SVB Financial Group (SIVB) 2011 Q2 法說會逐字稿

Good afternoon. My name is Molly, and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group Q2 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Meghan O'Leary, Director of Investor Relations. You may begin your conference.

Thank you and thank you all for joining us. We welcome you to our second quarter 2011 earnings call. Our President and CEO, Greg Becker and our CFO, Mike Descheneaux are here today to talk about our second quarter results, and they will be joined by other members of management for the Q&A.

I'd 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 caution you that we will be making forward-looking statements during this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information. This disclaimer applies equally to statements made in this call.

In addition some of our discussion today will include references to non-GAAP financial measures. Information about those measures including a reconciliation to GAAP measures can be found in our SEC filings and in our earnings release.

We'll limit the length of the call including Q&A to an hour. During the Q&A session, we'll ask you to limit yourself to one primary and one follow-up question before getting back in the queue to enable other participants to ask their questions.

Thanks and with that I'll turn the call over to Greg Becker.

Thanks, Meghan, and thank you everyone for joining us today. I'd hoped that my first quarter as CEO would be a good one but this certainly exceeded even my expectations. Today, SVB reported earnings per share of $1.50 and net income of $65.8 million. Even excluding earnings from investment securities sales and our debt repurchase of $0.55, our core EPS at $0.95 was exceptionally strong and well above Street estimates.

The key drivers of the quarter were consistent with what we've delivered in recent quarters. Continued loan and deposit growth, both of which grew 16% annualized over Q1 averages, high credit quality, evidenced by effectively zero net charge-offs and provision, and gains both from warrants in our VC funds business, which totaled more than $20 million on a combined basis for the quarter, the highest quarterly levels in over 10 years.

We see these results as evidence that our business is firing on all cylinders and we're well positioned for long term growth. We're doing well for several reasons. First, we're correlated with our clients and they are performing well. The technology and innovation markets are doing better than the general economy. We're seeing broad-based revenue growth and hiring with our clients even though the rest of the economy remains fragile.

Second, the venture capital markets have improved. VCs are still raising money albeit at a more moderate pace and funding for good companies are strong, and as we've said before, the venture model continues to evolve. New categories of investors such as super angels and corporate venturing groups are entering the market and providing important sources of funding that are not reflected in the headline numbers.

From a venture exit perspective, the second quarter was phenomenal both in terms of IPOs and M&As which are providing liquidity back to limited partners which provides a long term support for venture capital fund raising. Given the investments we have in our fund-to-funds business and our broad portfolio of warrants, we have clearly benefited from the strong exit activity.

Third, we're executing on our strategy and new business activity is strong. As an example in the second quarter, we've increased the number of closed loans by volume by almost 50% over the prior quarter. At the same time, we increased our loan pipeline by 10%.

Our ability to execute is allowing us to maintain our dominant market share of early stage companies while continuing to adapt to meet the needs of our clients as they grow.

Fourth, we're investing in people to add to our already experienced team in addition to product services and a scalable infrastructure, all of which are helping us to win in the market.

I also want to share with you why we've been so successful in attracting the type of clients we do. Clients come to SVB not just for innovative products and services but for the vast network we built over nearly 30 years, which allows us to make connections and provide insight that increases our clients chances of success. It's also one of the key differentiators that allows us to effectively compete in a market that continues to get more attention from banks and non-banks.

Let me give you a few examples of the kind of benefits we provide our clients. Two weeks ago, we hosted a cyber security conference that brought nearly 40 early stage IT security companies, venture capital and private equity investors, and corporate development teams from the Fortune 50. With this one event, we made important connections between a promising group of early stage companies, interested perspective investors and clients who requires looking for private companies innovating at a fast pace.

Another example was our recent leadership summit for venture capital and private equity executives from around the world. This event combined a high quality networking event in a relaxed setting and gave attendees relevant and practical content about everything from managing LP relationships to the emerging regulatory environment for private equity.

We also host numerous events every year that allow our early stage clients to get valuable feedback from perspective investors and customers. These include showcase style conferences where entrepreneurs present their business plans to venture investors as well as events with corporate CIOs where early stage companies demonstrate their products and get candid actionable feedback as well as connections to potential customers.

