expense is expected to grow between 5 and 6% over 2006 levels, excluding the impact of goodwill impairment. It is important to note that this outlook for noninterest expense does not adjust for expenses that result from positive operating leverage, nor does it consider the minority interest exclusion, which will have the effect of reducing our percentage expense growth.

With that, I am finished discussing our second quarter results. However, before I continue with the call, I would like to reiterate that we are extremely focused on controlling our expense growth and achieving an optimal capital structure. We have made progress on both fronts during the second quarter. We know that these objectives are key levers for increasing shareholder value, and our management team is committed to achieving these objectives.

Thank you for your attention, and now I would like to open the call for questions.

We will now begin the question and answer session. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Joe Morford with RBC Capital Markets.

Thanks, good afternoon, everyone.

Hello, Joe.

And thanks for providing a little more insight into the capital management plans. I guess along those lines, my question is, do you have a particular capital ratio and target level in mind that you are focusing on? And what can we expect in terms of the pace of the buyback over the next few quarters?

Joe, this is Mike Descheneaux here. So we have been going through a process in trying to assess and evaluate what is the best ratio for us. And we have come out with and determined for us it is the tangible common equity to total assets ratio. And so in general we are pretty comfortable with the target of about 8.5%, in that range, of course plus or minus some area.

Now as you know, as far as timing to answer the second part of your question, this can't happen overnight. There is constituencies that we need to keep happy, which are clearly the regulators, the rating agencies, and naturally the shareholders. So it a matter of time before we get this program running, I think we are very, very focused on it. We are doing at least 25 million a quarter of buybacks, and we expect that this will likely increase.

Okay. Thanks very much.

Your next question comes from Andrea Jao with Lehman Brothers.

Good afternoon, everyone.

Good afternoon.

Hi, Andrea.

Hi. Hoping to get your thoughts on how the mix of the balance sheet will change on both the loan side and deposit side. On the loan side, for the past few quarters, you have been talking about growing loans for later stage companies, which are lower yielding, but growing higher yielding asset based lending and factoring products.

And on the deposit side, can you talk about the implications of the new products that you are using to push client funds on books? How did these all come together? and implies forker the margin.

Andrea, this is Mike. We are going to turn it over to Dave Jones, our Chief Credit Officer, who will talk about the loans mix, and then we will probably move on to Greg Becker with respect to the deposits mix.

Okay.

So this is Dave Jones. And in terms of our loans, Andrea as you have mentioned, we are seeing a great deal of opportunity to grow loans with the later stage technology and life sciences and private equity. On the later stage technology company as you mentioned, the yields at the interest rate are a little lower. But as we mentioned at the Management Access Day in February, we have a considerable portion of the commitments to those credits that are unfunded. And when we apply the unused lines of credit fees back against the used part of it, the yield that we experienced on those later stage loans is not that much lower than some of our other business. So we don't expect a significant adverse impact on loan yield.

Obviously, we will see a considerable amount of growth in the loans. As we experience more lending in the middle and later stage, then inevitably there is going to be opportunity for us in the asset-based lending and the factoring arena, and those loan yields should be capable of offsetting the slight decline we will have for the larger credit facilities.

And Greg, on deposits?

Yes, Andrea, it is Greg Becker. On the deposits side, I guess I'd break it down into three different buckets. One is just demand deposits. And over time and we expect this see this happen is that it is going to grow at the pace of kind of new client acquisitions, if you will, with some volatility just based on the balance, the average balance in the account can fluctuate from quarter to quarter. So that is one aspect of it.

The second aspect of it then is the interest-bearing side. The existing interest-bearing products up until the new product we introduced is at a lower interest yield. And so we expect over time that those deposits will decline. The pace at which we don't know exactly how it will play out, but we believe it will decline.

To offset that, then we have introduced one new product in the second quarter, which just for quick numbers, for period end it contributed about $61 million to that period-end balance, and about $24 million to the average in the second quarter. So again, it was introduced halfway through.

And our plan, clearly is that that new one new product and future products will accelerate the growth of the deposits, to not only offset the decline with the historical money market accounts, but to show deposit growth over time. That is what we expect to see future outlook.

Great. Thank you very much.

Sure.

Your next question comes from Erika Penala with Merrill Lynch.

I just wanted to get your thoughts on the recent, I guess indigestion in the leveraged credit market. And the impact or, if any at all, that has on your initiative of market?

This is Dave Jones. And let me start, I would like my teammates to augment. Our business is not directly impacted by the leverage market. The buy-ons that we would target are a much smaller business opportunity.

So we would see the credits being in the 15 million to $100 million category, which is obviously not the end of the market that is experiencing a lot of press today. So I don't see our end of the business being significantly impacted. If anything, I think that one of the things that we are hearing is that the current unsettled nature is contributing to yield. And some of the recent trends to weakness and the structure, and compression and price, could mean that we can get better pricing, and hold to our solid structure expectations.

Okay. Thank you.

Your next question comes from the line of Fred Cannon with KBW.

Hi, good afternoon. And congratulations on a strong quarter! And a call where we don't have to talk about mortgages.

(laughter)

I wanted to --

We can talk mortgages, Fred.

Maybe we could get a little color on the funds business. I know it is always a little bit hard to sort out exactly how it hits the bottom line, but it looks like the funds management business had a fairly significant contribution to net income this quarter. And I was wondering, and obviously there was some volatility, but we haven't seen that before, and I was wondering if we could think of that bottom line, if that bottom line contribution is in fact the way we should think about it. And the sustainability and growth opportunities there?

