SVB Financial Group (SIVB) 2007 Q3 法說會逐字稿

Good afternoon; my name is Celeste and I will be your conference operator today. At this time I would like to welcome everyone to the SVB Financial Group's third-quarter '07 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). I would now like to turn the call over to Ms. Meghan O'Leary, Director of Investor Relations. Ma'am, you may begin your conference.

Thank you. Today Ken Wilcox, our President and CEO, and Michael Descheneaux, our Chief Financial Officer, will discuss SVB's third-quarter 2007 performance and financial results. Following this presentation members of our management team will be available to take your questions. I'd 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 fourth 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 our last filed Form 10-Q. Now I'd like to turn the call over to Ken Wilcox.

Good afternoon and thank you for joining us today. We've had another solid quarter of strong operating performance and growth in our core business. Earnings per share were $1.03 and net income was $38.1 million fueled by solid average loan growth of 6%, or 24% annualized, and solid noninterest income of $65 million. On balance sheet average deposits increased as well thanks to our new deposit product and client investment funds continue their strong growth. Noninterest expense growth remained well within our target range of 5%. Net interest margin, while somewhat lower at 7.18%, is still more than double the average bank NIM in the United States.

We are maintaining our dominant market share with venture capital and early stage firms and we continue to win new clients as part of our upstream expansion to larger companies and private equity firms. In short, we have a very good quarter to talk about today and we'll get into the details in a few minutes.

But I'd like to spend the first part of our call addressing credit quality and interest rates. These issues have dominated every conversation with investors since the summer and we believe the points we've made about our situation bear repeating. Let me start with credit quality because it's pretty straightforward.

Unlike most banks we have not experienced any credit quality issues to date related to subprime mortgages. The primary reason for this is that we have no direct exposure to subprime mortgages in either our loan or investment portfolios. We also currently have no exposure to asset-backed commercial paper.

Credit quality in private equity deals has been a source of concern in some quarters, but here too we are not like other institutions. That's because when we say private equity we mean something different than the very large leveraged buyouts you've been reading about in the financial press. Our private equity activities fall into two arenas. The first is capital call loans to private equity firms. These constitute the vast majority of our private equity lending. We've been making these sorts of loans for 18 years and they have very high credit quality.

Specifically in those 18 years during which we've lent billions of dollars to private equity firms we have lost a total of about $400,000.

The second private equity arena in which we operate is that of lending to fund small cap buyouts. This is a relatively new business for us and we have made a modest number of loans for this purpose. Although the business is growing, at this point it constitutes only about $100 million or less than 3% of our $3.8 billion loan portfolio. Again, these are not the problematic leveraged buyout deals that have been in the papers recently. For one thing they're much, much smaller. Our loans in this space average $15 million to $20 million. We also require covenants on these loans and always have, even when other lenders offered structures with few or no covenants.

It's worth noting that our strong credit discipline and our focus on lending to distinct market niches that we know very well act as a sort of hedge against us making the kinds of loans that have recently led to credit problems for other institutions. We like to say that we are good at managing risk rather than avoiding it. But we are able to manage it because we know our clients and their industries intimately.

We know what the real risks are versus the perceived ones. We know the management teams and the investors. We know how companies behave through market cycles. We have a great deal of visibility into which companies are good credit risks and which are not. Moreover, we lend based on the assumption that an up market will go down; that knowledge and our disciplined credit culture help to protect us.

Now I'd like to talk about the impact on us of recent rate cuts by the Federal Reserve. We have estimated that the Fed's 50 basis point cuts in September will have an impact on our earnings of $0.05 to $0.06 or $2.2 million in net income per quarter. Annually that translates to $0.24 per share and $8.8 million of net income.

Although we are working to build a business that is not wholly dependent on interest rates, in the main we are still asset sensitive. Having said that, we are more comfortable than we would have been in the past with the current environment because we have but in place a number of levers designed to compensate somewhat for the impact of interest rates by generating more income. Over the long-term we expect these levers to significantly mitigate the negative aspects of our asset sensitivity.

