SVB Financial Group (SIVB) 2010 Q2 法說會逐字稿

Good afternoon. My name is Mason, and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group's Q2 2010 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I'll now turn the call over to Ms. Meghan O'Leary, Director of Investor Relations. You may now begin.

Thank you, operator. Thank you all for joining us. We welcome you to our second quarter 2010 earnings call. I would like to remind everyone that our second quarter earnings release is available on the Investor Relations section of our website at svb.com. I would also like to remind you that we will be making forward-looking statements during this call, and actual results may differ materially. We refer you to our reports filed with the SEC, and ask you to review the disclaimer in our earnings release dealing with forward-looking information. This disclaimer applies equally to the statements made in this call. We will limit the length of the call to one hour, which will include Q&A. During the Q&A section, we ask you to limit your questions to one primary and one follow-up before getting back in the queue to enable other participants to ask their questions. With that, I will turn the call over to Ken Wilcox, President and CEO.

Thank you, Meghan and thank you all for joining us. I'm pleased to report that we earned $21.1 million in the second quarter, or $0.50 per share. We're proud of those numbers and encouraged by the fact that our performance in the second quarter was characterized by loan growth, high credit quality and increased net interest income. It appears that the positive momentum we talked about in April is beginning to generate results. First, there is growing evidence that despite the struggling economy, our clients are moving now to pursue opportunities for growth. Period-end loans grew by $245 million, a 5.8% increase over last quarter. This was the first loan growth we've seen in six quarters, and it was driven in large part by loans to our life sciences, venture capital and private equity clients. Activity in our pipeline also remains strong in the second quarter, an indication that this healthy demand may be the beginning of a trend. Second, if our positive credit quality is any indicator, our clients are entering the recovery in a position of relative strength. Our net charge-offs dropped by 70% in the second quarter, to less than $4 million. In addition, we saw a 15% decline in classified loans during the quarter, and a 38% decline from their peak one year ago. While we have our underwriting expertise to thank for the high quality of our loan book, we also believe the inherent resilience of our client base is a major factor. Third, our clients remain highly liquid. They added nearly $1.6 billion in total client funds during the quarter, $1 billion of which went to the balance sheet. These deposits allowed us to increase our average interest earning investment securities portfolio by another 30% to $5.2 billion dollars. We have more than doubled our investment securities portfolio in the last year as a result of this solid deposit growth, and our efforts have driven our net interest income to an all-time high. We are feeling encouraged by the resilience of our client base and by our solid loan momentum and good credit quality. In addition, our capital and liquidity remain very strong, even after completing the repurchase of the warrant issued to the US Treasury as part of our participation in the capital purchase program. Overall, SVB is well positioned to take advantage of the improvements we're seeing around us.

The primary challenge we have right now is the slow pace of the broader economic recovery. While we believe we have the resources to operate effectively throughout this recovery period, we expect to realize our most significant growth potential only when the economy shows sustainable improvement and interest rates begin to rise. This recovery may be complicated to some extent by the recent passage of the Financial Services Reform Bill. There are many questions still to be addressed by the regulators before we can say with any certainty what impact the new regulations will have on us. But I want to comment on two provisions of the bill that are of particular interest. First, is the so-called Volcker Rule, which puts limits on banks' investments in hedge funds and private equity funds. Clearly, this will have an impact on our Fund's management business, SVB Capital, but it is too early to say exactly what that impact will be. We built SVB Capital as a way of delivering value to our clients and shareholders, by providing clients with access to investments they would otherwise be unable to access on their own.

We do not believe the Volcker Rule was intended to restrict this kind of investment. But ultimately, the regulators will decide whether venture capital falls under the same umbrella as hedge funds and large private equity funds. If the answer is yes, we could be required to reduce our investments over time. Fortunately, the law would appear to provide ample time for exiting illiquid investments, anywhere from four to nine years. That amount of runway would give us more flexibility to make the best decisions for shareholders in determining our next steps with SVB Capital. Regardless of the outcome regarding limits on venture capital investments, we do not expect the Volcker Rule to impact our core banking business in any significant way whatsoever. The second provision of the Financial Reform Bill that particularly interests us is the repeal of the regulation prohibiting banks from paying interest on business checking accounts. Again, it is too soon to say exactly how this will affect SVB or any bank, since all banks will be affected. The provision will not be implemented for another year, and its impact would depend on a variety of factors, including market interest rates over time, client preferences, earnings credit rate policies and tax considerations. From our perspective, it becomes another consideration in striking a balance between our clients' objectives and our own.