At SVB, we focus on providing the type of value ad because we believe it's a critical differentiator in our market. These kinds of activities combined with our high-touch client service and exceptional relationship teams are what has allowed us to establish a market leading position and get extremely high scores in client satisfaction, and it's the entire solution of products, people and value add services that underpins SVBs unique model.

Most of you also know that we're working hard to expand our unique model on a global scale and we continue to make good progress in our global efforts. We're in the final stages of getting approval for our UK branch, and while we're waiting for the official word on our license, we continue to grow our loan portfolio there. Our UK loans are approaching $100 million and our pipeline is the strongest in history.

We have hired a very strong and well-connected managing director in our office in Israel to lead our efforts to continue building our business in that region. We're doing very well and our pipeline in Israel is going.

We're also making great progress in China as a result of Ken's presence there and our confidence in our ability to get a JV banking license is growing. Although it's very hard to say when it might happen. As we said before, China is a long term effort.

Regarding India, we remain committed to the long term but have yet to figure out the best approach to getting regulatory approval on our banking strategy. As new guidelines are introduced, we expect to have more clarity. In the meantime, our focus will be on expanding our non-bank financial company which allows us to lend money in India today.

The last point regarding our global efforts relates to our international venture capital and private equity practice which operates as it does in the US but works with firms focused on markets outside the US. This is a significant piece of our international efforts and today has more than $600 million of total client funds and nearly $100 million of average loans as of the second quarter. We believe we have significant upside in this business as well.

Stepping back a bit, since I became CEO in April, a lot of people have asked me what changes I plan to make on our strategy. As I've said previously, I've actively participated in building and executing our strategy over the years and am committed to it. I don't expect to make dramatic changes but at SVB, we're always in a constant state of improvement and fine tuning.

With that in mind, I want to remind you of our key areas of focus and what we see as our greatest opportunities. First is helping innovation companies of all stages and sizes worldwide. Second is expanding globally as I've outlined and helping our clients do the same.

Third, we've re-launched our private bank. The re-launch was driven by our clients.

They've been asking us for years to introduce a high-touch private banking model in lines of what we've already offered in our commercial bank, so that's what we're building. We're seeing a lot of good momentum and the feedback so far has been very positive.

Fourth is our funds management business. We see it as a great complement to our overall business, and we believe we have a good business model in any regulatory environment.

Fifth, we continue to work on cross-selling new and enhanced products and services. A few examples, we were the first bank in the US to introduce a chip-enabled credit card for corporate customers. We have also extended our global cash management services to include multi-currency accounts in 19 currencies currently. And finally, we're building a Company for the long term. The kind of Company that allows us to attract and retain great employees.

We think we're doing a great job in this area. In a recent employee engagement survey, 93% of our employees rated SVB as a great place to work, a fact which I'm particularly proud of.

This has been a terrific inaugural quarter for me as CEO. In any environment, I'd be pleased with this performance but I'm particularly pleased because we delivered amazing results in what is still a challenging macro environment, where our strong client base and active venture and private equity markets remain important factors in our success, we believe that our unique ability to add value and our strong execution will continue to differentiate us.

Thank you, and now I'll turn the call over to our CFO, Mike Descheneaux.

Thank you, Greg, and thank you all for joining us today. Clearly, we had an outstanding second quarter delivering earnings per share of $1.50 and net income of $65.8 million. Greg already gave you the high-level breakdown regarding the $0.55 impact from the sale of investment securities and the debt repurchase, so my comments will focus primarily on the remaining $0.95 of earnings per share which is an outstanding result driven by strong performance from our core business.

Let me touch on the highlights. First, we had record high net interest income driven by strong loan growth and investment of excess cash from continued deposit growth. Second, credit quality remained exceptional resulting in very low credit costs. Third, we saw another quarter of solid gains from our venture capital-related investments. And fourth, we had stellar warrant gains as a result of healthy venture-back exited markets.

I will also talk briefly about expenses and highlights of our updated outlook for the year. Let me start with net interest income, we recorded net interest income of $130.9 million for the second quarter, compared to $120.8 million for the first quarter, another all-time high.

This increase had 3 primary drivers. First was strong growth in average loan balances of $221 million or 4.2%, primarily from new loans to software companies, especially our larger corporate finance clients, as well as growth in our private bank. Average loans in the second quarter were $5.5 billion, a new all-time high. Period-end loans also reached a high of $6 billion.

