SVB Financial Group (SIVB) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Dave, and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group's second quarter 2009 earnings call. (Operator instructions.)

Thank you. It is now my privilege to turn the conference over to our first speaker, Ms. Meghan O'Leary. Please go ahead.

Thank you. Today, Ken Wilcox, our President and CEO, and Mike Descheneaux, our Chief Financial Officer, will discuss SVB's second quarter 2009 performance and financial results. Following this presentation, members of the our Management Team will be available to take your questions. I would like to start by reading the Safe Harbor disclosure.

This presentation contains forward-looking statements within the meaning of the Federal Securities Laws, including without limitations, financial guidance for the full year 2009. Forward-looking statements are 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-K and 10-Q.

The forward-looking statements are made as of the date of broadcast, and the Company undertakes no obligation to update such forward-looking statements.

This presentation may also contain references to non-GAAP financial measures. A presentation of and reconciliation to the most directly comparable GAAP financial measures can be found in our press release.

And, now, I would like to turn the call over to Ken Wilcox.

Thanks, Meghan. And thanks to all of you for being here with us today.

I'm proud to announce that we earned $0.24 this quarter, considerably above what we believe to have been the Street's consensus. A large part of the difference is due to better performance than expected, higher deposit levels, better use of those deposits, better pricing on our loans than expected, fewer loan losses, and so on.

Generally speaking, we are, I believe, doing better than either we, or for that matter you, expected. And we expect to be doing even better in the second half of this year. But let me be more specific, and in doing so let me distinguish between the business cycle on the one hand and some of the longer term changes we see taking place in our markets on the other.

Purely from the point of view of the business cycle our belief is as follows, the worst is likely behind us or worst case we're in the middle of it right now and it will be behind us by the time we hold this call again next quarter. That's what we believe.

Further, we're anticipating gradual and continuous, although certainly not dramatic, improvement over the course of the next several quarters. That's what we believe based on what we see happening around us and in the portfolio today.

Now, that's all very general and it relates pretty much exclusively to the business cycle, itself. So this time I'd like to go one step further and talk a little bit about some of the major changes that we see taking place in our markets, what implications these changes have for us, and what we're doing to address them. These will all be developments that we've been observing for some number of years already and for which we've been preparing ourselves piece by piece for the past several quarters.

In total I would like to discuss five significant developments. Number one, the venture industry is evolving and at least initially this evolution seems to involve lower levels of investment than we've seen for some time now. Venture capitalists are experiencing fewer exits in either the form of IPOs or even M&A transactions, and the ones they're experiencing are at lower valuations than has been true for some time.

As a result, their returns to LPs are lower, as well. Accordingly, many of them are less able to raise new funds. Consequently, many of these VCs are investing less money in their existing portfolio companies and, of course, founding fewer new companies, as well.

In general, the venture backed portion of our portfolio is shrinking, although our market share in that sector is increasing. On the other hand, many of our later stage, larger, and often publicly traded companies have continued to grow and in many cases actually flourished. In these past few years the mix in our portfolio has shifted a little from earlier stage companies to later stage, larger, and publicly traded ones.

I want to be clear, we still focus on startups, and our market share among startups is growing, but there are fewer of them today and many of them from prior years have grown into larger companies and are still with us. The result is interesting. Our market share among startups is now higher than ever, but our loan balances today are predominantly attributable to the midsize and larger company end of the portfolio.

And while the bulk of our profitability when I first became CEO nine years ago came from earlier stage companies, today, as you might expect, the bulk of our profitability comes from later stage, larger, privately held companies and publicly traded ones.

Number two, the companies that we work with are going overseas earlier and doing a lot more and different things overseas than would have been true just a decade ago. It has always been true that venture backed technology companies have on average begun selling products overseas much earlier in their lifecycles than most other kinds of companies.

But in this past decade with the sudden and unexpected emergence of both China and India and as the technology industry, both on the producer and on the consumer side, has spread itself out from the U.S. to many other countries two big things have happened.

