SVB Financial Group (SIVB) 2009 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the SVB Financial Group Q3 '09 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions) Thank you. I will now turn the call over to Ms. Meghan O'Leary, Director of Investor Relations. Ma'am, you may begin your conference.

Thank you. Before we get started today, I wanted to let you know that our CEO, Ken Wilcox, will not be on the call because he has laryngitis. It's nothing serious but he's not well enough to be here today. Greg Becker, the President of the bank, will be reading Ken's prepared comments. As usual, Mike Descheneaux, our Chief Financial Officer, will follow with his comments and after the presentation members of our management team will take your questions.

Now I would like to read 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 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 different materially from those contained in our forward-looking statements is provided in our press release and our last filed forms 10K and 10Q.

The forward-looking statements are made as of the date of broadcast and the Company undertakes no obligation to update such forward-looking statements. I should also add that this will contain forward-looking statements with regard to the year 2010 as well.

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

Now, I will turn the call over to Greg Becker.

Thank you, Meghan, and thanks to all of you for joining us today. If there was any quarter I was going to pass on Ken's comments, this is a good one. I'm pleased to announce that we earned $0.61 per share this quarter. Once again, we significantly exceeded The Street's expectations. We were able to achieve this result thanks to four things. First, improving credit conditions; second, continued market share increases; third, increasing investment of our excess deposits; and fourth, our commitment to expenses management.

As we said on our last call, we believe the worse of the economic cycle is behind us. We're seeing signs of stabilization and relative improvements among our client base. Our technology clients are beginning to experience an uptick in sales activity and some of our clients are moving forward with long delayed technology purposes.

Declines are feeling somewhat better than they have in the last 18 months. Valuations seem to be stabilizing. There are small signs of life in the exit markets and we've seen a slight rise in the number of companies receiving follow-on rounds, but it's too early to know whether this is the beginning of a sustainable recovery. There are many challenges ahead. Most technology firms are struggling with reduced customer demands and limited growth prospects. Liquidity in the exit markets is significantly down from a year ago and investor confidence remains extremely low, as we all know.

We have no influence over these external factors. Accordingly, we've continued to focus on the internal factors we can influence. Foremost among these is credit quality. As you know, we've devoted considerable attention to portfolio management throughout the economic downturn. These efforts have allowed us to resolve several outstanding credit issues in the third quarter. Most notably, we resolved HRJ, and we completed a $11.4 million recovery of a first quarter loan loss which we mentioned in last quarter's call. Our efforts led to a 37% reduction in impaired loans and a 17% decline in classified loans. They also resulted in a reduction in our loan loss allowance. Through our continued efforts, we expect credit to continue improving, albeit gradually.

We're also very focused on winning new clients and gaining market share. Our strong financial position and our ability to manage risk effectively have allowed us to keep lending at a time when many banks can't or won't. As a result of our efforts, year to date we have added 322 new borrowing clients who accounted for $723 million in new loan balances as of September 30. Today, our client count is at its highest level in our historically. It includes the early stage companies that are so critical to our strategy and a growing number of larger companies. These larger companies borrow more when they borrow and use more fee-based products than venture backed companies.

But whereas the majority of our profits come from established companies that have been with us over time, the vast majority of our new clients are early stage companies. Each of these early stage clients has the potential to grow over time into a large client and our aim is to help them succeed at all stages and to keep them as clients throughout that process. Given that our market share among larger companies is barely 12% by our measurements, we see tremendous opportunity for long-term growth.

Our focus on the innovation market adds to my confidence in our longer-term prospects. New markets emerging from the broader technology and life science industries are driving research and new product development. Accordingly, we've enhanced our capabilities and expertise to better meet the needs of our clients in clean tech, genomics, and advanced materials, just to name a few. These industries are beginning to attract more significant private and public investment. Over time, we believe they will provide us with meaningful growth opportunities.

Another source of potential growth lies in our global markets. Today, most of our clients have global orientations, if not global operations. To better serve them, we have established our own global offices and capabilities. We're continually expanding our ability to deliver products and services to help our clients succeed worldwide, just as we do in the US.

Finally, we see growth opportunities in the expertise we've developed in more than 25 years of helping clients succeed. During that time, we generated valuation data and operational metrics on thousands of early stage companies. This data has proven valuable to a whole new generation of growing enterprises as they navigate the complexity, competition, and regulation of their respective markets.

The marketplace is still vulnerable, but we believe things are improving. In the fourth and first quarters, we had good reason to look at our glass as half empty. Today, even taking into account the uncertainty of the markets that we all realize, we're more inclined to see the glass as half full.

I don't want to suggest that we expect the year ahead to be easy. Our revenue will be challenging if interest rates remain low and clients continue to deleverage. We'll also need to invest more money in our business to grow regardless of the economy. For this reason, I want to discourage you from extrapolating this quarter's results into future quarters.

Having said that, I'm confident we're doing absolutely the right things to deliver the best possible results we can in the current environment and will continue to do so. Our credit quality is once again within our expectations if not somewhat better, although we obviously want to see it continue to improve. Our capital liquidity positions remain strong. We have the right set of clients in the right industries. And we have the best employees in the industry whose dedication is the reason for our success. I want to thank all of them for their efforts.