Despite the challenges ahead for the industry and the economy at large, we are feeling positive. The technology industry appears to be recovering ahead of the rest of the economy, just as we expected. The second quarter brought another round of strong earnings reports from technology leaders, such as Intel and IBM, who are seeing higher demand and increased opportunity. Such momentum among these larger companies is generally a positive sign for the broader technology industry. Venture capital reports from the second quarter are positive as well. VC has invested $6.5 billion in 906 deals during the quarter, a 34% increase in dollars and a 22% increase in the number of deals, compared to the first quarter. Venture capital dollars invested year-to-date have increased by almost 50% over last year. Assets for venture-backed companies were also strong. Venture-backed IPO volume spiked to its highest quarterly level since 2007 with 17 offerings. The year is looking strong as well. There have been more IPOs in 2010 to date than in all of 2008 and 2009, combined. There were fewer mergers and acquisitions of venture-backed companies in the second quarter than in the first quarter, 92 compared to 119. But still a very strong number. Still one of the strongest quarters we've seen in the past four years.

We remain hopeful that this activity foretells a sustainable recovery in the technology markets overall. In the meantime, the opportunities for our clients are growing, and that creates opportunities for us. Thanks to the hard work of our outstanding employees, we continue to see robust activity in our pipeline and solid credit quality. We remain one of the best capitalized banks in the industry and are well positioned to take advantage of growth opportunities as they emerge. We continue to work hard to build momentum throughout the recovery that will provide significant earnings potential as the economy improves. Thank you, and now I will turn the call over to our CFO, Mike Descheneaux.

Thanks, Ken, and thank you, all, for joining us today. We are pleased to have delivered a strong second quarter marked by continued momentum in our core business and signs of improving business conditions for our clients. There are five highlights I think are worth mentioning at the outset. First is loan momentum. We are pleased that period-end loans grew by $245 million, and average loan balances held steady after six quarters of decline. Second, credit quality continued to improve as it has for the last five quarters, which is a great feeling. This improvement was led by lower net charge-offs. Third, we recorded our highest level of net interest income ever, $106.4 million, thanks to our investment portfolio, which is being funded by our growing deposits. Fourth and finally, our non-GAAP, non-interest income, net of non-controlling interests, rose by 5% to $37.2 million, thanks to higher client investment fund balances. Total client investment fund balances increased overall, and aggregate end-of-period deposits and off-balance sheet funds increased by $1.6 billion or 6% during the second quarter to $28.1 billion, the second highest period-end balance in our history.

Let's move into some details, starting with loans. Average loan balances held steady at $4.1 billion, but were trending up toward the end of Q2. These improvements are a result of improvements in our clients' markets as well as our success at winning their business. Our pipeline also remains strong during the quarter, which suggests that we may have reversed the trend of the last six quarters with a return to loan growth. We believe that the positive outlook for technology spending in the coming year will ultimately lead to higher utilization rates and increased commitments. The environment continues to be very competitive, but our ability to differentiate ourselves to win deals without sacrificing credit quality seems to be paying off. With respect to credit quality, we saw continued positive trends in the second quarter. Our allowance for loan losses remained flat at 1.6%, which reflects loan growth and changes in the composition of our portfolio. Even after provisioning for loan growth, our loan provision decreased by $3.3 million, to $7.4 million in the second quarter. That reduction was driven by improvements in our early-stage portfolio, which resulted in lower net charge-offs of $3.9 million compared to $14.9 million in the first quarter. This number reflects gross charge-offs of $7.1 million versus $21.2 million in the first quarter. Impaired loan balances were flat at $50.9 million compared to $50.6 million in the first quarter.

I am pleased to say that subsequent to the close of the quarter, we received payments totaling $5.8 million related to loans included in the impaired balance. As a result, we are entering Q3 on strong footing. Our overall credit trends reflect the high quality of our portfolio, our continued emphasis on strong portfolio management, and what appears to be an improving business environment for our clients. Moving on to the income statement, the headline is simply, higher net interest income despite a lower net interest margin. Net interest income increased by 5% or $5.6 million in the second quarter to $106.4 million, its highest level in our history. This increase stemmed primarily from the significant growth of our average investment securities during the quarter, from $4 billion to $5.2 billion, reflecting new investments in agency backed mortgage securities. Strong deposit inflows fueled our investment securities growth. Average deposits grew by almost $1 billion to $11.9 billion in the second quarter. This growth and the low interest rate environment impacted our net interest margin, which was 3.20% in Q2 compared to 3.30% in the first quarter, and it has also changed our 2010 outlook.