Average yields on the loan portfolio were somewhat lower both as a result of loan mix and pricing which reflects lower risk due to an improving environment for our clients.

A second driver of higher net interest income was the maturity and repayment of our convertible notes in April as well as the repurchase of $312 million of our senior and subordinated debt in early May and termination of the swaps associated with that debt. These transactions reduced our long term debt, which in turn reduced our interest expense in the second quarter by $3.5 million.

The third driver of net interest income was an increase in interest income from our investment portfolio driven by strong deposit growth. Average deposits grew by $603 million or 4.1% to $15.3 billion, another all-time high, primarily as a result of strong client acquisition during the quarter. Our clients are experiencing an increased liquidity as a result of strong exit markets and an improving funding environment. We are also executing well and have continued to win new clients, especially early stage clients through our value-added services.

We continue to put deposits to work during the quarter increasing our average securities portfolio balances by $788 million to $9.5 billion. We saw an increase of $2.7 million in interest income from the portfolio to $45.6 million due to higher average balances despite lower market rates.

Average yield on the portfolio was 1.92%, compared to 1.99% in the first quarter. Clearly given the size of the portfolio and our strategy of limiting portfolio duration, market rates on reinvested portfolio cash flow will continue to have a significant impact on our overall income and yields.

In addition to strong deposit growth, we also had success in our efforts to encourage clients to put cash into our off balance sheet investment products. As a result of these efforts as well as recent improvements in the funding environment for both private and public clients, average off balance sheet client investment funds grew by more than $1 billion in the second quarter to $17.9 billion.

Overall, total client funds reached another all-time high with average balances for deposits and client funds combined at $33.1 billion and period-end balances at $34.5 billion.

We see our clients strong liquidity as a tremendous positive. It speaks to the fundamental strength of our markets and demonstrates that we have a strong foundation for future growth.

We are also pleased that our net interest margin increased by 17 basis points in the second quarter to 3.13%, primarily as a result of loan growth and the maturity of our convertible debt.

Moving on to credits, we were very pleased with our portfolio of strong performance in Q2. We had a provision for loan losses and net charge-offs of essentially zero. This compares to a reduction in our provision of $3 million and net recoveries of $2.5 million in the prior quarter.

These results are a reflection of our client strength. That strength and our moderately higher confidence and credit trends among our clients led us to reduce our allowance as a percentage of total gross loans to 1.36%, compared to 1.44% in the prior quarter. Our allowance as a percentage of performing loans which is the driver we use for our outlook was 1.27%, compared to 1.33% in the first quarter.

Non-performing loans remained very low at $36.3 million, compared to $34.5 million in the prior quarter. Classified credits increased by $62 million in the second quarter. This increase relates primarily to the timing of funding rounds for a select group of clients and falls within the normal range from our experience. In our view, this increase is not indicative of broader credit issues and our confidence here is reflected in the allowance.

Now, I will move on to non-interest income. Net of non-controlling interest, non-interest income was $97.2 million in the second quarter, compared to $46.4 million net of non-controlling interest in the first quarter. These are both non-GAAP numbers.

We provide these non-GAAP numbers in addition to the GAAP numbers in our release because we believe they facilitate comparison of our performance to prior periods and offer meaningful additional information regarding the true economic benefit to us from gains and losses on non-marketable investment securities.

The biggest drivers of non-interest income in the second quarter were net gains on investment securities net of non-controlling interest of $45.2 million, compared to $8 million in the first quarter. The largest of these was a $37.3 million gain from the sale of $1.4 billion of investment securities.

The sale was made as part of our ongoing strategy, of limiting duration extension in our portfolio. Given the size of the portfolio, we view it as a fine tuning adjustment that contributes to a more stable duration profile and it is not intended to be a recurring item. Realized gains from the sale also had a positive impact on our capital ratios.

We also saw net gains of $4.5 million in our funds business, primarily related to social networking and Internet companies. About 60% of this number was tied to realized gains from liquidity events and distributions. The rest were unrealized gains on valuations, which have risen because of the markets. A number of our investments in these funds are currently in lock up and it's important to note that these markets can be volatile to the downside as well as the upside.