The first lever is loans, which, as I pointed out, have grown at a very healthy pace. We have strong prospects for continued prudent loan growth and we expect this growth to improve our bottom-line even though our margin will not likely remain at its current elevated levels.

The second lever is on balance sheet deposits. Our efforts to grow deposits, although still in the early stages, have exceeded our initial expectations. These deposits provide a lower-cost source for funding loan growth than short-term borrowing alternatives.

Another lever is noninterest income which includes income from client investment funds, derivative instruments including warrants, our funds business and fees from a variety of activities including foreign exchange. Noninterest income has more than doubled in the past five years to $168 million for the first nine months of 2007. With another quarter still to go that figure is already nearly 20% higher than the 2006 total.

A fourth lever at our disposal is our focus on making optimal use of our equity capital, finding the right balance between equity and debt to fund our growth and maximize shareholder value. Our $500 million debt offering in May was an important step in our capital management efforts. Share buybacks are another important part of that strategy.

A final lever is efficiency and we are on target to meet the long-term noninterest expense growth goal we set as part of our performance improvement initiative at the beginning of this year. To that end we have implemented a number of performance and systems improvements that are allowing us to better control our expenses and enjoy greater bottom-line impact from our revenue growth. We expect some of that revenue growth to come from our continued upstream expansion to private equity and later stage firms.

We've put time and a great deal of thought into offering our larger client products designed specifically for their needs that will help to differentiate us. As an example, in the third quarter we rolled out a new financial reporting tool to our SVB asset management clients that greatly improves their ability to track and manage their cash portfolios. We've received overwhelmingly positive feedback from clients about the power and usefulness of this new product.

We expect further growth to come from products that allow us to expand our relationships with early stage companies. One example of this sort of product is the 409A valuation and cap table management services offered by our subsidiary, SVB Analytics, which we set up last year. While revenues from this business are still small they are growing rapidly. There is a tremendous unmet demand for valuation services in particular which nearly every venture backed company needs.

Our results speak to the progress we're making on these initiatives and our long-term objectives. Overall we're pleased with our results for the quarter and our prospects for growth.

Despite larger economic concerns the technology industry is having a very good year. U.S. technology spending continues to be strong and many in the industry are expecting a significant ramp up in demand in spending in international markets. Venture investment appears to have held steady in the third quarter and exits improved during the same period. According to Venture One U.S. venture capital investment reached $8.07 billion in the third quarter, the highest level since the first quarter of 2001.

Year-to-date about $33 billion have been raised by venture backed companies through mergers, acquisitions and initial public offerings and 2007 promises to be the most active exit year since the boom. We often point out that the venture capital industry does not generally mimic the broader economy. Since venture firms are investing in a payoff that may be eight or 10 years down the road. These numbers support that assertion and validate what we're seeing among our clients, that in spite of issues in other markets technology companies are growing and they see ample opportunity ahead. And that is a powerful opportunity for SVB.

And now I'd like to turn the call over to our CFO, Mike Descheneaux, who will provide more detail on our results for the third quarter.

Thank you, Ken, and thank you, everyone, for joining us today as we discuss our third-quarter 2007 financial results and our outlook for the full-year 2007 results. Before I begin I would like to point out that we have slides to accompany our commentary today. Instructions for accessing those slides during the live webcast are in the press release we issued this afternoon. If you have any trouble with that webcast you can download the slides from the Investor Relations section of our website.

As Ken noted, diluted earnings per share were $1.03 in the third quarter while net income was $38.1 million. This represents an increase of $0.15 or 17% in comparison to our second-quarter non-GAAP diluted earnings per share. On a non-GAAP basis, which excludes the impact of a $17.2 million pretax charge for impairment of goodwill, net income for the second quarter of 2007 was $33.1 million or $0.80 per share. Our GAAP diluted earnings per share were $0.61 per share or $22.9 million during the second quarter.