Turning to non-interest income, non-interest income, net of non-controlling interest increased in the second quarter to $37.2 million, a 5% increase over $35.4 million in the first quarter. As a reminder, these are non-GAAP numbers. This increase was driven primarily by client investment fees as a result of higher client investment fund balances. Average client investment funds increased by $435 million in the second quarter to $15.5 billion. Owing to higher period-end balances in our SVB asset management business, which grew by $1 billion. Income from our other core fee business lines, which include deposit service charges, client investment fees, credit card fees and letters of credit, was higher in aggregate, as a result of the improving business conditions for our clients. However, fees from foreign exchange were down by $606,000, although still at a nice level, owing to lower notional volumes, especially in the light of the exceptionally strong ethics income we had in Q1. Gains on our investment securities portfolio, net of non-controlling interest, were lower during the quarter, adding $1.2 million to our bottom line, versus $3.2 million in the first quarter. Again, those are non-GAAP numbers. Net gains for the quarter primarily reflect the sale of all non-agency mortgage securities held in our fixed income portfolio.

I want to say a few words about total client funds before I move on. I mentioned earlier that we saw significant increases in both deposits and off-balance sheet client funds during the quarter. Average deposits grew by 8.6%, to $11.9 billion during the quarter, while average client investment funds grew by nearly 3% to $15.5 billion. We also reached a milestone in our SVB asset management business, where we actively managed client funds. They exceeded period-end balances of $7 billion, an all-time high, in early July. As I said, we see this positive trend in total client funds as evidence that our clients' liquidity is increasing, driven by improving economic conditions, particularly for technology industries. Additionally, it is a sign that we are engaging clients in the market and showing them what makes SVB different from other banks. Now we'll move on to our updated outlook for the full year 2010.

Let me start with the two areas that have changed, deposit growth and net interest margin. For 2010, we expect that average deposits will increase at a percentage rate in the high 20s. We raised our outlook for average deposits due to our clients' focus on maintaining liquidity and a lack of compelling yield available in the current low interest rate environment. We had said previously that we thought $1.5 billion to $2 billion of deposits might move to our off balance sheet funds once we opted out of the FDIC's extended deposit insurance program. That opt-out became effective June 30, and the deposit behavior we have seen since then suggests to us that lower interest rates are likely to influence our clients' deposit behavior more than deposit insurance. As a result, we think the likely flow of deposits off the balance sheet over time, assuming a low interest rate environment, will be in the range of $1 billion to $1.5 billion. As a result of our higher expectations for average deposits and a low interest-rate environment, we have decreased the outlook for our net interest margin to a range of 3.2% to 3.4%. We previously said we expected a net interest margin of between 3.5% and 3.8%. As a result of this solid momentum on loan balances we saw toward the end of the second quarter, we continue to believe loan trends will improve in the second half of the year. We expect average loan balances to decrease at a percentage rate in the high single digits for the year, which implies higher average quarterly balances in the coming quarters. Our pipeline remains strong, and the strong loan growth we have seen in the last 45 days reinforces these expectations.

We feel we are starting at a strong point going into the second half of the year. In general, we expect business conditions for our clients to continue to improve, albeit slowly. With demand for technology recovering and an improving venture environment, we expect increasing demand for loans and fee-based services as well as better results in our venture-related investments. We expect credit quality to remain stable, assuming a gradual economic recovery. Our clients are performing well on their credit commitments and the underlying trends in our portfolio are positive. I would like to close by saying that although the economic recovery appears to be a long-term proposition, we are pleased with the momentum we have been seeing among our clients and the impact it is having on our business. We are encouraged by growth in our loan balances and the strong credit performance of our portfolio. Despite what you are hearing regarding the level of economic uncertainty these days, our clients and the industries they serve are just demonstrating their resilience. They appear poised to out-perform the industry overall in the years ahead. Their prospects have generated some new competition given the dim outlook for many banks in their traditional industries. Nevertheless, we believe we have a compelling value proposition as well as the resources to remain competitive and adaptive. Thank you. And now, I will ask the operator to open it up for Q&A.

(Operator Instructions) Your first question comes from the line of Joe Morford from RBC Capital Markets. Your line is open.

Thanks. Good afternoon, everyone.

Hi Joe.