First, our companies are not just selling products overseas early in their lifecycles, now they're also sourcing talent, raising capital, acquiring technology, and establishing beachheads overseas, as well, in many different places, and much earlier than has ever been true in the past.

And, as you would expect, an even higher percentage of their sales are now overseas and much earlier than would have been true a decade ago. Today most of the companies we work with have a global orientation and, accordingly, we have become increasingly global in our orientation, as well.

We have in the course of these past few years not only established beachheads, ourselves, in a number of key countries, but we have over time expanded our ability to deliver relevant products through those beachheads, as well. In short, we are facilitating this trend that we're seeing in the market. To not do so would be a mistake, and if we hadn't done so we would be far less relevant to our target market today than we are.

Number three, the kinds of companies that are attracting investment dollars today are different from the kinds of companies that were doing so only a few years ago. We see more and more money flowing into alternative energy sources, natural resource management, genomics, broadband enhancements and applications, and advanced materials. And proportionately less into some of the niches that were most prominent in years gone by.

Accordingly, we have developed expertise in these new arenas, and we will continue to do so as the market further evolves. Again, not to do so would be a mistake, and if we hadn't done so we would be far less relevant to our target market today than we are.

Number four, interest rates are low and, in my opinion, are likely to stay low for some considerable amount of time, as the Fed seems to be more worried about deflation than inflation, and under any circumstances does not want to dampen the flames of economic activity.

As a result, we do not forecast any significant improvements in [NIM] for some period of time. There will, of course, be minor improvements as we continue to invest larger amounts of our excess cash in somewhat higher yielding instruments than Fed funds. Under these circumstances value pricing and expense control are more important than ever. Accordingly, we have been keenly focused on both of these for a number of quarters now and intend to continue to do so.

Number five, increasingly the companies that we work with are looking for advice in this increasingly complex, competitive, and regulated world. Accordingly, we have devoted a good deal of time in these past few quarters to developing ways in which we can take the data that we generate in the course of banking, fully half of the venture backed companies in the United States and a number outside the U.S. and turning that data into information that our clients find useful. This data involves things like valuations, as well as operating metrics, and the companies that we work with are finding both of these useful. We believe that this aspect of our business will over time not only further distinguish us from our competition but could generate meaningful revenues, as well.

Our responses to these trends, coupled with our continued emphasis on helping our clients succeed have resulted in immeasurable increase in our market share in these past several quarters.

Now, before turning the meeting over to Mike, I would like to mention a few things of a more tactical nature. One, we have closed HRJ. This is good for the shareholders. As we stated last quarter we didn't expect any additional loan loss reserves, and that is in fact the case. Plus we have an opportunity now over time to actually recover some portion of the reserves or charge offs we've already taken.

Number two, we've made meaningful progress toward raising the funds that we need to accommodate the allocations we've obtained through SVB Capital and believe that we have a clear path to a successful resolution of this issue.

Number three, in these past few quarters we've made progress on further improving our risk management systems in ways that we hope could make it easier for us to identify developing problems even earlier than we have in the past, and thereby enable us to address such problems even more effectively.

Number four, our capital base, as well as our liquidity position remains strong. Further, we've taken steps to improve our utilization of excess liquidity which should over time provide additional benefit to our shareholders.

Number five, finally, we are continuing even in this very difficult environment to strengthen our systems and to include the very backbone of our IT infrastructure. This, too, puts us in an even better position to compete in the future.

We are still building our organization for the long haul, and over the long haul innovation will continue to play a pivotal role not only here in the United States but we believe in the rest of the world, as well. We are here to facilitate that development.

And, with that, I'd like to turn the meeting over to our CFO, Mike Descheneaux.

Thank you, Ken. And thank you, everyone, for joining us today.

As Ken said, in the second quarter of 2009 we reported net income available to common stockholders of $7.8 million, the equivalent of $0.24 per share. Although our performance improved in Q2 we continue to feel the affects of the economic downturn across our business, most particularly in lower loan balances and higher credit costs. However, there are some early signs that the economy may be nearing a bottom, although it would not be surprising if we bump along the bottom for some time before things improve.