Finally, we saw net gains of $3.5 million from our strategic and other investments, including $2.3 million from the sale of our shares from the LinkedIn IPO. That $2.3 million reflects warrants that were converted to shares that were sold, so one can actually view this as a warrant-related gain even though for accounting purposes, it is reported as a securities gain.

The improved fund raising and exit markets also positively impacted our warrant gains during the quarter. We recognized $13.9 million in net gains on equity warrants in the second quarter, compared to net gains of $4 million in the first quarter. $7.6 million of that came from the exercise and sale of warrant positions and $7 million came from valuation gains on the rest of the warrant portfolio, driven by small handful of positions. Again, some of these positions are still in lockup and their valuations are subject to fluctuations in the markets.

Warrant gains during the second quarter came primarily from M&A activity among Internet and social media companies as well as hardware and biotech firms. Our warrant gains during the quarter are a reminder that while the gains in this portfolio can be quite lumpy and subject to market conditions, they contribute to our overall returns over the long term.

Before I move on to the outlook, I want to touch on expenses as our strong performance during the quarter led to higher compensation cost, although overall expenses increased modestly. Non-interest expense increased by $3.6 million to $121 million in the second quarter, compared to $117.4 million in the first quarter. This increase stemmed from higher performance related incentive compensation costs. As you know, we have a pay for performance model at SVB.

We have significantly exceeded our internal targets for the year so far and as long as we continue to outperform, it will be reflected in our compensation cost. The compensation increase was offset somewhat by lower FDIC assessment fees and a gain of $3.1 million on our debt buyback which was recognized as a reduction in non-interest expense and was included in the other line item.

Next is an update to our outlook. As a reminder, all of my comments refer to our outlook for the full year 2011 as compared to the full year 2010 unless otherwise specified. We are increasing our average deposit growth outlook from the low double digits to the high 20s. This change reflects the fact that we continue to add clients faster than we can grow our off balance sheet funds as well as the persistent effect of the low interest rate environment.

For the second consecutive quarter, we are improving our outlook on overall credit quality due to the strong performance of our portfolio despite choppiness in the broader economic environment. We are reducing the range for allowance from between 1.25% and 1.35% of performing loans to between 1.2% and 1.3% of performing loans due to an improvement in the overall credit quality of our portfolio. We are also reducing our outlook for net loan charge-offs. We expect net charge-offs to be less than 25 basis points of average total gross loans. That compares to our prior outlook of less than 50 basis points of average total gross loans.

We are adjusting our net interest margin outlook from our previous range of 3.3% to 3.4% to a range of 3.05% to 3.15%. Our increased deposit outlook is the primary driver of this change, although it is also related to recent sales from our securities portfolio, the reinvestment of portfolio cash flows in a lower rate environment as well as lower yields on the loan portfolio due to loan mix. Given our results for the quarter and the year so far, we are increasing our out look for gains on equity warrants to a range of between $25 million and $35 million. We previously said we expected gains of between $7 million and $10 million.

Likewise, we are increasing our outlook for gains on investment securities excluding gains from the sale of available for sale securities to between $15 million and $20 million. We previously said we expected gains of between $13 million and $16 million.

While we are increasing our forecast for warrants and securities gains, we would like to emphasize that these are particularly difficult items to forecast since the timing, magnitude, and realization of gains or losses is uncertain and highly dependent on market conditions. We are raising our guidance based on our progress for the year so far, what we know today, and where we believe the exit markets may trend in the coming quarters, but we're also expanding the size of the ranges to reflect the difficulty of protecting these items.

Overall, we are very pleased with our results in the second quarter. We believe they show we have the right strategy and are doing the right things to execute on it. While competition is a given, we are adapting by being competitive and smart. And in that effort, the experience, networks, and expertise we have built over nearly 30 years gives us a tremendous advantage. We remain extremely positive about the opportunities ahead of us.

Thank you and now I will open the call for Q&A.

(Operator Instructions)

Your first question comes from the line of Steven Alexopoulos from JPMorgan.

Hi. Can you guys follow-up on the discussion from last quarter and just point out where the Tier 1 leverage ratio ended the quarter at the bank?

The Tier 1 leverage for the bank level which is what we're really focused on, you'll see that coming out in our document is somewhere in the neighborhood of 6.82%, so it's up from around let's say a 6.54% or so in the first quarter so we made quite a bit of improvement in Q2 thanks to strong growth in the earnings as well as the benefit of selling some of those investment securities we noted on the call.