There are four areas I would like to highlight with respect to our third-quarter 2007 results. The first area is our earnings from our core banking business. Once again core earnings remain strong. Average loans grew at a compounded annualized rate of 26%.

The second area is credit quality. Our provision for loan losses was $3.2 million which is comprised of $2.3 million of net charge-offs and a $900,000 provision related to loan growth. Net charge-offs decreased $2.8 million during the third quarter compared to the second quarter.

The third area is noninterest income. Income from derivatives, specifically gains from equity warrant assets and net gains on investment securities, contributed significantly to our earnings. Additionally, we noted nice increases in fee income.

The fourth area is expense management. As mentioned, we recorded a pretax impairment charge of $17.2 million in the second quarter. We did not have any notable items like this in the third quarter and as a result noninterest expense was significantly lower in the third quarter. However, excluding the impact of the goodwill impairment charge recognized in the second quarter, noninterest expense in the third quarter rose 3% from the second quarter. We feel we are on track to stay within our targeted noninterest expense growth rate of 5% for 2007.

Let us shift our focus to the details of our third-quarter results. Net interest income rose to $95.7 million in the third quarter compared to $94.6 million in the second quarter of 2007. The rise in net interest income was primarily due to increased average loan balances which grew by $204 million during the third quarter. Average loans outstanding during the third quarter totaled $3.6 billion.

We experienced growth in all core industry segments, particularly in capital call loans to private equity firms. I am pleased to report that we have made progress in the third quarter with respect to our goal of growing on balance sheet deposits. Average deposits increased, albeit slightly, for the first time since 2005 to $3.94 billion in the third quarter, a rise of 2.2% or $85.6 million.

This increase reflects the impact of our new money market deposit account for early stage companies. In the third quarter that product contributed $144.9 million to average deposit balances and the quarter end balance was $221.6 million. These are impressive amounts especially in light of the fact that the product was only introduced in May 2007.

I would like to point out that end of period deposits were down from last quarter, which was an exceptionally high quarter, and were flat with the same period last year. However, end of period deposit balances are subject to more variability than average deposits. As a result we believe average deposits are a better indicator of trends in overall deposit levels.

We continue to focus on achieving the appropriate mix of on balance sheet and off balance sheet funds and, as Ken noted, we have more products in the pipeline designed to achieve this goal. Before I finish with deposits I want to note that we also introduced a new interest bearing deposit product this month, a Eurodollar sweep account. Over time we believe new products like these will allow us to attract deposits to the balance sheet.

Let me move on to our net interest margin. Net interest margin was 7.18% in the third quarter compared to 7.39% in the second quarter. Our net interest margin contracted largely due to additional interest expense associated with our debt issuance in May as well as increased interest expense associated with our new interest bearing deposit product. Loan fee income was also lower during the third quarter. Loan yields were slightly impacted by a 50 basis point decrease in our prime lending rate in late September.

Although we expect lower interest rates to further impact our net interest margin moving forward, as Ken pointed out, we believe we have levers at our disposal to somewhat mitigate the negative impact of lower rates on our net income.

As I mentioned at the outset, noninterest income increased in the third quarter primarily as a result of net gains on derivative instruments and investment securities. Additionally, we also had increases in client investment fees, foreign exchange fees and corporate finance fees. Specifically noninterest income increased 17% to $65 million.

Net gains on derivative instruments were $8.8 million during the third quarter compared to $4.8 million in the second quarter. These gains were driven by net gains on equity warrant assets which totaled $9.2 million in the third quarter compared to $4.6 million in the second quarter. IPO and M&A activity remained favorable during the third quarter.

Net gains from investment securities in the third quarter were $14.7 million which represents an increase of $1.1 million over the second quarter. Net gains from two of our managed funds of funds contributed $12.8 million to third-quarter gains.