I would like to highlight six items. One, credit quality. Two, net interest income and net interest margin. Three, loan balances. Four, noninterest income. Five, noninterest expense. And, finally, number six, capital. After that, I will also provide you with our updated 2009 outlook.

First off is credit quality. Our credit quality in the second quarter was in line with expectations we set in April, the result of our continued diligence in proactively managing our portfolio. We recorded a provision for loan losses of $21.4 million in the second quarter, which is significantly lower than the $43.5 million provision recorded in the first quarter.

The second quarter provision reflects gross loan charge offs of $21.9 million, primarily from our life sciences software and private client services portfolios. We said in prior calls that we expected all segments of our portfolio to be challenged by the current economy in 2009, with particular stress among our early stage clients. Our experience in the second quarter was consistent with that expectation, with approximately $12 million in charge offs coming from early stage borrowers.

The ratio of net charge offs to average gross loans improved significantly to 1.74% in the second quarter versus 3.21% in the first quarter. Year-to-date that ratio was 2.5%.

Our allowance for loan losses increased minimally by $500,000 in the second quarter to 2.26% of total gross loans, up from 2.18% in the first quarter. However, we expect the allowance for loan losses to improve during the remainder of the year.

Nonperforming loans did increase by $13.8 million in the second quarter to $111.5 million, primarily from our software and private client services portfolios. Approximately $43 million of our nonperforming loans relate to HRJ Capital. As you will recall, in the fourth quarter of 2008 we recorded significant increases in net charge offs and reserves related to loans to HRJ.

As noted earlier, an independent asset management firm announced it would assume management of HRJ's funds. This transaction is a significant step toward bringing that matter to a close. We will finalize the numbers as part of our Q3 reporting, and we expect a significant decline in nonperforming loans as a result. Furthermore, we do not believe the resolution will have a material impact on our net income or provision.

And on the subject of credit I want to mention one important item that we expect to close on in the third quarter. During the third quarter of 2009 we expect to complete a transaction that will result in a recovery of approximately $11.5 million on a pretax basis from a hardware loan that we charged off in the first quarter of 2009.

Next up is net interest income and our net interest margins. Although our net interest margin declined from 3.97% to 3.71% in the second quarter, as expected we were able to hold net interest income steady at $91.7 million despite a significant decline in loan balances and higher deposit levels.

There are three reasons why we were able to achieve this. Number one, we increased our investment portfolio by $580 million, generating $1.9 billion in additional interest income. Two, we decreased interest expense by $1.2 million as a result of lowering rates on deposits in the first quarter to be more in line with market rates. And, three, we benefitted from a decrease in interest expense of $900,000 on our long-term debt, primarily as a result of lower LIBOR rates on the interest rate swap agreements we entered into in May 2007. I would like to note that we do expect our net interest margin to improve in the second half of the year.

Average deposits grew $505 million to $8.4 billion owing to the full quarter affect of our discontinuation of a third-party off balance sheet suite product and clients opting for the safety of FDIC Insurance for demand deposits.

In making investments we continue to emphasize liquidity. Year-to-date we have increased our investment portfolio by more than $1 billion and we expect to invest a further $500 million to $1 billion during the remainder of 2009. We still have significant levels of excess cash owing to the influx of over $2 billion in deposits on to the balance sheet in the last two quarters, a significant portion of which flowed to demand deposits because of the FDIC Insurance.

However, we expect clients to begin moving a significant amount of these funds out of demand deposits into interest bearing accounts or off balance sheet funds when the FDIC's Insurance of demand deposits expires or when interest rates begin to rise. In the meantime, they remain in highly liquid overnight deposits.

One interesting item I would like to highlight is that despite a decline of 500 basis points in the Fed funds rate in the last 22 months, our net interest income in the second quarter was up nearly 6% in comparison to the same quarter last year, due mainly to growth in average interest earning assets.

Now, I'd like to move on to loans. Although we remained very active in the market, we are facing challenges growing and even maintaining our loan balances. The two key headwinds have been deleveraging by our clients and standard term loan repayments.