Great, and just a question on the loan growth. Can you give some color on what drove such strong growth this quarter in software, can we talk about the pipeline heading into Q3?

This is Dave Jones and as we have experienced in the last few quarters, we continue to see a very strong appetite on the part of both private equity firms making software company acquisitions and also in a couple of cases where some of our existing clients are purchasing another software company. As far as the pipeline is concerned, it remains very significant, as strong as it has been in recent periods.

Great. Thanks.

Your next question comes from the line of Joe Morford with RBC Capital Markets.

Thanks, good afternoon, everyone, and congratulations on a good quarter.

Thanks, Joe.

The deposit growth is amazing again another 1 billion in the period, it sounds like primarily some new clients so just wondered if you could just talk about the client acquisition efforts in general, any particular stage where you're having greater success, where are you getting these clients from and a lot of them in businesses that will have credit needs at some point or are you cross-selling other products?

Yes, Joe, it's Greg. Let me start and others may want to add. We've had a significant increase in new client acquisition. It's mainly been at the earlier stage and you know how our model works. Our model is to bring in clients, a majority of clients in the early stage and then grow with them and stay with them up until they become a much larger company, so at the earlier stage, the earliest stage companies, typically aren't in need of credit at the earliest stage. It's really not until they raise some rounds of venture capital activity and start to build out their infrastructure where we would start to lend money but yes, the majority of the growth has been at the earlier stage.

And then a question for Mike I guess. Could you just talk a little bit more about the security sale transactions this quarter in terms of what exactly you sold and what you bought in terms of yield to maturities and what kind of impact is that going to have on margin going forward?

Well, the first item is the sale of securities as far as impact on margin going forward. We reflected that in our guidance, you saw we did bring down net interest margin, albeit it's mostly because of strong deposit growth. As far as redeploying the funds from the sale it continues to be the same investment philosophy so nothing has changed from that standpoint. Again, the aim of security sales is to reduce the volatility and risk of duration extension and so you'll see it eventually coming out in our releases is our duration is roughly around a 2-year period or so we're keeping what we call the very reasonable duration there.

What was the stuff yielding that you sold and what kind of yields are you getting on the new purchases?

Well, all in as you've seen what -- the interest rates are certainly low but just the way it ranges is probably somewhere, Joe, between around a [1.5%] to around a 4% but the overall blend is a little bit higher, probably around that 2% mark or so.

Okay, thanks very much.

Thanks, Joe.

Your next question comes from the line of John Pancari with Evercore Partners.

Good evening. Can you talk a little bit about the deposit growth in terms of the stickiness of the deposits and I guess if you can update us on your expectation of deposit attrition and when you could actually see some of these deposit dollars moving off balance sheet?

Yes, John. This is Greg again. Most importantly the way we look at it is from a total client funds perspective and part of the reason that so much of the new total client funds is being driven to the balance sheet, the main reason is because of the fact there's no yield to get, so you see where the deposits are going with the numbers and it's mainly coming into demand deposit accounts. We've introduced some new products, suite products for off balance sheet for our later stage clients and that's starting to pick up pace but the amount of new total client funds has been so strong that the off balance sheet has not been as fast as the overall total client funds that are coming in which is why deposits are still going up. Really, the big catalyst as we've said previously to move more of the money from on balance sheet to off is increasing interest rates and it's very tough to predict when that's going to happen and it continues to get pushed out into the future, so that will be the big catalyst, John, to see deposits move off the balance sheet into our off balance sheet products.

Right, so outside of the rate environment, nothing product-wise that will push the movement there in the balance sheet?

Well, we have some of those, John, so again, we did introduce one new product and we have other products that we're currently developing, but again you're seeing these products generate $300 million, $400 million even though it's a short period of time and it makes a difference but again when you look at the significant amount of total client funds coming on board, it's still not enough to direct a declining balance in on balance sheet deposits.

Okay, and then lastly, just in terms of the NIM outlook, I know you mentioned the change from your previous guidance was mainly given the deposit growth which makes a lot of sense and also security sales. The other items that you mentioned, the reinvestment yields and the lower loan yields, were they largely expected and pretty much factored into your former guidance that you gave last quarter or is that change as well?