Of the $14.7 million in net gains from investment securities recognized during the third quarter, $11.5 million was attributable to minority interest. To put this in perspective we recognized $13.6 million of net gains from investment securities during the second quarter of which $7.2 million were attributable to minority interests. For more details and components of minority interest, please refer to the table in the back of our press release entitled Minority Interest in Net Income Loss of Consolidated Affiliates.

Income from client investment fees increased by 4% to $13.1 million during the third quarter due to growth in our client investment funds. Average client investment funds reached $20.7 billion during the third quarter which is the highest quarterly average to date. Growth was due to our focus on venture capital and private equity firms as well as larger clients. It is hard to believe that only five years ago these funds totaled only $8.5 billion.

I would like to take a moment to highlight foreign exchange fees. Foreign exchange fees increased by $900,000 to $6.7 million during the third quarter as a result of higher volumes of international trades by our clients. In the third quarter we executed the largest trade in our history, a trade that exceeded $200 million. This business has been a steady performer and we expect it to continue to do well as we expand to larger clients.

Let us now turn to SVB Alliant, our investment banking subsidiary. During the third quarter we recognized $5.2 million in corporate finance fees related to the resolution of a select number of SVB Alliant transactions. You will recall that we announced our decision in the third quarter to shut down that business unit. We said last quarter that we did not expect those activities to negatively impact our net income and so far they appear to be having a neutral impact.

Moving on to noninterest expense. As we noted earlier, excluding the impact of the $17.2 million pretax goodwill impairment charge, noninterest expense was 3% higher in the third quarter than in the second quarter. The 3% increase reflects an increase of $4.5 million in incentive compensation for employees which was related to strong financial performance. Partially offset by a cumulative decrease of $2.1 million in net occupancy and business development and travel costs.

Next up is credit quality. As I noted earlier, we recorded a provision for loan losses of $3.2 million for the third quarter of 2007 which represents 33 basis points annualized as a percentage of total gross loans. That reflects $2.3 million of net charge-offs compared to $5 million in the second quarter of 2007. It also reflects $900,000 of provision related to loan growth compared to $3.1 million in the second quarter.

Our third-quarter gross charge-off experience supports our view that the modest increase in second-quarter gross charge offs was not the start of an upward trend. Nevertheless we are comfortable with current levels of gross charge-offs.

We also view nonperforming loans as an indicator of credit quality. Nonperforming loans at the end of the third quarter were $9.8 million compared to $12.2 million in the second quarter and $9.3 million in the third quarter of 2006. We are in the lower end range of our historical nonperforming loan experience.

Now I'd like to move on to capital management, specifically share repurchases. We repurchased 1.14 million shares of our common stock during the third quarter at a cost of $58 million. That is about double the pace we have kept for the past two quarters. At September 30, 2007 we had 199 million remaining in our share repurchase authority which expires in July 2008. We expect to continue repurchasing shares in the coming quarters as we remain focused on achieving an optimal capital structure.

Let us turn to our outlook for 2007 and some final adjustments we have made to better reflect our expectations for the year. I want to note that our outlook, which we revisit and update as appropriate each quarter, reflects our expectation for the full year 2007 versus the full year 2006. At this point in the year it also gives you an indication of our expectations for the fourth quarter, but we want to reiterate that is an annual outlook.

Our outlook regarding loans and off-balance sheet client investment funds remains unchanged. For the year ending December 31, 2007 we expect that average loans will increase at a percentage rate in the low 20s and average off balance sheet client investment funds will grow at a percentage rate in the high teens.

We have revised or clarified our outlook for deposits, our net interest margin, certain fee income, our provision for loan losses and noninterest expense growth. We expect average deposits to be flat in 2007. You will note that we have improved our outlook as a result of the introduction of two new deposit products, particularly the money market deposit account for early stage clients.

We expect our net interest margin for 2007 to be modestly lower than in 2006. In 2006 net interest margin was 7.38%. We lowered our outlook as a result of the recent Federal Reserve rate cut and expectations of an additional 25 basis point rate cut in the fourth quarter.