In the second quarter these activities resulted in lower average loan balances of $4.8 billion, a decline of 6.6% from the first quarter. The decline is coming primarily from our later stage software and hardware clients, as well as private client services. However, I believe some perspective is in order, specifically that for the first six months of 2009 loan balances were 17.3% higher than for the same period last year.

While many companies are holding off on borrowing or do not need to borrow as much in this environment we are still actively adding new clients and making new loans. In the second quarter we added 234 new borrowers who added $236 million in new loan balances. That compares to 157 new borrowers contributing $219 million in the first quarter. These borrowers were primarily from our private equity, [inter capital], and later stage hardware and software portfolios.

Now, let me turn to non-GAAP, noninterest income, net of non-controlling interest. While it was higher quarter-over-quarter at $34.4 million versus $25 million in the first quarter it continues to be impacted by declining valuations in our private equity and venture capital investments, lower warrant income, and lower fee revenues.

Much of the improvement in noninterest income in the second quarter related to lower aggregate losses on our venture capital and private equity investments in the second quarter. Additionally, we were aided by a realized net gain of $1.2 million on warrants due primarily to increases in valuations on warrants held in several public companies. However, private company warrant valuations were actually lower during the quarter.

Continued economic headwinds pushed fees and products and services down to $22.1 million versus $23.4 million in the first quarter. These include client investments and letter of credits fees, both of which were down in the quarter, as well as FX fees and deposit service charges which remained flat.

This number does not include credit card fees, which appears as a new category in our press release. As you may recall, during the second quarter we announced we would bring our credit card business in-house. These credit card fees offered a bright spot in the second quarter, growing from $1.5 million in Q1 to $3 million in Q2. With them fee based income was $25.1 million in the second quarter versus $24.9 million in the first quarter.

And a final note on noninterest income, during the second quarter of 2009 we determined that we had incorrectly recognized certain gains and losses on foreign exchange contracts in prior periods. As a result, we reversed $3.8 million in after-tax FX gains and losses, the equivalent of $0.11 per share from prior quarters. The specific periods impacted were the first quarter of 2009 and the full years 2008 and 2007. This error had no impact on the second quarter. We consider these reversals to be immaterial and have revised the financial results for those prior periods. You will find more details on these revisions in our press release.

Turning to expenses, we recorded noninterest expense of $89 million compared to $87.1 million in the first quarter. Our expenses included an increase in FDIC assessments of $5.9 million largely as a result of a $5.0 million special assessment fee, as well as from higher average deposit balances.

Compensation expenses were down slightly in the second quarter, primarily because of higher payroll taxes and seasonal accruals in the first quarter. We maintained total personnel at 1,260 compared to 1,262 in the first quarter. You may recall, though, that we had a $4.1 million non-tax deductible goodwill charge in the first quarter, and the absence of a similar charge in the second quarter also helped our expenses.

Moving on to capital, our ratios remain strong with tier one leverage at 9.88%. Our ratio of tangible common equity to tangible assets was slightly lower in the second quarter at 6.94% owing to continued growth in assets driven by increases in deposits.

Our ratio of tangible common equity to risk weighted assets increased to 10.54%, primarily due to lower loan balances. Given the recent growth of our assets and the related composition we pay particular attention to tangible common equity to risk weighted assets, as we have a significant amount of assets in low risk weighted asset classes. We feel tangible common equity to risk weighted assets is a more reasonable reflection of our risk profile than other capital ratios.

We have been asked frequently whether we plan to repay the funds we received from the Treasury's capital purchase program in the near future. Let me say that we continually evaluate this possibility. However, there are various factors that influence our thinking on this matter. First is overall economic performance and outlook. Second is the current performance and future outlook for our credit quality. And, third, is the ready availability of debt and equity to financial institutions, like us.

We would like to see further improvement and stability in these factors before determining when we will repay the funds. For the time being the additional equity enhances our flexibility and ability to do business comfortably in this challenging economic environment.