I guess two questions. First related to the Volcker Rule. Maybe, Mike, can you give us the exact amount of what VC and private equity investments that are subject to the rule? Is that number growing? Are you continuing to make investments here in the near term or in a sense honoring calls? And when do you expect to know more about this, and perhaps whether you'll be staying in the funds management business?

Joe, let me answer the first part of your question, which is to give you a rough ballpark of how much we have invested in the venture capital/private equity world, at least those investments related to that area. And then Ken will comment a little bit more on the Volcker Rule and the impact of the rest of your questions. But if you go back to Q1, in general we have approximately $210 million to say $220 million of investments in the private equity and venture capital space. We'll come up with a little more updated number here with the [Q] when it comes out. But it's a little bit higher than that, but not too much. In general, when we think about investments at risk, that's about, let's say $220 million here for the moment. And then perhaps question Ken will answer the second part of your question.

Joe, let me speak to the second part, and that's around when we will be making decisions concerning the ultimate, I suppose, outcome, which means will we be continuing to invest, or will we not be continuing to invest? If we're not continuing to invest, what will we be doing with the investments that we've already made? The problem there is that it is really premature to answer that question. I don't think there's anybody on earth who is in a position to answer that question right now. And if they do answer it for you, my opinion is they're jumping the gun, and they may well have to change their answer to your question at some point in the next couple of years, because it was just, as you know, signed into law. And now we're going to go through an extensive period of time where law is somehow translated into regulation, and that could take at least a year and maybe, two and who knows, because sometimes things that can only take two years end up taking three or even four. So I think it is going to be a long time in coming. Second, it's still not very clear, based on what's called the [colloquy,] which are the accompanying letters that are written by individual senators and others around what they really meant when they voted. It's still not really clear whether they were intending to have this include venture capital or not. In fact, there is ample evidence that the instigators weren't really intending to target venture capital to begin with. So we don't really know how that's going to come out, and I would say there is not a person on earth who knows how it will come out. And when we finally figure it out, I will almost guarantee you that at least a year or two will have gone by; and potentially even more. And once the final decisions are made, the law provides several additional years for disposing of whatever assets are in your possession at the time. So ask me again, but wait a couple of years.

Okay. And then my other question was on just the loan growth in the quarter. If I look at your table outlining larger loans, over $20 million, that balance was up, call it $183 million in the quarter , which is roughly 75% of the overall growth in loans this quarter. And it sounds like it was primarily due to a couple of life science credits. And can you talk a bit about the nature of those credits? It doesn't seem like they're necessarily capital call lines, but are they participations? And does this -- I guess, given that, how are you really feeling about demand going forward, and how sustainable it

Joe, this is Dave Jones. Let me touch on that. So your review is accurate. The larger share of the growth from a niche perspective did come from life sciences. There were a couple of pretty significant transactions in there. Neither one are participated. And, Joe, not to get into more detail than would be appropriate, but I can assure you that the loan structure is as good as realistically could be for the size of credits, meaning that it is a very solid, very solid source of repayment for the credits.

Yes, Joe. It's Greg Becker. The second part of your question, which is on kind of loan growth, maybe the outlook. As Mike had said, we had this loan growth toward the end of the quarter, mainly driven by a couple large loans. But as we've said in the previous call, the pipeline has been building. It was nice to see this pick-up at the end of the quarter; but our outlook is positive, and the growth is from what we've talked about before, which is across our growth segment -- corporate finance, global and utilization rates improving as well. And the combination of all those things is really what is the composition of our pipeline; and that's what we drive our comfort from, from growth for the balance of the year.

Okay. That's very helpful. Thanks.

Your next question comes from the line of Steven Alexopolis from JPMorgan. Your line is open.

Hi everyone.

Hi Steve.

If we could start, I know you said your client base is proving more resilient to the slowdown in the economy. Just curious, if you compare last quarter's call to this one, did you see any more caution in terms of the outlook from your clients that could impact the closing rate of what is in the pipeline?

Yes, Steve. This is Greg Becker again, and I would say that there's kind of contradicting messages. One, you listen to a lot of feedback from the overall general economy, and it's very muted, very uncertain or still uncertain. The words unusually uncertain I think were even used. From our standpoint, when we talk to our clients, companies are still -- they're spending money on technology. They are feeling good about their demand. So they're still somewhat concerned about the overall market outlook, but they continue to be optimistic about the demands for their business and their products and services. So I would say my gauge would be it's slightly better than last quarter, which is slightly better than the quarter before that. So it's a continuation of the positive trend that we've seen.