We have increased our expectations of 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 low 20s. The provision for loan losses will be impacted by net charge-offs and loan growth. We expect net charge-offs for the fourth quarter of 2007 to be between 30 and 40 basis points annualized.

Finally, we improved our outlook for noninterest expense which we believe will grow only 5% during 2007 as opposed to our previous expectations of growth of 5 to 6%.

Before moving to the question-and-answer session I would like to reiterate the following points. Our core earnings remain strong. Our business model and credit discipline have protected us from any direct exposure to credit problems associated with subprime loans or the housing industry. To date we have not seen a negative impact on our pipeline or prospects as a result of credit issues.

While interest rate cuts effect our margin and net interest income they do not take away our ability to grow our current income streams and create new ones. We continue to enjoy significant upside in noninterest income and solid loan growth, both of which helped to lessen the impact of rate cuts on net income.

We are working to achieve an optimal funding mix to support our continued growth in part by attracting more deposits to the balance sheet. The first of two new interest-bearing deposit products is more than meeting our expectations and we have plans to introduce similarly targeted products in 2008. We remain focused on controlling our expense growth and achieving an optimal credit capital structure.

Overall we are very pleased with our results for the third quarter and we sincerely appreciate the efforts of all of our employees at SVB for the tremendous job they are doing. Thank you for your attention. This concludes the review of our third-quarter results. With that I would like to ask the operator to open the call for questions.

(OPERATOR INSTRUCTIONS). Joe Morford, RBC Capital Markets.

Congratulations, a really great quarter here. First, on the capital management front, Mike, I guess I just wanted to confirm -- you're working towards a tangible common equity/tangible assets ratio of target of 8.5% and even after buying back about 3% of the stock this quarter that ratio actually went up this quarter to 10.8%. Is there a chance we should see a continued buyback pace at the current levels or this aggressive perhaps maybe more aggressive?

So first point, Joe, is you are right; we are targeting an 8.5% ratio. The one thing to bear in mind with respect to the second quarter, you'll note that the period end balances, particularly the loan balances, were up significantly. So when you look at that that kind of in a sense skews the ratio so to speak. So whereas if you were more to use average balances you'd get a different picture.

So we definitely believe we've made great progress this quarter in our share buybacks. As we alluded to earlier, we repurchased $58 million. To answer your question, yes, we expect to continue to be aggressive at those levels. Hopefully that gives you a little bit of insight.

Okay. And then the other question was just on the deposit front. How are you going about steering clients from the off-balance sheet to the new bonus money market? Is it just a rate? It looks like from the average balance sheet you're paying about a 1.6% rate on that. And going forward should we really expect these off balance sheet funds to be pretty flat and then whatever growth will be in this bonus money market then?

Joe, it's Greg Becker. (technical difficulty) question. One is the product that we've introduced so far, the early stage money market account, has been geared toward new clients. And so that's the first thing. So all of that has been generated from new clients to the organization, so it's not being moved over from other balances or directed from existing balances. That's number one.

When you go out and look forward there's clearly -- we still believe there's going to be growth in our off balance sheet funds as well. So as we've said in past calls, our goal is really to create that optimal balance between both on and off balance sheet. And so we don't believe -- our goal is to have both those areas grow. So I guess that's the game plan, that's what we saw in the third quarter. And as Mike talked about, that's our plan going forward is to release new products into the market in the first part of '08.

Okay, sounds good. Thanks so much.

Joe, just one more thing. You mentioned on the rate side, when you look at that rate, that 1.6 or 1.8% that you talked about, that's really a blend of many products. So I would say the early stage money market account is a competitive rate product. And so competitive from the standpoint of what you would find in the market. So it's really that number you mentioned is a blend, just to be clear.

That's helpful. Thanks, Greg.

Andrea Jao, Lehman Brothers.