Now, I'd like to comment on our revised outlook for 2009. Our outlook reflects our expectations for the full year 2009 versus the full year 2008. Although we revisit and update our outlook each quarter, it is an annual outlook.

Several aspects of our 2009 outlook have changed, primarily because of lower venture capital investment levels, as well as the impact of the continued economic downturn. With the exception of credit quality I'm going to talk only about the changes in our outlook from April 2009. Please refer to our press release for additional information.

One, we have lowered our expectations for loan balances based on market conditions, as I discussed earlier. We now expect percentage increases in average loans to be in the mid single digits rather than the high single digits.

Two, we now expect the allowance for loan losses as a percent of loans to be in a range of 1.4% to 1.45%, excluding reserves for already impaired loans, primarily because we believe that credit quality for the remainder of 2009 will be more reflective of our second quarter results.

Three, we have also lowered our outlook for aggregate fees from deposit services, letters of credit, and foreign exchange. We now expect a percentage decrease in the low single digits for those fees in 2009, rather than an increase owing to general economic conditions.

Finally, point number four, we have improved our outlook for noninterest expense growth once again to a percentage rate in the mid teens, primarily owing to lower compensation and benefits expense reflecting the impact of the economy on our results and lower than expected fees from the special FDIC assessment. Nevertheless, year-to-date FDIC fees were significantly higher than we expected.

We are maintaining our outlook on net charge offs. We are still expecting net loan charge offs of between 1.75% to 1.8%, a figure that includes net charge offs through June 30th but excludes potential charge offs from already impaired loans.

Clearly, we see challenges in the remaining months of 2009 with headwinds from suppressed venture capital valuations, a lack of exit opportunities for our clients, declining loan balances, pressure on the net interest margin from the low rates environment, and the continued need to aggressively monitor and manage credit quality. As we said last quarter, if the economy were to significantly deteriorate it could change our expectations for the year.

Nevertheless, we do see opportunities for growth, as well. Companies will continue to borrow, and we believe we will see meaningful future activity among mid and later stage companies, venture capital and private equity firms renewing their investment activities, buyout focused organizations and our international expansion. We also continue to build our business, creating new revenue opportunities through adding new products and services designed to help our clients succeed domestically and around the world.

In the meantime, we are focused on making the right decisions to help ensure our continued viability and strength in this challenging market. We have fortified our capital base and ensured we have ample liquidity. We have a strong balance sheet and we remain vigilant with regard to credit. We will continue to support our clients and execute on our long-term strategy regardless of market cycles.

This concludes the review of our 2009 second quarter results. With that, I would like to ask the Operator to open the call for questions and then Ken will provide some closing comments. Thank you.

Okay, it would be my pleasure. (Operator instructions.)

Our first question comes from the line of Mr. Joe Morford. Sir, you have the floor.

Thanks. Nice quarter, guys, particularly on the credit front.

Thanks, Joe.

A couple of questions. First, just really clarification on HRJ. I hear you that it doesn't impact the net income of the provision, but do you -- I mean what are your current expectations for any recoveries on the, I think it was $7.5 million or so that you've charged off, and how much of any specific reserves will be freed up in the allowance and what would be the timing of that, would that be third quarter, as well?

Joe, this is Dave Jones. And as indicated in Mike's remarks, the near-term expectations of anything in HRJ are nominal. So the extent to which there could be a modest reversal of specific reserve for HRJ it would be very modest is my belief, based on present understanding, and the recovery opportunities are likely to be over an extended period of time, so I wouldn't anticipate anything in the very near future.

Just one clarification, when we're saying nominal, we're talking about the nominal impact to the provision or our bottom line net income.

Correct.

Okay. And can you talk a little bit more about the event that led to the large recovery coming through in the third quarter, and is that taken into account in the net charge off guidance which I think was 140 basis points for the second half of the year?

And this is Dave, again. So we have a transaction that is presently in the works that would sell our debt position to another party. And the information contained in the press release and our comments today would reflect our confidence that the transaction is going to settle in the near term.