I would characterize it as a slight change. Again, the primary driver being deposits but you have seen the interest rates drop down and yields drop down from the first quarter as well too and one thing as you all know is that has such a big impact and particularly given the size of our investment portfolio getting around that $10 billion mark that even a 10 basis point move in market-rates can certainly have a large impact and so again, it's just readjusting our outlook based on where rates are today. Should those go up, then certainly that could change and should they go down, that would probably change as well too but again it's more or less based on today's interest rate environment.

Okay, thank you.

Your next question comes from the line of Aaron Deer with Sandler O'Neill.

Good afternoon, everyone.

Hello, Aaron.

You touched on the competition you're facing from banks and non-banks and I know that just in conversations that I've had with people in the industry it seems like as in prior cycles there's a lot more people stepping into your niche and I'm wondering if you can talk a little bit about the kind of pricing and term pressure that maybe you've seen recently?

Aaron, it's Greg I'll start and Dave may want to add a little bit more on the lending side. We've obviously as we look back over the last few years and you look at what one segment has really stood out as being performing at a higher pace or better pace than the rest of the economy, its been the technology market and so we've been saying for the last few years that competition is going to increase so in a lot of ways it's not a surprise, and as I said in my comments, the way we look at it is we have to have a compelling product set.

We have to have the right people to deliver the products, the right client service, but we also have to figure out ways to differentiate ourselves and we spend a lot of time talking about how we can put things together that it's going to be really difficult for competitors to put together and that's just we talk about it all the time and it's just a big emphasis for us, so we know competition is going to continue to increase and our view is we just have to approach it in a different way that we can really help our clients in a way that other institutions are going to have a difficult time.

And Dave, I don't know if you have any questions or comments on it from a loan competition?

Yes, so from a pricing perspective, certainly we're competing on every single transaction and it feels like in some cases that we're having to accept less rate than maybe we would have a year ago, but I think there's also a need for us to recognize that on average, our clients are performing better than they did a year ago. And on a risk adjusted perspective, maybe the clients are deserving of some of that, and structure, so we will see some instances where we are being encouraged to be particularly aggressive and we're trying to be smart and the instances where maybe we need to be a little bit more aggressive and the instances when we don't and hope for when we don't. We're obviously growing very well so we're comfortable in the idea that we do not have to do anything unnatural in the pricing war structure.

Right. Thank you very much.

Thanks, Aaron.

Your next question comes from the line of Julianna Balicka with KBW.

I have a couple questions. One follow-up to the question asked by Joe earlier on the security sale, you had mentioned about the range of yields that you had sold. Could you talk about the durations that you've sold and what you are reinvested in?

So it's more or less a similar duration. Again, if you look last quarter I believe we had a duration of around 2.9 years. We sell off some of it here. We're at around roughly a 2-year duration but again, it's about the volatility and more or less again with still the same premise where we expect to invest anywhere from a range of 1.5 to 3 years of duration so again nothing has changed from that standpoint. It's just reducing the volatility of duration extension risk.

I guess I'm still not clear why if the duration hasn't changed that much and your yield hasn't changed that much why you took such a large gain without making any, I guess offsets?

Well, perhaps that's more of an involved discussion we may want to take offline.

Sure. Okay, and then the other question I had was more of a philosophical question like cyclical, you do come to a point where your clients are depositing a lot of money at Silicon Valley and then it's not going to be able to keep up enough, it just happens every few years on a regular basis so from the perspective of managing through this particular cycle like philosophically versus past cycles, what in your mind are things that you will or will not do in kind of managing or having too much funding and in the past I know you've done some niche lending and now you're sticking to the securities portfolio, and that seems to be your strategy or can you maybe talk a little bit larger picture about that?

This is Greg. I'll start answering I guess. Thinking about what our strategy is, it's focused on the markets that we've described. Clearly we do not want to stretch. We don't want to reach beyond where we've had very good experience and again now we're starting to expand more on that from a global perspective and we clearly believe that, that's going to provide and has provided the growth that we think is reasonable and prudent loan growth to our business. That's number one and then on the funding side, while if you look at the loan deposit ratio over time, its changed. We have in our history always had very high low loan balances relative to total client funds. Now, what changes that is what happens when interest rates are up or down and where that money will come on or off the balance sheet and what we're spending a lot of time on is coming up with the right products and services that will balance that out more when rates are high or when rates are low, such that we don't have such an inflow of deposits on the balance sheet or in some cases such an outflow deposits of the balance sheet. So we feel very good about our strategy around loan growth. Don't feel we have to chase other markets that maybe we aren't as comfortable with.