Finally, we're in a position to continue gaining market share while executing on our plans for future growth and strengthening our ability to compete.

With that, I'd like to turn the call over to our CFO, Mike Descheneaux.

Thank you, Greg. And thank you, all, for joining us today. We are, no doubt, pleased with our results for the third quarter. We delivered earnings per share of $0.61 and net income of $20.6 million compared to EPS of $0.24 and net income of $7.8 million in the second quarter. Key drivers of these results were a lower provision for loan losses, higher net interest incomes, and lower non-interest expense in the third quarter.

There are four items I would like to talk about today in addition to our updated 2009 outlook. The first is credit quality which improved from prior quarters principally due to three factors. First, an overall improvement in the credit quality of our portfolio, reflecting improving business conditions for our clients. Second, the favorable resolution of certain impaired loans. And finally, the partial recovery of $11.4 million related to a loan that we previously charged off in the first quarter of 2009.

The second item is net interest income and net interest margins. We enjoyed an increased in net interest income and a relatively steady net interest margin as a result of our growing investment portfolio. That said, low interest rates and lower loan balances remain barriers to increasing our net interest margin.

Third, non-interest expense was significantly lower during the third quarter, owing to lower FDIC assessments than in the second quarter despite higher deposit balances. Your will recall that we had $6 million in FDIC assessments in the second quarter, including a $5 million special assessment.

And fourth, non-interest income. The core of the income was essentially flat, but the rate and magnitude of losses related to our venture capital funds decreased significantly.

Let me start with our perspective on credit quality. We performed well thanks to our continued focus on portfolio management. Some of you may be wondering about our higher charge offs during the quarter in relation to the lower allowance. I would like to walk you through this but before I do this, I want to emphasize that our reserve for performing loans has been consistent at 135 to 140 basis points.

Now, some details. First, we resolved HRJ in a manner consistent with our expectations. The resolution of HRJ and a small number of other impaired loans reduced non-performing loans by $39.3 million to $72.2 million in the third quarter. The resolution of these loans resulted in an $11 million increase in net charge offs to $32 million. This number reflects an $11.4 million partial recovery of a hardware loan that we charged off in the first quarter. As a result of charging off these loans, we reduced our specific reserves for impaired loans by $21.3 million to $23.4 million.

The reduction of specific reserves for impaired loans lowered our allowance to $86.7 million compared to $110.5 million in the second quarter and resulted in a lower provision of $8 million compared to $21.4 million in the second quarter. We believe that Q3 is more representative of coming trends than prior quarters. That is not to say that we won't have charge offs or a higher provision in some future quarter, but overall, our portfolio is in better shape and is seeing continued signs of improvement. Our credit quality is playing out much as we said it would at the beginning of the year and as a result, our current allowance coverage is based on those expectations.

I would like to note one item before I move on. As you know, we do a small amount of lending into large participating credits, technically knowns as shared national credits. Our portfolio of these loans is atypical in that we tend to have fewer than five lenders in each deal and we have long standing operating relationships in most of these deals, even those where we are not the lead on the loan. Our current portfolio of participating credits is extremely modest, consisting of approximately 15 client relationships and $180 million in funded commitments.

As you also know, the four Federal regulatory agencies governing banks recently released the results of the annual shared national credit review of all such loans. I am pleased to say that there were no material third quarter credit consequences for SVB as a result of the exam.

Now I would like to move on to net interest income and net interest margin. We recorded a $5.1 million increase in net interest income to $97 million in the third quarter resulting from a rise in investment securities owing to our continued deployment of excess liquidity.

In the third quarter, we invested $829 million on top of the $580 million we invested in the second quarter which is on track with our stated investment plan. These investments were primarily in agency issued mortgage securities and US agency notes which had an average duration of approximately 2.6 years and a yield of 2.7%. A lower cost of deposits and a decrease in the LIBOR rates underlying our long-term debt also contributed $1.7 million to net interest income while the effect of the $235 million decrease in loan balances partially offset increases.

Net interest margin in the third quarter was relatively flat owing to the low interest rate environment, in flows to deposits, and declines in loans, offset by increasing investments in securities. We plan to invest an additional $400 million net of maturities by the end of 2009 although we will continue to evaluate our investment pace. We expect net interest margin to remain stable throughout Q4; however, the current interest rate environment and barriers to loan growth will inhibit any meaningful improvements in net interest margins in the coming year.

Moving on to loans, average loan balances declined by 4.9% in the third quarter to $4.5 billion as a result of continuing deleveraging by our clients, especially larger borrowers. Year to date, average loans have declined 8.5%. The bulk of the third quarter decline came from our software and hardware clients as well as our VC clients whose use of venture capital call lines of credit is at a cyclical low in the economic cycle.

Now let us turn to deposits. Average deposits continue to increase beyond our expectations in the third quarter, driven primarily by client's preference for the safety of our balance sheet as well as a lack of attractive alternative investment options for their excess funds. We believe that a significant portion of the new deposits we have recorded in the past three quarters, possibly as much as $2 billion, is related to FDIC insurance.