In terms of it being reflected, so the $11.5 million would represent over 20 basis points relative to our gross loans, and it is one of the factors. So we have the 20 plus basis points reflected in the anticipated recovery. We have another 90 basis points roughly in specific reserves for impaired accounts, those accounts most likely to incur loss. And then over and above that is our guidance for 142, possibly 145 basis points.

Okay, that's helpful, Dave. And then, lastly, I guess, on average loan growth I see the guidance now is for mid single-digit growth for the full year, but more specifically for the second half do you see continued declines in balances given all the trends you talked about the operating environment or are we getting closer to seeing those balances flatten out, at all?

Yes, Joe, this is Greg Becker. I think the guidance would point to for the second half of the year that we expect flat to slightly improved loan balances, and part of this is that we talked about last quarter that first quarter was just so challenged, there were so many reasons that held-off any loan growth or people making decisions. We see that changing modestly, and really combining some additional capital, call borrowings, some corporate tech borrowings, some global growth, we think those are the things that will fuel a flattening, in fact, a modest turnaround in that balance.

Okay, thanks, Greg.

Yes.

Our next question comes from the line of Mr. Aaron Deer. Sir, you have the floor.

Hi, good afternoon, guys.

Hi, Aaron.

A question on the I guess client deposits, the off balance sheet funds, it looks like they were down about $1.7 billion, while on balance sheet deposits were up about half a billion. The delta between those I guess about $1.2 billion, does that represent the cash burn of the VC backed companies or is there something else going on there?

Yes, Aaron, this is Greg Becker, again. And that's what we're seeing. Again, our market share is growing, we're adding clients, and our belief is that it's really just a cash burn that our clients are experiencing and the fact that it's not being replenished at the same pace by future venture capital rounds of financing.

Okay, and then the private client services loss in the quarter, what type of loan was that and, or loans, I guess? And what was the dollar amount related to that?

Aaron, this is Dave Jones. And it was a collection of loan losses. There were four or five different borrowers with whom we took loan losses, and the aggregate of the loan loss between the four or five borrowers was roughly $5 million.

Was -- can you say what the -- what it was for, specifically? I mean was it for properties or was it for, I guess I'm just curious what those private client loans are?

I think probably it would be best to generalize it as investments that the collective borrowers were making.

Okay, thanks, guys. Appreciate the help.

Thank you.

Our next question comes from the line of Mr. [Christopher Nolan]. Sir, you have the floor.

Thank you. Why build the reserve ratio in the second quarter given that the charge off ratio has improved so much and the guidance is for -- there seems to be improved credit quality in the lower reserve coverage?

This is Dave, Chris. And in a sense what we're talking about, I think you're focused on is the percent of the portfolio that increased. When you look at the dollars in the reserve there is a very insignificant change in dollars. So I think that the dollar level of the reserve reflects that we think that the second quarter performed to expectations. We think that we have a better sense of how the balance of the year and the foreseeable future will play out. So we're confident that we have an adequate reserve established.

Okay, and given the guidance for, if I'm correct, 140 -- 1.45% loan loss reserve ratio for the second half of the year -- is that correct, Dave?

No, I don't think so, because what we're -- what we have is that 1.4 to 1.45 plus --

Oh, okay.

-- plus the specific reserves, which are roughly 90 basis points on the present portfolio.

Great. Thanks for the clarification.

Okay, our next question comes from the line of Mr. John Hecht. Sir, you have the floor.

Thanks very much, and congratulations on executing a good quarter. You talked about margin contraction based on some of the factors that we saw in the quarter, including low interest rates, but you did see your yields improve during the quarter on the loan side, and given the lending that occurred during the quarter I'm wondering if you could give us some color about how you were able to reprice some of the assets upward during the quarter?

Yes, John, this is Greg Becker. And the increase, the improvement in loan pricing I would characterize as modest. Obviously, we'll take even modest increases in pricing in this environment. And most of it is really repricing for the increased risk profile that we see, generally speaking, with the client base. So I wouldn't characterize it as a huge opportunity for us either this quarter or on a go-forward basis but it did help to contribute to part of the, I guess, a lower decline than maybe was expected.