Good afternoon, everyone. And congratulations on the operating leverage, it's notable. My first question is on SVB Alliant, please remind us how soon that should be wound down, is it the fourth quarter, early first? And in the meantime, since you're letting them finish up on transactions, should corporate finance fees remain elevated at third-quarter levels or should this pull back?

Hi, this is Mary Dent; I'm on the management team here. Most of the business activities at SVB Alliant have been finished. We'll be doing the final wrapup of all business activities toward the end of this year, first quarter of next year.

So the second part of my question, do corporate finance fees pull back?

This is Mike Descheneaux, Andrea. So to answer your question, yes, they will pull back. We don't expect them to maintain the levels that we have here in the third quarter. As you know, when we wind up the rest of these deals there's just no more deals left in the pipeline to realize any fees.

Okay, understood. My follow-up question is more general. Could you talk about how liquidity issues in the broader market impact or perhaps don't impact the venture capital lists that find the companies which you in turn bank?

Let me take a shot at that and maybe others around the table here will also like to add a view or two. It's first of all very difficult to answer that question because of course nobody can tell the future. The second thing that I would say is that it would appear, at least initially, that if there's any impact at all it would probably be a positive one and I say that for essentially two different reasons.

One is I think it's important to underscore that the venture capitalists in general, and certainly those that we work with, are looking out at a longer-term horizon, meaning that today's activities are intended to bear fruit eight to 10 years from now, or in some cases sooner than eight to 10 years from now, but certainly not in the next year or two. The result being that a venture capitalist simply wouldn't be a venture capitalist if they allowed the conditions of the market to totally determine their views and their activities in the short run.

The other thing I would say is that there is, and continues to be, a huge amount of capital in our capital market system globally today which I know is no news to any of you. That has to find outlets and it would appear that as enthusiasm for private equity, in terms of the very large private equity funds, is that enthusiasm wanes someone the people that manage those funds look for other alternative assets and venture capital is an obvious candidate.

As we see venture capital funds going out into the market to raise money today we find that they are still having absolutely no problem raising funds and that they still have to turn away pension funds and endowments that are scrambling to get into them. And at the same time we certainly have seen no abatement in the level of venture investing in terms of what funds are putting into companies and their certainly has been, if anything, a pick-up in that activity in recent months.

Andrea, this is Marc Verissimo. I just also might add that if you look at the structure of your typical venture capital fund or private equity -- and I'm excluding hedge funds in there -- is that investors are (technical difficulty) their money for commitments and also they have to fund those commitments and it's hard to get your money out without severe penalties. Now this would be in contrast to most of the hedge funds which have either 90-day, 180-day calls. So the money committed here is committed for a much longer period of time and it can't move in and out of the funds the way it would in the hedge fund industry.

Okay. This is very helpful. Thank you.

Fred Cannon, KBW.

Thanks and I'd like to echo the other remarks about it's nice to see such a very strong quarter. Two questions, one is in terms of the expense control. If I look at your guidance for 5% year-over-year and back out goodwill in both years it comes to having expenses in the fourth quarter of about -- I get about $73.5 million which is a significant drop from the $83 million of this quarter and even if I back out the issues that you raised about 80 in the quarter. Am I doing something wrong or can we expect that kind of significant linked quarter drop in the expense run rate?

Well, I think first of all, we're not commenting specifically on fourth quarter. But I think one thing to bear in mind; we did have a fairly large increase in Q3 related to the incentive compensation which I mentioned. And so we don't really expect those levels to be maintained that high.

Okay. So that would come down, but my 73 would still seem to be a bit aggressive relative to what -- even without that, is that fair? Or you just don't want to comment on that?

I won't comment on the 73. On the high-level on the year-on-year we feel comfortable with our -- excluding the goodwill we feel comfortable with our 5%.

That does back into a pretty low number. Great. That would be great to see. Second comment is the loan to deposit ratio has shifted dramatically over the last couple years at SVB. I calculated on an average basis about 92% now and you have it here on an end of period basis at 96%. Obviously one of the things you're doing is changing some of your deposit strategies. I'm wondering, Mike, how you're thinking about managing this balance sheet on an ongoing basis now that the core dynamics of it has shifted from a low loan deposit ratio to a high one?