Average deposits rose by 5.7% or $478 million to $8.9 billion. You may note that period end deposits also rose significantly. A key driver of this increase in the third quarter was a temporary increase of $900 million related to capital calls for investments which was made on the last day of the quarter. This deposit impacted our ratio of tangible common equity to tangible assets by more than 40 basis points.

Moving on to non-interest income, we saw a significant decrease in the rate and magnitude of losses in our venture capital fund investments which boosted non-interest income by approximately $10.7 million to $34.3 million. We recorded gains of $3.9 million on investment securities related to venture capital and private equity in the third quarter primarily in our managed funds, compared to a loss of $6.8 million in Q2. But net of non-controlling interests, and this is a non-GAAP number, we recorded a modest $1 million net loss on investment securities. This loss was driven by a $2.2 million reduction in our cost basis owing to valuation declines in certain VC investments. Despite this loss, we believe we are seeing stabilization in valuations for now.

The income from credit cards, letters of credit, deposit service charges, foreign exchange in our client funds management business continue to be impacted by the down economy, remaining flat in the third quarter at $25.2 million versus $25.1 million in the second quarter.

Before I turn to our outlook for 2009, I would like to say a word about our capital position and address the question of when we might repay TARP funds. We are certainly well capitalized and we believe our ongoing commitment to maintaining our capital strength, to which TARP has contributed, has paid off during these challenging economic times. We are well positioned to continue investing in our business and taking advantage of opportunities to continually strengthen our market position.

We are evaluating the best way to repay TARP as soon as we reasonably can. There are a number of factors that will influence our decision. These include an improving economic environment, our ability to maintain credit quality within our stated standard, and ready access to the equity markets. The current and emerging regulatory environment will also significantly influence our actions. No doubt we are seeing some encouraging signs in the economy. We seem to have entered a stable state on credit quality, SVB and the debt and equity markets have rebounded strongly. For the time being, as I have said, the additional equity enhances our flexibility and ability to do business comfortably in this challenging economic environment.

Now we would like to turn to our updated outlook for 2009 and give you some insight into our thinking for 2010. I'm going to address primarily the changes in our outlook and I will refer you to the press release for more details. Our outlook refers to the full year 2009.

First, average loans will increase at a percentage rate in the low single digits owing to current market conditions. Previously, we said we expected growth in the mid single digits. Average deposits will increase at a percentage rate in the 70s, owing to the continued influx of funds to the balance sheet. Our allowance for loan losses as a percentage of growth loans will be approximately 1.85% including specific reserves for already impaired loans. This is an improvement stemming from our resolution of certain impaired loans in the third quarter and a general improvement in overall credit quality.

Our ratio of non-performing loans to total assets will be lower than 2008 levels. This is an improvement owing to our successful resolution of previously impaired loans. Net losses related to our venture capital investments will be comparable to 2008 levels rather than double 2008 levels as we originally thought. This is an improvement over our last update owing to market conditions.

Finally, non-interest expense will increase at a percentage rate in the low double digits. This improvement from the mid teens stems from our conscious decision to scale back selectively on our hiring as well as lower incentive compensation tied to performance that has been below our targets.

I want to take a moment to set the stage for the coming year with regard to net interest margin, loan growth, income from our VC fund investment, and expenses. As many of you know, our asset sensitivity means that we generally benefit from a rising interest rate environment. You also know that after the last Fed rate cut of 75 basis points, we did not cut our prime rate. This decision means that we will likely hold our prime rate steady fro the first 75 basis points of any subsequent Fed rate increase. If the Fed chooses to inch up interest rates slowly, it may put pressure on our net interest margin until those increases exceed 75 basis points.

In addition, we would expect a higher cost of deposits related to the eventual expiration of unlimited FDIC insurance on demand deposits and a resulting shift of some deposits from demand deposits to interest bearing sweep and money market accounts. We could also see a meaningful portion of deposits move to our off balance sheet products.

With regard to loans, we expect growth to occur in 2010 but it will be flat to limited. While our market share gains and ongoing efforts will help to drive loan growth in the long run, we do not expect a return to our historic growth rates in the near-term. Likewise, we expect VC fund valuations and exits to be limited by slow recovery which will correspond to extremely modest returns, if any, in our fund's management business.

As for expenses, we believe our expense numbers demonstrate the seriousness of our commitment to expense control. One of the most significant aspects of this commitment in 2009 was our conscious decision to scale back selectively on hiring for our growth plans in order to keep compensation expenses in check.

Moving into 2010, we expect to renew some of those staffing initiatives for ongoing and special projects. Barring another economic downturn, we would expect to see a meaningful increase in employees in some of our growth areas. We dramatically reduce incentive compensation for 2008 and have been accruing at a much lower level in 2009 consistent with 2008. This is because we have not met our target despite solid performance relative to other banks.

As we look toward 2010, we continue to weight the impact of compensation on retaining our employees against what may continue to be a difficult external environment. While it is premature at this point to project incentive compensation costs, given the importance of our employees to our long-term business success, we expect that incentive compensation in 2010 may approach more normalized levels. Overall, in 2010, we would expect our run rate for expense growth driven by FTE and incentive compensation, this could be 10% to 15% in growth. This assumes performance to our targeted levels and no dramatic increase in FDIC assessments.