Okay, and as a distant related follow-up on that, when you guys are coming to refinance situation with an earlier stage company, whether it's private equity or, I guess this is a venture capital kind of question, but even in the private equity segment, when there is a refinance opportunity how willing are the sponsors at this point to continue to add equity to help these organizations de-lever? Are you getting a sense that there's a greater willingness now or about where we were six months ago?

And this is Dave, let me at least initiate the response on that. And what we have seen is a resurgence, modest I want to underscore, but a resurgence in venture investments. So in the fourth quarter the community seemed to be frozen stiff and few investments occurred, but in the first quarter and arguably slightly more so in the second quarter the venture capitalists established their willingness to fund the company.

Now, when you look at the venture capital activity be mindful of the fact that the venture capitalists have encouraged their portfolio management teams to reduce their operating expenses, thus, there is less money required for the operating company to get through another 10, 12, 18 months of operations.

So we're seeing good activity. We clearly in terms of a segment of our portfolio, I saw over 60 different companies that closed on equity round during the second quarter, and I'm sure that there were a lot more that were not necessarily on my radar screen.

And that was up dramatically from Q1 or just kind of linear improvement?

It was improvement, and given where we are in the economy certainly all the improvement is welcome improvement.

Okay, and --

Hey, John, this is Greg. Maybe just to add on to it. If you look at the data that's come out, although it's preliminary from the different sources that track venture funding flow, it depends upon which source you're looking at, it's anywhere from a 15% to as much as a 30% improvement in dollars over Q1. And if you take that data and you marry it up against kind of what we have experienced in our portfolio that feels about a right level from an improvement perspective.

Great. Thank you, guys, very much for the color.

Thanks.

Okay, our next question comes from the line of [John Pincari]. Sir, you have the floor.

Good afternoon.

Hi, John.

I'll ask a question about a different portfolio for once here. Can you talk a little bit about the wine, the premium wine portfolio? We've been hearing a little bit and seeing some select journal articles discussing the wine business and the difficulty out there in California. Can you just give us some color on what you're seeing in your portfolio?

And this is Dave. Let me offer a perspective. What we are seeing is that the overall volume of wine sales is trending down, and this is very reminiscent of what we saw after the last recession. So 2000, post 9-11 of 2001, we saw a decline in wine sales.

What we're seeing is that clients with the higher dollar, the higher price point wine is generally more affected than their lower price point wines. So what they're losing in revenue dollars off of the high dollar wine, they are making up somewhat with the more moderate priced wine.

So our clients are being impacted, but the sense of it is that a trend line similar to what we saw through and after the last recession could be a reasonable expectation of what we will see through and after this current recession.

But can you give us a little bit of color in terms of the level of nonaccruals you may expect on the portfolio or delinquencies, or just given that as an idea of where that's starting to trend, how that, like you said, you are seeing that you're affected? Can you give us some color on that?

So our level of nonaccruals and past due are very low but historically in the wine portfolio, as with our technology portfolio, we do not see a large level of nonperforming or past dues. What probably is more representative of the company performance is our internal risk ratings, and certainly anybody with a wine portfolio now in these days should be expected to have a higher level of adversely rated credits. And we have been seeing that.

We, I think that there will continue to be some degradation in that portfolio. It is not clear that the current trend line in terms of nonperforming and charge offs will be different than last time, and last time nonperforming and charge offs were very low.

Okay, all right. And then, secondly, can you talk about your participating loan portfolio? Just give us an update in terms of the credit transitioning there?

Sure, so we continue to spend a significant amount of time looking at those credits, and there have been none of the credits in that segment of the portfolio have moved from a pass rating to a more adverse rating over the last 90 days. And the general client activity that we're seeing is that generally the clients are experiencing more revenue, which obviously is better for them. So that part of the portfolio is fine, in my opinion.

Okay, thank you.

Okay, and it looks like our last question in the queue comes from Mr. Fred Cannon. Sir, you have the floor.