Fred, this is Marc Verissimo. On the funds, as you know there are two sources of income. One source is management fees, and those are very stable source of income. And then the other part is realizations of value, either IPOs, M&As, et cetera. And when you looked at this quarter versus last quarter, there was one more realization of value. And clearly you could see in markets in the number of IPOs, et cetera that things were more robust during the second quarter. Second, the second big difference was that when you looked at this quarter versus first quarter, our ownership of those gains was higher.

So if you looked at the first quarter, a good deal of those gains went to them came out of the minority interest line. That means those were funds that were general partners that we are a limited partner of. But a good chunk of the gains went to the other limiteds. Versus this quarter you looked at the big gains, and Mike can get into more detail. They came directly to us, or to funds where we had a large ownership position. But you look at one source of the funds very stable, the other source as far as gains realization, as you know, Fred, and given today's market occurrence of what happened today, you know those can go up and down.

I guess, Marc, in that sense, that shift where we saw you guys capturing more of the investment gains versus going off to the limited partners, is that a ratio that we can think of as improving moving forward? Or is that going to bounce around too?

That will bounce around, Fred.

Fred, this is Mike. As you know, those are a bit lumpy because you can have gains in funds where we may own say 50%, or gains in funds where we may own 8%. Again it just depends if we have a particular financial security, where it is located, which fund it is, perhaps if it is a good hit or a good gain resulting from an IPO market, we just don't have control on where that is at.

Okay. Kind of on a trajectory, given the volatility, the VAT is generally positive on both. One just happens to be much more stable than the other, is that a good way to think about it?

If you are looking in the short-term, you can expect lumpiness. And if you are looking over the longer haul, you should reasonably as do we expect a positive trend line.

Right. It looks like that business is taking off, though. Thank you.

Your last question comes from Andrea Jao with Lehman Brothers.

Hello, again.

Hello.

I was hoping to get your thoughts on how your value proposition to your clients will change given the changes in SVB Alliant, if any?

Andrea, this is Greg Becker. I will answer that. When we embarked on the strategy I would say back in 2001 to really become more of a diversified financial services company, there were a lot of other pieces to the puzzle, of which the investment banking side is one aspect of that. So that is one aspect of it. So it wasn't that dependent on Alliant, although clearly it helped. That is one aspect.

The other part of it is that when you look at the number of deals that Alliant was doing on an annual basis, to see how many clients were actually being touched, it was really a small number.

So when you look at the large number of clients we have, 10,000 and the number of deals that we are doing on an annual basis, again there just wasn't as much, that much overlap in the total client base. So could it have an impact? Yes because it is one less thing we have in our quiver. But we don't believe it will be material.

Andrea, to be even more explicit about the math there. In the case of Alliant, roughly half the deals that did were generated, the leads were generated for them by the commercial banking organization. So if they did 35 deals, you would say 17.5 of them came from the commercial bank. Looking at now from the other perspective, we have 10,000 deals, and they were doing north of 30 a year.

Okay.

Does that help?

That helps a lot. Awesome. Thank you very much.

And your final question comes from Brent Christ, Fox-Pitt.

Good afternoon. A couple of quick questions. Just looking at the end of period balance sheet relative to the average, and I know there tends to be a little bit of window dressing around the end of period balances, but you saw quite a spike in the loans on an end of period basis. Can you talk a little bit about what is going on there and if any of that is sustainable?

This is Dave Jones. And I will at least start to respond that. We didn't have a disproportionate, we really didn't even have an average level of the window dressing, Brent, that you have seeing in prior quarters. A lot of the business as you can look at the end of the period balance and the average balance. You are correct in saying that it did look later in the quarter. But it is a lot of business that was in the queue.

By the time we could get all of the documents signed on both sides of the transaction, it was the end of the quarter. The business is good, private equity as Mike indicated was a significant part of it. That business tends to be a little transactional. But it is not the kind of volume, it is not the kind of size of transactions that is going to go way up, and then way down quarter to quarter, I don't believe. So I am looking favorably at the second half of the year in our loan growth as indicated in our business drivers.

Okay. And then two other quick ones. Can you talk a little bit about just the drivers, and the uptake in gross chargeoffs this quarter?

Well, yes. And this is Dave, and I will address that. And I guess I have to admit that I don't really see it as an uptick, so to speak. We have had periods going back in the history, $6.3 million was experienced in the fourth quarter of 2004, second quarter 2006 was 5.8. So as Ken said in his comments, all the quarters will bounce a little bit, but we are bouncing off of very low levels, second quarter of 2007 was a small bounce. The nature of the chargeoffs has been consistent over a long period of time.

While it is a very significant, very productive, very profitable part of our business, we tend to lose a lot. Most of our loan losses come from the early stage lending, and in the second quarter, that was the case as well. So $6.3 million gross chargeoffs on a portfolio of $3.7 billion is a very acceptable level for me.

Okay. And then just the last question. Is there any color you could provide around the second deposit product that you have planned to roll out later this year? And kind of how you view the opportunities with that, relative to the money market product you have already rolled out?

Yes, Brent, this is Greg Becker. From an opportunity perspective, we think it has same level of opportunity that the first product does, as either interest-bearing deposits. And so, it is pretty straightforward. And that's clearly what we are looking for is interest-bearing deposits on our balance sheet, and again, we have another one planned in Q3. And we expect to roll out more over the coming quarters.

Okay. Thanks a lot.

Yes.

Well, thank you very much. If there are no more questions, we will close the call. Thanks for dialing in.

This concludes today's conference call. You may now disconnect.