Ken talked about some of the factors that we expect to drive our future success. I would like to close by adding my own thoughts on our own potential for growth. Let me start by saying that we expect the economy to be better in 2010. It has taken its big dive and we hope that there is not another one in the future. Our clients appear to have substantially reacted and adjusted to the economic downturn and they are showing signs of life.

We have judiciously applied the lessons of the past 18 months to what was already a rigorous credit monitoring process but we are realistic. With high unemployment and low expectations for GDP growth, there are still plenty of challenges ahead for every Company. Fortunately, we have several things that will ultimately work in our favor.

First and foremost is that we have aligned ourselves with the right industries. The technology sector has generated a host of new ideas and opportunities that are attracting government and industry attention, as well as funding and are expected to play a key roll in any eventual economic recovery.

Second, we are doing the right kind of lending. We have virtually no commercial real estate and only a very small credit card business. Third, we will strongly benefit from a rising rate environment when and if it finally comes. Although we may experience some additional margin pressure in the near future, our potential earnings power in a more normalized interest rate environment is compelling. At this point, the forward curve suggests we may begin seeing a rising interest rate environment in mid-2010. Fourth, we have and will continue to maintain our strong capital levels and ample liquidity.

As Greg said, we have the best employees in the industry whose dedication is the reason for our success. But finally, we have positioned ourselves to take advantage of the significant growth opportunities inherent in our dynamic client base by enhancing our array of products and services for larger companies and by establishing ourselves globally at a time when global presence and capabilities have never been more important to our clients.

Thank you and now I ask the Operator to open the call for Q&A.

(Operator Instructions) Our first question is from the line of Joe Morford with RBC Capital Markets. Please, go ahead with your question.

Good afternoon, everyone. Congratulations on the strong report.

Thank you, Joe.

I have two questions. First, I guess I'll apologize, Mike. I kind of lost you as you were going through the reserve change. I was just wondering maybe if you look at -- can you kind of break out the specifics on the charge offs? It appears that maybe of the $32 million charge offs, $24 million of that was related to HRJ and then so the balance would be $8 million but you had a recovery of $11 million, so that suggests that the balance of charge offs being $19 million. How much of that was kind of early stage and were there any other kind of noteworthy charge offs in the period?

Joe, this is Dave Jones. Let me at least start the response to that question. So, I think it would be better to start from the gross charge off perspective rather than the net charge off perspective. The $46 million or so of gross charge offs would include $27 million in clients that had been previously impaired of which HRJ was the most significant. But the number that you proposed in terms of the size of the HRJ loan loss is much larger than was actually realized. So, there were other clients that were impacted in that number as well. Of the $19 million in gross charge offs related to previously performing credits, most of that was from the early stage business. There also was a modest amount from our private client services group.

That helps. Then the second I guess was a follow-up for Mike. It seems like some of the conditions that you've laid out for repaying TARP are starting to come through. Can you kind of give us your current thoughts about how you would go about repaying TARP in terms of would you be paying it out of cash flows or consider raising additional equity at this point? Any current thought process would be great.

You know, Joe, one of our main objectives is to continue to maintain strong capital levels. Certainly with receiving some of the TARP proceeds, that certainly did help maintain our capital levels at very high levels. So, we're certainly evaluating our desires for the higher capital levels here as we go forward, but we have not commented on how we're going to repay that at this time. But we'll continue to evaluate it.

Okay. Thanks.

Our next question is from the line of with Aaron Deer with Sandler O'Neill and Partners. Please, go ahead with your question.

Good afternoon, everyone. I know you spent a fair bit of time on the call trying to explain this but I'm still having a hard time reconciling what sounds like kind of a cautious outlook and certainly a lot of the VC and private equities data of late has been pretty mixed. So, trying to reconcile that with the decision to bring down the reserve. Can you give a little bit more thought behind that rationale?

Aaron, this is Dave, and again, I will start the response. So, the important thing to focus upon is the level of reserve that we have had consistently for our performing book for the last several quarters. So, tying back to the fourth quarter of 2008 when the economic environment shifted, we elevated the level of reserve required for performing assets to a level of approximately 135 to 140 basis points. And we have kept that level consistent.

What we needed to do since the fourth quarter when we had a substantial increase in the level of impaired assets was to increase the reserve related to the impaired assets and as we experience in the third quarter a rather significant decline in impaired assets, that evaluation of reserve necessary for the lower level led to a decrease.

Also important to point out that behind the level of impaired asset that we've had fourth quarter through second quarter, lesser level in the third quarter, is that we have been seeing a continuing addition of other assets of any size. So, we had larger loan reserves for larger accounts and we have, as I say, not experienced an increase and or an addition to really the number of larger credits for which we are concerned and feel like we need to have a reserve.

The assessment is that going forward that the profile of the loan losses is going to be different that the profile of the loan losses over these last three quarters.

Aaron, this is Greg Becker. Let me just add a couple points on to that. I would say the cautionary part of the message that both Mike and I provided really relates to the fact that there is still a lot of uncertainty out there and so that's one point. Second point, as Dave mentioned, we do have much better clarity on the credit picture which is very much a positive from where we were. That definitely goes into the positive camp.