Well, thanks. Most of my questions have been answered. But I just wanted to ask more, perhaps Mike or Ken, a philosophical question on the balance sheet. We've seen a huge transformation in the last year from -- in the balance sheet with the loan and deposit ratio I think a year ago was 94% and currently it's 52%, and the current balance sheet certainly from a liquidity and capital standpoint looks like a fortress balance sheet.

As we go forward, and I mean it sounded to me that a couple things. Number one is that net loans deposit ratio may well flip further and go below 50%. Number two it's at least in the meantime until you can kind of get an all clear signal on the economy you're probably going to maintain these strong levels of liquidity and capital.

That said, the question is kind of strategically what would you guys like to see the balance sheet evolve to? Is it back to the future, kind of like in 1990 Silicon Valley balance sheet with a 50% loan deposit ratio and a bunch of securities, or is it something more like we saw just a couple of years ago?

All righty. I think I know what your preference would be, so let me just answer that in three different ways. One is the good news is that we have been I would say amazingly successful at deposit raising, and we may have overshot the mark. And so I think we would be interested in correcting that. But I think we ought to try to look on the good side because not every organization has been quite that successful at raising deposits, and I'd like to at least feel good about the positive side of that development.

But I do want to recognize exactly what you mean, and I can assure you that we are not targeting a loan to deposit ratio of 50 or lower, or even 60, but we're aiming for something that is a little bit more optimal.

Having said that, things are situational, meaning we are in the midst of a recession here. And I think that when you're in the midst of a recession, responsible bankers seek to have fortress like balance sheets. And this balance sheet is in part a function of having been more successful at raising deposits than we intended to be, but it's also in part an expression of our deliberate attempt to create a balance sheet that I think is appropriate to a recession of the magnitude of the one we're experiencing. So to a certain extent I think this makes perfect sense given where we are.

But your question really goes to normalization, and under normal circumstances and in an economy that was more robust than the one we're in right now we would hope to have a loan to deposit ratio that was more in the optimal range. And the optimal range to my way of thinking is 75, 80, somewhere in there, maybe even on some days 90. We don't want to get Mike too nervous by going too much above that, but on the other hand we don't want to make you too unhappy by being too much below it.

We also under normal circumstances in a more robust economy would try to optimize our capital as opposed to stockpiling it, but for the moment I don't think -- I think it's good and responsible to have some more capital than you might want to have in better times.

And, finally, I will say that, you know, we've come a long way over the years in terms of perfecting the tools that we can use to either bring deposits on to the balance sheet or move them more into the broker, dealer. And you know that we don't have complete discretion in that regard but we, I think, are getting better and better at achieving what we're hoping to achieve in terms of where the preponderance of the deposits are located. And I think that in the coming quarters and coming years we'll come out with tools that are even more effective at accomplishing what we're hoping to accomplish.

So I think we'll do a better job of creating the optimal balance sheet, but once again I think it's really relative to the state of the economy. So I hope that helps, Fred?

Yes, that is very helpful, Ken. And regarding your last comment then, as we -- when we do normalize, hopefully sooner rather than later, you will continue to pursue the kind of thought balance sheet management of the deposits that you tend to pull in at a rapid rate during a growing economy, just as you did earlier in this decade?

Well, absolutely, Fred. I will say that we, a few years back, discovered that a balance sheet could be a source of profitability, too, and we have not lost interest in that concept.

Thanks very much, Ken.

Yes. I think we're at the end of the line here, so I think I will just round-off by giving you a summary comment or two.

I want to reiterate that we are confident that we're moving in a good direction. I'd also like to repeat that we are in this for the long haul, and over the long haul we are convinced that the economy will improve and that the innovation space will continue to play a pivotal role not only here in the United States but in the rest of the world, as well. We are focused on responsible growth, risk mitigation, expense control, and good balance sheet management.

And I'd like to conclude by thanking the 1,260 SVBers, all of whom contributed, each in their own way, to our progress this quarter. Thank you very much.

Okay, this concludes today's SVB Financial Group's second quarter 2009 earnings conference call. You may now disconnect your lines.