Okay, that makes sense. Very good. Thank you very much.

Thank you.

Your next question comes from the line of Christopher Nolan with CRT Capital.

Greg, you mentioned earlier that the incremental loan growth is being made partially from the private banking unit. What sort of loans are that, what sort of collateral are you typically taking?

Yes, the majority of loan growth that we've had, Chris, has been real estate mortgages, single family mortgages and again, when you look at and I know Dave can provide some more color but from a loan to value perspective, from a profile client perspective, they are exceptionally strong, and so we look at it and while the loan margins on a gross basis are low relative to the rest of our portfolio on a risk adjusted basis, we feel like it provides a very good return, and again, we look at that whole private bank model as a great opportunity and one that our commercial clients, venture capital clients are asking us to get more involved in which is why we built out the practice that we've built and feel very good about the upside. Dave--?

Yes, so just a little more color on that. As Greg indicates, most of the borrowers would be venture capitalists, members of a private equity firm. A lot of the mortgages that we're doing are refinancings which is contributing to very low loan to values. These borrowers are high income and the amount of their mortgage debt relative to their income I would describe as very modest.

Great and I guess as a quick follow-up. You mentioned briefly a strategy to grow asset management within the context of private banking. Is this something you're looking to do organically or are you starting to consider acquisitions?

Yes, Chris. That's not something that I had described. It's something we're going to consider. Something we'll look at but I'd say right now, the asset management that we have as a Company is geared toward corporations, companies, and it's the off balance sheet solutions that we have for them to invest their excess cash.

Great. Thanks for taking my questions.

Yes, Chris.

Your next question comes from the line of Casey Haire with Jefferies.

My questions on the Tier 1 leverage ratio as well as the ability to push deposits off balance sheet. The reason I ask is because I understand that the Tier 1 leverage ratio went up this quarter but obviously the securities gains helped as well as the debt retirement. Given that both of those are unlikely to recur, won't you guys, won't the initiatives to push deposits off balance sheet have to increase, otherwise you guys would be close to that 6.5% threshold level?

Well, just to clarify that. Every single quarter of course we assume we're going to make money, make earnings, and just on kind of the recent run rate, even excluding these large items, I mean we're able to support an annual growth of say $1.4 billion, $1.5 billion in deposits so if you take that down on a quarterly basis so $400 million, $500 million, $550 million we can just support with just basic earnings of kind of that run rate that we had. So if you couple that with potential successes of moving some of these deposits off balance sheet or putting them into some of these newer products, again we believe we'll continue to keep the Tier 1 leverage ratio going in the right trend. Even if we drop down for 1 particular quarter or so we think the overall trend movement can continue to be on the upside.

Okay, so but I guess my question is assuming deposit growth maintains this pace, and you don't increase your ability to push deposits off balance sheet, would that -- that would erode the Tier 1 leverage?

Yes, mathematically you're right, yes.

Okay, just quick follow-up. Regarding the securities sales of $1.7 billion, was that toward--?

$1.4 million, Casey.

Oh, sorry, $1.4 million, was that towards the end of the quarter?

Yes, more or less towards the end of the quarter.

Okay, great. Thanks very much.

Thank you.

(Operator Instructions)

Hearing no further questions, I just want to wrap up and in closing, I just want to reiterate that it was a great quarter driven by strong performance in our core business which we're all very proud of. We're doing well because our clients are doing well. Venture funding is available for good companies and there's still plenty of excitement in the exit markets. The team is doing a great job.

We're investing in people, products and infrastructure, and that's helping us win in the market and what's making this all possible is we say all the time is it's up to our employees, thanks to our employees, all 1400 of them. Without their efforts and our commitment to clients, there's no way we can deliver these incredibly strong results so I just want to say thanks to all of them and thanks to all of you guys for joining us today.

Have a great day.

Thank you.

Thank you. This does conclude today's conference call. You may now disconnect.