The other part of the cautionary side is on the loan growth, we've had historically extremely high loan growth and we've had a couple quarters, three quarters of decline in loans and there's still some challenges out into the future. While we're optimistic that that's going to correct itself and turn back around, a lot of the deleveraging is out of our control. And so if there's a there's caution, I'd say it probably relates to that a little bit.

That's very helpful. I know several of you have spent a lot of time over in China in recent months. I'm just wondering if maybe you can talk a little bit about your strategy there and what's going on.

Yes. Aaron, this is Greg again. We're really looking at all four markets that we are -- have offices and are spending time on and the opportunities around that. We have spent time in China as we have in London and Israel and in India. Right now I'd say it's still a little uncertain exactly what the path will be for us over there. As I say, many people would admit it's a big opportunity. We certainly feel that way. But as far as clarifying exactly what those plans are, we're just not in a position to articulate that at this point.

Fair enough. Thank you.

Our next question is from the line of Ken Zerbe with Morgan Stanley. Please, go ahead with your question.

Thanks. On the deposit side, obviously you're investing some of the excess cash in the agency, the CMOs, and the agencies. My question is, do you -- have you had any conversations with some of your larger depositors in terms of what they might be doing with their cash once interest rates rise or potential clients pull that out? I guess I'm just trying to reconcile. If you're investing the funds where I know several callers ago you didn't want to because you weren't clear about deposit behavior, has that changed? Do you feel comfortable that these are now sticky deposits going forward?

Yes. Ken, this is Greg again. A couple points. One is we have been talking to some of our larger depositors and getting a sense of what their behavior may be when the FDIC -- I guess a couple things. One is when FDIC insurance goes away, probably sometime next year, number one, and or if interest rates start to pick back up. As Mike alluded to, we believe that number in the checking account of DDA number, non-interest bearing, is somewhere in the neighborhood of roughly $1.5 billion to $2 billion of money that's really in there mainly for the FDIC insurance.

If and when FDIC insurance goes away, what's going to happen? Our belief is there's going to be a mix. Part of that's going to stay on the balance sheet and move into interest bearing accounts. The other we will retain and it will move into our off balance sheet investment products. From a number perspective, anywhere from $0.5 billion to $1 billion could be in the interest bearing accounts and the balance going to the off balance sheet vehicles.

Great. Thanks.

Our next question is from the line of Dave Rochester with FBR Capital Markets. Please, go ahead with your question.

Good evening, guys. Given what you've been talking about in terms of your cost stance on loan growth and given your view on the recovery, when do you anticipate that loan growth will actually resume? Is this going to be more of a 2011 or potentially 2012 event?

Yes, Dave. This is Greg and Dave Jones may want to add as well. I would say even though we may be coming across more cautious, obviously we expect to see loan growth in 2010 although it probably will be more limited to what we've seen in prior years. Part of that is just it is a little unclear exactly where the numbers will shake out. But I would tell you, when I think about loan growth, where it would come from, there's a few things.

One is corporate finance which is our later stage companies. We -- a small - deals we've done almost zero to date but we believe we're going to start seeing some. We have seen some in the fourth quarter and we'll see some growth there. The PEVC -- it's a private equity and venture capital. Mike already mentioned we felt it's at the bottom of the cycle. So, we expect to see some growth there. But again, it's out of our control when that happens. Again, hopefully it's the bottom and we'll see some growth there.

A reversal, the deleveraging which is as I think everybody knows, we have a significant amount of unfunded commitments. So, it's not as if we have to go out and add a lot of new clients. It's the fact that the facilities that are there, will they be utilized in a meaningful way? As the economy improves, we expect that to happen. Finally, on the global side, we expect to see growth there and you're really starting from such a limited base that all that is incremental to the base. Now, exactly how that will play out? That's where the cloudiness of the crystal ball occurs. That's probably where the caution here is coming from. But we do expect it to occur in 2010 and obviously beyond that.

This is Dave. I can't add a lot to what Greg is saying because I agree with everything he is saying but I would add that when you look at some of the information that we are accumulating internally relative to the pipeline, when it is that you look at the kind of activity that some of us are seeing in the loan committee, you see a stark difference from what we would've had six months ago.

So, it all has to start somewhere and the opportunity to see in the not too distant future some loan growth, I think is starting now and we've got a lot of people out in the marketplace working to make that happen for us.

I know with the global side of things it's very difficult for you to predict what that growth will ultimately look like, but looking out four, five years into the future, would you be surprised to see that being 10% or 20% of your loan portfolio? Is that the ultimate goal of those operations over time?

Dave, probably the only thing I would comment on that is that we fully expect on a percentage basis that the global growth is going to be at a higher rate than we're going to see in the US which is relatively obvious. But when that growth rate starts to decline and it becomes 10% or 15% of the loan book, we're just not in a position to say right now.

Just one last one on the competitive landscape. Has this changed at all over the last three months as things have softened up in the markets a little bit?