Okay. Thanks. Maybe just one follow-up for Mike. How should we be thinking about the yield on the $5 billion of taxable securities going forward, those $290 million, pretty close to a bottom here?

As far as where we're trending, where it's going to go?

Well, it's been trending down quite a bit each quarter for the last two quarters. Just wondering if that $290 million is a reasonable run rate here, or does it keep going down because you're trimming duration in that book?

Yes. It could go down a little bit, because we do have some of the investment securities that are maturing each quarter as well. And obviously, the reinvestment rate that's available out there, particularly considering when you think of the two-year treasuries are around 50 basis points or so. So yes, there is certainly pressure on that going forward a little bit.

Do you have a bottom of where you think it bottoms out approximately?

No, again, a lot of it just depends on how we reinvest it. Rates have been coming down quite a lot lately. We're certainly trying to balance what's available out there in the rate. We're trying to keep a very sensible duration. But right now, again, it's just going to be driven by the rates here.

Okay. Fair enough. Thanks.

Your next question comes from the line of Aaron Deer from Sandler O'Neill & Partners. Your line is now open.

Good afternoon, guys.

Hi Aaron.

Mike, maybe just following up on Steven's question, can you just maybe give a little bit more color on how you're managing the duration risk and interest rate risk in the securities book? I guess, with it now being larger than your loan book, it's a big piece of the balance sheet, and it seems like there could be some growing risk there.

Well, what we're trying to manage too is making sure that we're investing sensibly in maintaining liquidity. One of the things you have to be conscious of is the fact of not going too, too far, getting too far out in duration, particularly with a fixed rate portfolio. And again, unfortunately here right now in this rate environment, the rates are so, so low. But again, our first and primary objective is protecting the portfolio and just being sensible of obtaining some yield here. So we're still targeting that two, two-and-a-half year duration. And as we probably pointed out at the end of last quarter, we did add a bit over $1 billion in some variable rate securities, some LIBOR-based, with a relatively;y short duration, say one, to one-and-half years. We're primarily going to keep that objective of maintaining strong liquidity, because again, there's just not a whole lot of yield out there to chase. To get any kind of yield you really need to go five, six, seven years to get anything decent. So again, the primary objective is keeping strong liquidity.

With that, I guess you also have what, more than $4 billion in cash on the balance sheet. What's the right number for that, and are you still looking to deploy more of the cash?

Yes. Aaron, since we did opt out of the FDIC's insurance program, we are going to start to see some of that tail off toward the end of the year. We are seeing it moving essentially from our balance sheet to our off-balance sheet, investment funds business. So we have started to see that already at the onset of Q3. So you will certainly see those balances go down quite a fair amount here. As I updated here on the call, we expect anywhere from $1 billion to $1.5 billion probably to come off between now and the end of the year on those deposits, and it would certainly come out of the cash balance levels.

That's helpful. Thank you.

All right, Aaron. Thanks.

Your next question comes from the line of John Hecht from JMC Securities. Your line is now open.

Good afternoon. Thanks for taking my questions. The first question is more about the venture capital environment. You guys were discussing that deployment in Q2, increase from Q1. IPO activity was all supportive of a solid VC environment. But if I read something accurately recently, it suggested that venture capital fund raising was down relatively significantly from the early part of the year. I'm just wondering, what is your perspective on this, and what do we make of this in terms of the consistency potential for a loan demand?

John, this is Greg Becker. I'll start first. Obviously we feel good about the growth in venture capital in the second quarter. Maybe a follow-up to your question, which is, is it sustainable at that level? I think the second quarter was a strong quarter. I can see it probably declining more, flattening out for the balance of the year, mainly based on what you said, which is the fund-raising that is taking place. It's hard to raise money out there, and I think that's going to continue for a while. So although we feel good about the second quarter, again, it's probably going to be slightly down to flat on a go-forward basis. The other point I would make is, given that the M&A volume, and the IPO volume, the venture firms that we're talking to are feeling a lot more optimistic than they were last year. And it is consistent, maybe even a little improved from Q1. So those are the positive things that are going on in the market. But I wouldn't extrapolate the second quarter number and roll that out and say we're going to be seeing a $25 billion or $26 billion investment year.

Okay. And then the second question, unrelated. Mike, if I heard you, you referred to a post-quarter, approximately $5 million payment on an impaired loan? Or was it a payment on a $5 million of impaired loans? I just want to make sure I heard that right.