I'll take a stab at that first and then perhaps some of my colleagues can jump in. You're right historically we're used to loan deposit ratios of 55 to 65%; of late they've certainly been approaching 90's, your calculation is right. But when you compare us to other peer banks in our group, it's roughly right around that 95% level. So we're still slightly lower than our peers. We feel comfortable at those levels as well.

Having said that, we even feel comfortable going even higher, even breaking through the 100% mark as well. But again, we've been very active on focusing on deposits. We haven't had to focus on that in the past, but now we are and I think you've seen some of the positive efforts of late with our new products on there. So we hope to see that make some sort of dent in it or to bring more deposits on balance sheet.

Before we pass it to Greg who has some specific comments -- Fred, I just wanted to say that it was deliberate.

Fred, it's Greg. Just to pile on to what Mike said I mean. I look at it from my standpoint if we can have a stable loan to deposit ratio somewhere in the 95 to 100% and, as Mike said, even going a little bit over, to me the most important thing is having that be stable. And so being in that 95 to 100% range is not of any concern, and again, going over it. It's about the stability of that and that really is a key part of the deposit initiatives that we're driving.

So as you've seen and we've shown, loan growth hasn't been an issue and we're starting to prove that the deposit side is backing that up. And once we get that in line I think we're going to be very comfortable with the stable number.

So as outside analysts, just to reiterate, we should see it as a sign of success, Ken, that you got it to this level, but you do want to maintain it at this level moving forward more or less?

That's exactly what I'm driving at. The truth is that we were underutilizing our balance sheet and we're trying to make every effort now, Fred, to use our balance sheet as a source of our profitability in the same way that we have our P&L historically. So it was a deliberate shift and I think that we're all better off for it. I agree certain with Greg and with what you just said, Fred, in terms of targeting stability and consistency.

Great, thank you.

John Pancari, JPMorgan.

Good afternoon. Two quick questions, one on the interest rate side of things. Have you considered anything more aggressive in terms of hedging your interest rate exposure?

John, this is Mike Descheneaux. We are continually evaluating that. A question just comes of the economic cost to actually do that. So what we have been doing clearly over the past few years is trying to find natural ways to try to mitigate our asset sensitivity. So at this point we haven't put on any synthetic instruments to protect ourselves, it's just been through natural. And again, we continue to look for means to try to mitigate our asset sensitivity.

Okay. And then just a second question here over to credit. I know your expectations for the fourth quarter -- actually I believe that's the only area you gave us some fourth-quarter indications -- is for charge-offs to be around the 30 or 40 basis point range. It is up modestly from the 25 basis point range that we see for this quarter. Is there anything there, any direction or is that just a general expectation for it to rise off of these levels?

This is Dave Jones. I will try to address that. I think it's just the general comment that that would put us in the ballpark of just under $3 million to something over $3 million and I'd be very comfortable at that level.

Okay. All right, that's all I have. Good quarter. Thank you.

Christopher Nolan, Oppenheimer & Co.

Good afternoon. How much of expense savings do you anticipate from closing down SVB Alliant, operating expenses?

I don't have those numbers off the top of my head. One thing I'd like to reiterate when we were talking about fee levels a minute ago is that -- and also we commented that we do not expect a drag going forward from SVB Alliant. So if that's the concern, whether or not we're going to have any negative implications, I think you can be assured more or less that we won't have a negative drag. So if your question is more of what does it look like for next year with respect to forecasting expenses, is that what you're really driving at?

No, I'm trying to drive at fourth-quarter operating expenses, sort of following up on Fred's question.

Right, so by and large the bulk of all the individuals at Alliant are gone, so you have the costs and infrastructures associated with that are essentially out of the system. So that will also be a driver to Fred's question as well.