Again, this is Greg again. The competitiveness has been really for the last 12 months it's been challenged. I wouldn't say this is something that's new. But we have seen some pickup in competitiveness from the standpoint of just think about the period of time nine months ago or 12 months ago. Everybody was pulled back. Everybody was concerned. And there's a lot more clarity now. The economy is more stable than it was. So, you do see more banks that are feeling more comfortable. How is that relative to our norm over the last four, five, six years? The competitiveness from my standpoint, it's still below what I would say is a normal level but it's not as low as it was nine months ago.

Great. Thanks, guys.

Our next question is from the line of John Pancari with Fox-Pitt. Please, go ahead with your question.

John? Are you there?

It appears that question has been withdrawn. I'll move on to the next question. Our next question is from the line of John Hechtwith JMP Securities. Please, go ahead with your question.

Thanks for taking my question. Actually most of my questions have been asked. I wondered if you guys could provide some commentary on what you're seeing in your eco system. What are you seeing and expecting in terms of capital deployments from the venture capitalist? What are you see in terms of burn rates from the early stage technology companies? And if you could maybe even provide a little sector overview of where you're seeing -- where you're comfortable with trends on a sector basis and maybe where you continue to be concerned in terms of early stage technology companies and their position in the marketplace?

John, this is Greg and then I'll have Dave add some commentary as well. When you look at the venture capital activity, numbers are really just coming out for the quarter. I'd say they're mixed. You can look at some of the data and say it's slightly up and some of the other data and it's slightly down. I would just say it's kind of moving sideways as opposed to really anything else. So, that's what the numbers will probably show.

Then the anecdotal information that we have, because we do have so many interaction points with venture capital firms, I would say they are more optimistic than they were over the last several quarters. You're seeing deals get done. They're feeling better about deploying money. As I mentioned in my comments, valuations have been stabilized at a lower level. I think all those things bode well.

What is of concern, though, is the number of venture firms that are raising money which is still extremely low. I would say the optimism is improving. The capital raise is being relatively depressed.

As far as sectors go, again, the initial information that we have is that the life science sector is actually making up a higher percentage that it was over the last few quarters. IT was down, software specifically. And I guess for us, whether it happens in IT or software, we have significant portfolios in each so we don't probably spend as much time on that sector side. But it's -- from our standpoint, I guess it's comforting knowing it's at least going sideways and not continuing to head down. So, I think there is improvements ahead, but it's still, again, a cloudy crystal ball.

This is Dave. Let me speak to what we were seeing at client level burn. Clearly, there was a strong initiative from late summer 2008 through early spring of 2009 to manage down client burn. Over the last more or less six months, I would say that we have seen that leveling out. So, the initiative that was started, I think that probably the management teams and the investors for the most part are satisfied with what companies have down to respond to that.

I appreciate the color. The final question related to this would be that when you're borrowing clients hit a point where they need another venture capital round of financing, are you seeing changes in the pattern there? Are you seeing the environment stabilize where better companies don't have a problem raising capital? Or is it still a tough environment?

This is Dave. I think that a tough environment probably is a fair characterization. But still saying that, the good companies are getting the rounds raised. So, we obviously need to monitor this and do monitor this very closely. The volume of our relatively early stage or early stage clients dependent upon the next round has seen an improvement in the second quarter and that improvement level held pretty consistent in the third quarter. So, a large number of our clients continue to get funding, but it is a -- it is a more difficult process, as you might expect, than it would've been 18 months ago.

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

Our next question is from the line of Christopher Nolan with Maxim Group. Please, go ahead with your question.

Hey, guys. Thanks for taking the call. Quick question on the capital commitments for SVB capital. Can you give us an update on that?

Yes, Chris. This is Greg. Let me just -- I'm just going to have similar comments to what we talked about last time in that we continue to make meaningful progress towards raising the funds we need to close that gap that we've talked about before at SVB capital. As Ken mentioned in his comments last quarter, we're really not going to go into detail about that but I'd say the bottom line is that we're feeling very good about the progress that we've made this quarter.

And a follow-up on the prior quarter in terms of the environment for venture capital, given that it's so slow domestically and you're seeing certain large investors which is some of these school endowments pull back from the market. Should we anticipate that more the focus for SVB over the next 24 months will turn more to China, given the economic growth environment's much more favorable there?

Chris, I would say that's reading too much into our global strategy. Over many years the international operations we fully expect to grow. But the opportunity for us, I would still say the most significant opportunity over the coming one, two, three years, are going to be domestically. And whether we're spending more resources and time going after mid to later stage companies, it's really a matter of the opportunity. And we think there's an opportunity there today.

We think there will be an opportunity there tomorrow. But in the early stage, yes. It will come up and it will go down, just like the last cycle. We saw it the last cycle where there was a pullback in early stage, so new Company formation, it went to later stage. And then in 2003 and 2004 and 2005, the pace of investment in that early stage picked back up. We expect that to continue again.

So, do we move resources from the opportunities in the early stage to the later stage? Well, it makes sense that we're going to move them where the opportunity is and where there are companies that we should be banking. I don't see a fundamental change that you would notice.

Great. Thanks, Greg.

Our next question is from the line of Fred Cannon with KBW. Please, go ahead with your question.