This is Dave Jones. Let me touch on that. We had a couple of accounts that received significant collections of the book balance in the first part of July. So they were impaired as of June 30 and that $5.8 million was collected in the very first part of July.

Now, I would like to add just a couple of points to the answer that Greg was giving around projected loan growth. And those would be that what we're really seeing out there in the market right now in terms of the relationship between the level of money that's being invested on the one hand, which clearly has gone up, and the level of money that's being raised for new funds, which is clearly not going up, is less a question of the venture industry moving in a bad direction and more a question of the venture industry actually, at least in my opinion, moving in a good direction. Meaning we're seeing a significant culling going on in the venture industry. People who were unsuccessful in their venture investing in these past several years are falling by the wayside. They're either exiting funds that are substantially successful and will be continuing; but individual partners may not have had that much of a positive impact. Or, the entire funds at the lower end of the pyramid are falling by the wayside.

But the best funds in the industry, at the top of the pyramid, are continuing to flourish. They're largely flush with dry powder and are continuing to invest. And ultimately, although it makes for choppy waters in the short run, ultimately in the long run, this could only be good for the industry. And we see it as a positive development, even though in the short run it may be a little choppy and has been a little choppy. No question about that. The other thing that I think we need to add to our answer is that a substantial portion of not only our lending, but also of our pipeline, the pipeline that gives us some considerable confidence that things are moving in a good direction, comes from companies that have already graduated from the venture capital cycle, and are no longer dependent on venture capital infusions in order to grow because they either are past the need for that type of equity infusion, or in many cases, are already public.

Great. Thanks for that perspective.

Your next question comes from the line of Bobby Boland from KDW. Your line is now open.

Thank you. Just two quick questions. First, I think Mike, this was your very last sentence. You said the business was beginning to attract competition. I was wondering if I heard that right and if you could, I guess, elaborate on that?

Hi, Bobby. This is Greg Becker. Let me take that, and then Mike can add on. As Mike had said, we're not surprised that there is additional competition or increased competition. Mainly when you think about the prospects other institutions have much of the opportunities for their growth, historically has been in real estate and real estate-related lending. And as we all know, that has been challenged, and the outlook for that is to continue to be challenged for the foreseeable future. With that in mind, everyone has growth goals, and the market that we serve is obviously one that we clearly enjoy, we enjoy to be a part of. So it's not surprising that we're seeing more competition in that space.

Is it competition that's been there that's increasing their, I guess, [heft] into it? Or is it new participants coming in?

Yes, it's mainly the ones that have been out there in the space, kind of around the edges. And we've talked about this increased competitive landscape and the probability for it for, quite frankly, the last couple of years, and as the market turned down, this is one of the things we have talked about. And we have been, again, planning for increased competition because of the appeal of the market for a long time. So our goal has been and will continue to be to leverage our strengths, the high-touch client service, the people that we have, our ability on the lending and structuring side. But also what I'd say are the long-term differentiators, and probably the two biggest ones from my standpoint are the knowledge and information that we have that is unique that no other institution has. And that's part of the knowledge bank or business services area that we continue to develop, although it's early. And then secondly, and probably more importantly, mainly because our clients are going global more early-on in their life cycle is the global capabilities that we have. And those two, from my standpoint, are the biggest differentiators, and those are the ones that we're relying on, along with our people, to really deal with the increased competition that we're having. So yes, there's more competition, we expected it. And we're taking a long-term look on how we are differentiating ourselves.

I would add just one sentence to that, and that is that it's yet another wave in a string of waves over an extended period of time, meaning the last time we had no competition was, I think, 1992. And since then, we've had waves of competition. They come and they go. Very few competitors actually sustain themselves through multiple waves. For the most part, they disappear after a wave or two, and so it goes. And certainly, we're seeing a resurgence of competitive activity. But if the future is anything like the past, it will subside, and then we'll see more again later. And so I think it's something to be concerned about, and I would categorize us as hyper-vigilant in this regard, but we shouldn't characterize it as a new phenomenon, because it's, in truth, always been there, at least for the past 18 years.

Okay. And then the second question, if you could. You talked about line utilization. I was wondering if you could give a linked quarter of where we are in the line utilization for some of your borrowers. And then is that across the board, or is it in a particular sector?