Okay. So we should see a significant drop in the comp and benefits line just from SVB Alliant plus the incentive compensation coming down in the fourth quarter?

Yes, all things equal, yes.

Okay, great. And finally, the reserve ratio has come down a little bit from the second-quarter level. Is there a particular target? Should we expect that number to start climbing again, particularly given the outlook for a higher charge-off ratio in the fourth quarter?

Chris, this is Dave Jones. I think the number is flat; I think we were 114, 115 for the second quarter and we're 115 for the third quarter. So that's a number that the longer we can continue to tack on positive credit quality, as we have the last three or four years, we'll be forced to push down. But it's not a number that we're going to be driving aggressively lower.

Great, okay. Thank you. Good quarter.

James Abbott, FBR Capital.

Good afternoon. My question is on the margin and just if you can give us a sense as to the progression during the quarter, whether there was any sort of sudden shift downwards or if it was a relatively gradual trend. And then it strikes me that that might be a little bit below budget and is that simply due to be Fed changes or are there other factors?

We'll start with your first question which was with respect to whether it was a gradual trend or not. I would look at it as a gradual trend so to speak because you have to remember we brought on new debt or we had the full effect of the debt offering that we had in May, so now you have that full effect in Q3, as well as we began to embark on some of these new deposit products which have a higher interest than we usually have seen for typical money market accounts.

So I would just say it's more of a gradual trend. I mean, I haven't seen any indications other than these factors. Of course, the full effect of the rate decrease from the Feds in September -- so that's what I see.

So it's not substantially different than what you had budgeted for in the third quarter (inaudible)?

No, I don't think so. I mean, again originally in our outlook last quarter we had not put in our margin a 50 basis point decrease, right? So we didn't have anything built into that.

Right, yes. Exclusive of that factor, that's what I was trying to drive at. And related to the margin as well, obviously very sensitive to any decreases in non-interest-bearing deposits and I do look at the average balances so I'm not ignoring that. But would you expect that to grow as we continue to progress or be relatively stable, how should we approach that?

With respect to DDA accounts?

Correct.

This is Greg and, I mean, you're going to have variations from quarter-to-quarter, but obviously our goal is that it will be stable to slightly up over time. And if you -- the basis for that is if you have stability with the existing client, so as you grow new clients and they are bringing in an equal amount of DDA balances, that you should have growth around that, again with some volatility just on an average basis.

Okay. And last question related to the margin is the Fed funds sold. Is there any way to make that line item more efficient so that you can enhance the margin by reducing that number?

I mean, of course we always look to try to optimize, it's just the nature of the beast. So I don't really have anything to comment on that.

You can't go through a more borrowing based approach where you reduce the Fed funds sold altogether to zero and use borrowings to fund variations in cash flow?

Again, we continue to explore any options we can to optimize. There's really not much to say on that.

Okay. Well, thanks again. I appreciate your candor.

Brent Christ, Fox-Pitt.

Good afternoon. Two quick follow-ups on a couple topics you guys have already hit on. But in terms of the expense levers that you expect in the fourth quarter, is there anything significant that's not salary and benefit related where you expect some additional leverage or is it pretty much all in the salaries line?

I think by and large it's coming in that compensation line. I mean, nothing really sticks out of my mind as far as other expenses.

Okay. And then just a follow up on the margin. You mentioned a number of factors impacting the decline this quarter. Could you give us a sense in terms of order of magnitude of how much of it, the decline, was related to the new money market deposits versus the Fed cut or lower loan fees?

Actually if you recall when I was just speaking a minute ago, the order would -- comment something like this -- the full effect of the debt issuance in May has probably the largest impact on our net interest margin and then it drops off pretty rapidly after that. The impact of the rate decrease, since it came so late in September that really did not have a significant effect yet. Now clearly in the fourth quarter it will have an impact. But again, by and large it was the debt issuance in May that had one of the largest effects.

Okay, thanks a lot.

There are no further questions at this time.

Thank you very much. That concludes our third-quarter earnings call.

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