Good afternoon. Just, Mike, I was just going to -- a couple questions on the high liquidity position that you have. It looks even if you're holding $1.5 billion for deposits, it may run off next year because it's the deposit insurance and invest another $0.5 billion, you still would appear to have about $2 billion in cash. I was wondering if there was any -- I know you want to maintain capital. Are there any other options to reduce debt levels? Is the cash available at the holding company to do such a thing if you were interested?

Frank -- sorry, Fred. Fred, if I just clarify a few things, what you're referring to is actually the liquidity at the bank levels. Let's take for example, we have $4 billion worth of cash at September 30. Let me worth through you, work with you on this. If you take away the almost $1 billion of that spike in deposits that we mentioned at the last day of the quarter, then you're down to $3 billion. As we pointed out on the call, we also said that we believe we benefited from the FDIC in deposits by approximately $2 billion. So, them you go from $3 billion back down to $1 billion and having a cushion of $1 billion is certainly nice to have, considering when we have such wide swings in our cash balances. Now, if you consider that we will invest up to an additional $400 million or so by the end of the year, I think that pretty much accounts for all that excess cash there on our balance sheet. So, at first it may look like we have a lot more excess cash than we need, but I can certainly assure you that we are very focused on optimizing that and investing the right amount of money to get the optimal returns.

Thanks. I had heard or I thought it was $1.5 billion in terms of FDIC --

I mentioned in my commentary that it was actually $2 billion. But even if it is plus or minus $300 million or $500 million or so, it's not overly significant.

Alright. And I guess part of that is, is that cash available at the holding company? That's really at the bank level, correct?

That's right. It's at the bank level.

Okay. With these large levels of liquidity, at this point, have you given up some of the traditional asset sensitivity at the Company with the low loan deposit ratio?

You know, Fred, the asset sensitivity reduces if when we're bringing on deposits and interest bearing instruments or interest bearing deposits, now we certainly have added a healthy amount of deposits in the demand deposits. So, arguably our sensitivity would have increased somewhat with the inflow of more demand deposits, because as you know, the reason why we're asset sensitive is because we have such a great gift of having a large amount of demand deposits that are obviously at 0% interest rate.

Right. But the securities investment does reduce the asset sensitivity to some degree, is that correct?

It does because those are going into the fixed rate securities. That's correct.

Just as a follow-up, Greg, I know a year ago you guys changed some of the products of the off balance sheet deposit products to kind of allow some of the liquidity to come back on to the balance sheet. As you anticipate going forward, are you kind of changing those again in terms of making sure that $2 billion Mike talked about can be captured by you guys.

So, Fred, a couple things. One is we're always evaluating the products that we have off balance sheet, making sure we have a broad enough product set to cater to whatever clients would want as far as a solution off balance sheet. Really, the change last year was with one product in particular. It was an off balance sheet sweep product. It was as simple as saying we wanted to move that off balance sheet sweep to an on balance sheet sweep. That was the absolute biggest driver of on balance sheet deposit inflows last year.

We believe right now, I certainly believe that the product set that we have both with the active asset management -- we call it SVB asset management and SVBS which is SVB securities. Those two entities have a broad enough product set and have the expertise to take care of pretty much whatever clients would want. I don't expect to see a lot of changes but it's always being evaluated.

And you feel comfortable that you could capture that deposit flow if it occurs, Greg?

Yes. If the $2 billion that Mike talked about when rates -- when FDIC insurance goes away or if rates start to pick back up, there's a part of that's going to go and stay on balance sheet, we believe. We certainly expect that whatever the net amount is, that it would go into one of our off balance sheet products. That is clearly our expectation.

Just to clarify, Fred, we certainly will do everything we can to try to keep those funds on the balance sheet. It's not as if we're just going to give up and let them fall off the balance sheet. We will certainly try to keep them on.

Would you keep them on with rate or do you mean just keep them on as non-interest?

It could be in the form of rates or it could be in the form of different products, offering products to them.

It's a matter of what your balance is, what you want to keep. Obviously the more -- if you want to drive more to your balance sheet, you would look at increasing your interest rates. And we have -- we spend a lot of time on that, figuring out again what's the optimal amount right now. There's - you can't go below zero on rates. So, it's hard to incent people to move it off balance sheet and if we want to move more on, if we need to at some point, we may have to consider raising rates. But right now we feel very comfortable at the levels we're at.

Sorry, Mike. I think I'm being a bit dense here. Your strategy, at least a few years ago was to try and capture a lot of the -- any interest rates -- at least my impression was -- to capture interest sensitive deposits off balance sheet and earn the fee rather than keep those on the balance sheet. That changed a bit a year ago to maintain liquidity. As you go forward, I guess the question is, is the strategy going to be to capture interest rate sensitive deposits off balance sheet or on balance sheet?

You know, Fred, it all comes down to "Can we make it accretive?" So, if we believe we can make it more accretive to our bottom line by keeping it on the balance sheet, we will certainly pursue that strategy.

Alright. Thanks.

Our next question is from the line of John Pancari with Fox-Pitt. Please, go ahead with your question.