Bobby, this is Dave Jones. Let me touch on that. Overall, the line utilization was up, but very, very little from first quarter. What we saw was that our factoring clients picked up a little bit. Our asset based lending dropped off a little bit. Our venture capital clients, with whom we have significant unfunded commitments at any point in time, drew up on their facilities in the second quarter. But up ever so slightly overall.

Okay. Thank you.

Your next question comes from the line of Ken Ugman from BOA. Your line is now open.

Actually it's Casey [Eire] filling in for Ken. Good evening. I had a question on the margin, the margin guidance of 3.2% to 3.4%. We're currently on the year we're averaging 3.25%, implying there's not much room to go below. But if I heard you right, you expect some more deposit growth coming in the latter half of the year. I'm just trying to figure out what am I missing regarding -- doesn't loan growth have to out pace that deposit growth for the margin to sort of quit from eroding?

I think there's two things, Casey. One is actually the deposit balances we expect to start declining between now and the end of the year. And then we talked about $1 billion to $1.5 billion that are going to come off. So that will certainly -- if you're taking that out of cash, which is earning 25 basis points here today, that will obviously have a positive effect on the net interest margin. But perhaps one of the stronger things that will help net interest margin is loan growth. So if you bring on loans, which you look at our average yields for loans in the neighborhood of over 7%. When you start adding the loans at over 7% versus the overall net interest margin of between 3.2% and 3.3%, it is going to be accretive overall. So that's where it's going to come from.

Okay. So you see deposits down $1.5 billion period-end between now and year end?

It's somewhere between a $1 billion and $1.5 billion that we expect to move off.

Okay, alright, I misheard that. And then finally, so the variable rate agency PMOs, what is the yield that you guys get on new investments there?

Well, what we ended up doing is at the beginning of Q2, is somewhere in the neighborhood yielding around 80 basis points or so. And they tend to have say, one to one-and-a-half year duration or so.

Okay.

And they are indexed to LIBOR.

And that's primarily going to be the investment strategy going forward?

Well, we obviously continue to evaluate where we can get the best yield out there, again, keeping in mind liquidity. But as you look out at the yield curve and the investment alternatives, there's just not a whole lot of compelling investments out there.

Okay, great. Thank you.

Your next question comes from the line of Mike [Zerenski] from Credit Suisse. Your line is now open.

Hi, guys. Thinking about capital, at least the way I measure it, you seem to have a decent amount of excess. Should I be thinking about any ways you guys can deploy it? And I guess a share buyback, would that even be an option?

We're always exploring what's the best use of capital. But I would say first and foremost, I mean we certainly expect that we can put it to good use here, over time. So I wouldn't necessarily expect any share repurchases or buy-backs here at this time. We have a lot of growth opportunities, and our balance sheet has been growing considerably. So I wouldn't expect that here in the near term.

Okay. And Ken, I know this is a tough question for all of us in terms of the ability to pay interest on commercial deposits eventually. Should maybe we think about this as a way that competitors -- a tool competitors can use that could increase competition and maybe that causes banks to hold higher cash balances? I'm just trying to see if you have a more solid opinion on how this could play out.

Could you -- not to repeat the whole question, I guess to get to the line of thought that you were --

So if banks can start paying on commercial deposits now, and effectively, I think you pay implicitly by credits already, but you make it explicitly. I guess there would be a way that could increase competition if other banks wanted to start paying higher rates, right? Which could lure over deposits. I guess would that cause people to maybe keep higher liquidity or cash balances? I'm just trying to think of how this plays out or if you have -- .

We are trying to think of how it's going to play out, too. And the truth is that it's a very complex set of issues. Fortunately, we have, I think, a year to figure it out, and we've got lots of people that are doing a lot of modeling, and we're testing out various scenarios. I'd like to say that it's a good thing. But I have a hard time doing that with a straight face. At the same time, I don't honestly think that it's necessarily a horrible thing, for the simple reason that we're all in the same boat. And I will say that I guess I'd rather be SVB than some banks because first of all, we certainly have enough deposits to fund our loans, and are probably going to be disinclined to take advantage of the repeal of REG Q to pay up in order to get deposits onto our balance sheet. So there are going to be people out there, banks that I'm sure you know about that have trouble funding their loan growth and are going to be paying up, now that they have the opportunity in another year. They're going to be paying up in order to get deposits to fund that loan growth, and that's going to squeeze their margins. I think that there could be scenarios, in fact, I have envisioned scenarios, and they don't necessarily pertain to today. But if I look at the 20 years I've been here at SVB, there have been times when the ability to pay on DDA would have been a big help to us. And so I think that this is a really multi-faceted question. We obviously have to deal with it. We are concerned, but we're confident that we'll figure out ways of using this, potentially even to our advantage over time.