Thanks. Sorry for hanging up there. My name was called and I promptly hung up on myself. I just want to ask in terms of your outlook again for next year, just listening to, Mike, when you got into your 2010 outlook, you were talking about the likely modest loan growth and then the deposit mix shift to somewhat higher costs and the flattish margin near-term, particularly, and then lack of liquidity events and potentially higher expenses. You put that all together. Is the delta to the upside really just from the normalization of credit costs? Where is the real earnings catalyst here for the near-term moving into next year in the shorter-term, I should say?

You know, John, certainly credit quality does absolutely have an influence on our results, as you have correctly -- as you've seen in Q3 here so far. As long as we're able to continue to improve and maintain our credit quality, we're going to tend to perform well. Certainly with respect to the upside on the catalyst, a lot of it also will be contingent on the economy. So, for example, if we see the economy starting to turn around and improve, there's a few things that are going to benefit. First and foremost could be the loan growth, as well as even in our investment portfolio centered around the venture capitalists and private equity funds that we have as well as even warrants. Those are off the top of my head. Those are certainly the three things in there.

Hey, John. It's Greg. Maybe just to add a few things, the fee income side as well. You have fee income, whether it's FX or other things that are -- they've become more depressed when you have the economy that we have and as things start to improve, whether it's FX, trade letters of credit, just the overall fee income. We introduced this earlier this year, our own credit card. So, we look at doing debit cards and other things like that. There are opportunities for us to grow fee income as well. I would say the cautious outlook is being realistic with what Mike said on interest rates. As I said earlier, we do expect loan growth. Our only cautionary part was we still have some headwinds and people are referencing that things are getting better and they're looking back to what growth we saw two or three or four years ago on a consistent basis, that isn't what people should expect to see.

Okay. Alright. And then on the credit front, can you just -- from your standpoint now, today, what would you say is the weakest area of your loan book in terms of credit trends? I guess if you could just kind of dovetail into what you saw by way of your watch list credits and your 30 to 89 day delinquencies?

This is Dave. So, in terms of 30 to 89 delinquencies, we don't have the same level of past due loans that most banks do. So, $8.5 million of 30 to 89 days past due. Not a significant concern there or is there much opportunity to look for any trends. What is the one area that I am looking at in terms of loan loss is clearly in the early stage business. My comment there is not that it is a deteriorating situation. I don't believe it is. But I do believe, as was said earlier, that we've evaluated the large loans. There isn't an issue with the larger loans. I think that as we've suggested for the last year that the one thing that will create most of the pain and loan loss will be with the early stage.

Okay. Last question on that is any updates on the wine industry business in that portfolio?

This is Dave. The updates that we could offer on the wine portfolio is that we continue to watch it closely, to understand the consumer buying habits, what they're buying and what they're not buying. We continue to monitor real estate values and we continue in that vein to be very appreciative of the fact that most of our wine exposure is in Napa and Sonoma Valleys where it would be the least risk for land value deterioration. We're appreciative of the fact that the team has endeavored to look at the better quality clients or prospects and most of our dollars are in the better locations. We experienced in the wine book following the tech crash and following the events of 9-11, a deterioration. We experienced an elevation of classified and we did not have a significant adverse trend in terms of non-performing and charge offs. At this point, based on our evaluation of the wine portfolio, the expectation is that it will perform similar to what we experienced during the economic recession and recovery that was for them 2001 through, say, 2004.

Okay. Great. Thanks for the color.

There are no other questions at this time. I'll now turn the call back over to Mr. Greg Becker for closing remarks.

Great. Thank you. I just have a couple points in closing. One, I just want to reinforce what Mike and I both have said, and Dave as well, that what we feel good about this quarter is that it has provided a lot more clarity in the credit quality side of it. It is improving. We've resolved some of the large loan issues. Our classified loans, non-performing loans have dropped and bottom line is the portfolio management is doing what we knew it would which is do a good job even in a downturn. So, that's point number one.

Point number two, and you've heard us talk about this, is that we still have challenges and uncertainties is probably a better way to describe it. Whether it's the economy, venture capital activity, and obviously probably one of the biggest drivers, completely out of our control, is interest rates and when those are going to turn around. All those are headwinds. We're probably the only bank out there hoping for inflation to occur. I know it doesn't help the economy but it certainly bodes well for us.

The third point is really in the growth prospects which is we do believe, we have a whole portfolio of growth prospects and I talked about a few of them. Whether it's corporate finance or all these unutilized or undispersed credit facilities that when the economy turns around we expect will hopefully see some lift in our loan growth and even global although modest, it's still going to be moving at a high percentage rate, just given the low book base that it's starting from.

And kind of the fourth part is that you can look at the markets that we serve and technology companies have tended to turn around at a faster pace when the economy starts to pick back up. And as everybody knows, that's a core part of our business.

And maybe just one last point, overall, is just our overall franchise strength. One of the things that I've been impressed with and we saw this same thing in the last downturn, is our overall franchise strength. We've seen our relationships with the venture capital community, our clients, I think strengthen because we have been and will continue to be that consistent partner even in a down economic time. I think it makes our employees feel good. I think it makes management feel good and I think bodes well for our growth prospects in the sense of people want to work with somebody that they feel is a good partner.

With that, I want to thank everybody for joining us today and have a great afternoon or evening.

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