That's helpful.

Hi, Mike. This is Greg. Let me just add on couple of things. One is, the institutions that compete with us today, if they wanted to use that today as a way to get deposits from our clients, they could clearly pay up on their money market account balances today and pay much higher rates than we could to try to attract them. So it is slightly different. But if they wanted to do that, they have that option. That is number one. Number two, institutions, if they're going to reprice their demand deposits, there's a lot of other demand deposits on other banks' balance sheets as well, but they would have to look at repricing. So it's too early to tell how it will shake out. But my feeling is that it won't be as big of an impact as it potentially could be for the reasons that we have already talked about. It's still too early to tell.

Let me add one thing to that, and that is that it doesn't directly answer your question. But I think it's advantageous to be a bank like ours with a substantial broker dealer that in most quarters, it actually ends up having more client funds than we do on our balance sheet. And that affords us an additional lever in terms of enticing funds in one direction or another. And the way we've structured that, the broker dealer obviously, we end up doing reasonably well no matter where the funds go, So I think that again, facing the repeal of REG Q I would rather be us than some other banks.

Okay. Those are good points. And last real quick, increased competitions, the existing -- or the loan yields have been creeping up. Should I think about them not creeping up anymore then if there is increased competition in terms of the loans in place? Or new loans to go on the book?

That's also a tough one to answer, because obviously the best lenders are going to get the best pricing. And it's not always the case that competition results in reduced margins.

Okay.

Maybe Greg would like to add some details to that.

Mike it's also a question of what the mix is. From the standpoint obviously we have a very diverse loan product set from factoring to commercial finance to traditional loans, and they have a wide range of yields associated with them. And depending on the mix of that, that can have an impact on a quarter-to-quarter basis. All things being equal, the mix doesn't change. Do we expect to see a significant change in loan yield? Probably not, until interest rates pick back up. So it's mainly the changes that you've seen have mainly been driven by mix.

I appreciate the color.

Your last question comes from the line of Christopher Nolan from Maxim Group. Your line is open.

Hi. Thanks for taking my call.

Hi Chris.

Hi. Is there any geographic concentration or change in terms of the loan growth? Are you seeing more from overseas, or is it just no real change there?

And, Chris, this is Dave.

Hi, Dave.

Hi. So loan growth on the non-US side, as a percent of that portfolio, is very nice, starting from a very small base. But the loan growth that we are seeing is in the US and geography really isn't an issue. Software, hardware, life science companies sell globally. They don't sell locally. So the perspective really is the niche. And where we're seeing growth is, as indicated, largely life sciences, some from the venture capital, capital call lines or credits that we provide. So it really isn't a geographic issue.

Let me --

Oh, go ahead. Another question?

If you want to add something, please go ahead.

Go ahead, Chris. Go ahead and ask your last question here.

Do you have any update on your comments from last quarter to talk about possibly purchasing loan portfolios?

Yes, Chris. This is Greg. I would say the update is -- the message is the same as it was last quarter, which is we're always on the lookout, and that hasn't changed. So our level of interest in trying to pick up something hasn't changed. But as with last quarter, there was nothing imminent that we're looking at that we wanted to comment on, on the call.

So purchasing of a loan portfolio is not a factor in terms of your loan growth guidance for 2010, correct?

No, it is absolutely not part of the outlook.

Which isn't to say that we're not constantly looking. So let me then wind up here by stating unequivocally that we are feeling positive. Now, I know I say that almost every quarter, because we are pretty positive people. But I will, as a point of comparison, say that we are feeling, I would say more positive this quarter than we were three months ago. So it's a good trend line in terms of our mood. And there are good reasons why. Think about it. Venture capitalists are investing, I would say significantly more, actually, than they were last year. Our portfolio companies are doing better, and I would say significantly better than they were last year. Credit quality is improving, and is considerably better than it was last year. Loan balances are up, and there is a hard time saying significantly up over last year. But after all this waiting, it's nice to see them going up. Deposits are growing like topsy, and fortunately, we have the broker dealer to encourage some of them into. And there are significantly more and better exits right now than there were a year ago. So in short, pretty much everything is looking up to one degree or another; and accordingly, our outlook on the future is looking up as well. And that's it. Thank you very much.

Thank you, ladies and gentlemen for joining this conference call. And it does conclude. You may now disconnect.