SVB Financial Group (SIVB) 2011 Q3 法說會逐字稿

>> Operator Good afternoon. My name is Christian and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group third quarter 2011 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 our host, Ms. Meghan O'Leary, Director of Investor Relations. Madame, you may begin.

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

I would like to remind everyone that our the third quarter earnings release is available on the investor relation section of our website at www.svb.com. I'd also like to caution you that we'll be making forward-looking statements during the call and that 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 1 hour.

During the Q&A session, we'll ask you to limit yourself please to one primary and one follow-up question before getting back in the queue to enable other participants to ask their questions. Thank you. And with that, I will turn the call over to Greg Becker.

Thanks, Meghan. And thank you all for joining us today. I am pleased to report that we had another excellent quarter. We delivered net income of $37.6 million or $0.86 per share, and beat consensus estimates as a result of solid performance across our business and positive conditions for our clients.

Tremendous loan growth of $474 million was the real highlight of the quarter. It pushed us over the $6 billion average loan mark for the first time and drove record net interest income. We also performed exceptionally well across all credit metrics, a reflection of the strength of our existing portfolio and the quality of our recent loan growth.

On top of that, we had healthy gains from our venture-related investments and warrants, thanks to a positive funding environment and solid M&A activity for our clients. And we continued to make the investments we view as essential to our strategy for long-term growth.

As a result, expenses were higher than Q2 but in line with our expectations. Our performance shows we're capable of delivering good results in challenging conditions and are still able to invest in our long-term growth initiatives. Our success continues to be driven by a combination of our client's performance, as well as our execution.

Given that our clients are focused on innovation, and generally they're doing better than the overall economy, it allows us the opportunity to finance this growth. Now, of course, there are some sectors and companies that are feeling the impact of the current economic environment, but most of our clients have been growing rapidly and are planning for continuing growth in the coming year.

Our client's activity levels bear this out. Let me give you some examples. Our transaction volumes across many categories were significantly higher during the quarter than the same quarter a year earlier. For example, card transactions increased 45% year-over-year.

International US dollar wires increased by 20% year-over-year, while foreign currency wires increased by 25%. Our multicurrency deposit accounts have grown 300% since year-end to an amount equivalent to nearly $500 million US, a testament to the growing global nature of our client base.

In addition, we've continued to see increased overall entrepreneurial activity. 1 of the reasons we're seeing so much start-up activity is that today's internet and Cloud-based software and service models make it more capital efficient than ever to start up a company.

The third quarter was our second best quarter ever for early-stage client acquisition, with a very strong client formation in Silicon Valley and New York. This is where SVB's market dominance and deep involvement in the entrepreneurial ecosystem are a huge advantage.

We have an incredible brand developed over nearly 30 years of focus on innovation. The knowledge and networks we build over that time allow us to do things other banks typically can't or won't do.

As an example, a few weeks ago we hosted our SVB accelerator CEO Summit at the Computer History Museum in Mountain View, where 220 CEOs and an additional 350 people on a web stream spent a whole day hearing from real entrepreneurs about the defining moments in their company's lives, and not just about how they succeeded, but about how they failed and went back to try again.

It was an amazing event and almost every person in that room or online was focused on getting a new company off the ground. If you have a chance, you should check out all the videos from the event on www.svb.com.

As a result of our efforts, we are able to attract what we believe are the best clients, who understand that transactions don't drive success -- solutions, knowledge, and relationships do. The global nature of the technology industry makes these relationships all the more important.

This is a primary reason we're so focused on global innovation and developing our networks and capabilities to support it, especially in the UK and China. We have been working for years in both of these markets as they have established ecosystems for innovation in entrepreneurship. Along the way we have built many relationships with clients and partners, both current and prospective.

I will give you a quick update on our efforts in these 2 countries. I returned from a trip to the UK 4 weeks ago, and it's amazing to see how strong our brand is there already, not just in the tech and VC circles. As an example, recently, in a speech to his party, British Prime Minister David Cameron highlighted the arrival of 5 companies in the UK, as a sign that London is fast becoming Europe's technology capital.

Those companies were Facebook, Intel, Google, Cisco, and Silicon Valley Bank. Very nice recognition. As you know, SVB has applied for a UK banking license. We're in the process of finalizing our systems and infrastructure and expect to get approval when we've done that, which we think is likely to be around the end of the year. In the meantime, we continue to lend and build momentum in the UK, which we believe will translate into strong revenue growth after our license is approved.

In China, we received some great news this week, specifically that SVB and Shanghai Pudong Development Bank have received approval from the China Banking Regulatory Commission to proceed with the establishment of our joint venture bank. We're grateful to the CBRC for granting us the approval.

This milestone is also a great testament to our partnership with Shanghai Pudong Development Bank, the strength of our team in China, and to SVB's global brand. Just as a reminder, as big of a step this approval is, we still have a long way to go before the joint venture bank's capabilities are build out and it begins to make meaningful contributions to our business.

In the meantime, we're continuing to build our relationships in China and support many cross-border companies, VCs, and private equity firms who are currently doing business there. We're building momentum internationally and domestically and our clients give us a lot of reason to feel positive about the future.

The business environment for our clients at every stage of growth still appears to be healthy relative to the broader economy. I'm also optimistic because of the healthy business activity among our later stage growth, as well as our corporate finance clients.

As you know, it's been our strategy over time to extend our products and services to more established companies in the innovation space. Even as the broader economy struggles, these clients are actively pursuing opportunities to grow through acquisitions and that is benefiting SVB. Their activity has driven much of our loan growth during the year, particularly in the area of buyout financing.

Of course, we're very aware of the challenges. The economy is uncertain and shows few signs of stabilizing. Despite the historic resilience of our clients, they would certainly not be immune to the effects of a double-dip recession, if 1 occurred.

The low interest rate environment is another challenge, and we don't expect to get any help there for at least the next couple of years. But, while we're focused on monitoring and managing these challenges, we're still positive about our prospects now and for the next year.

And on that note, I want to talk a little bit about our expectations for 2012, starting with the caveat that anything I say at this point about the coming year is very preliminary. That means it could change, as we have not finalized our 2012 budget process. That said, I would still like to provide some directional guidance for 2012, relative to our expected full year 2012 results.

First, we expect continued strong loan growth in the mid-teens range on an average basis. Second, we expect credit quality to remain good, assuming no significant and sustained deterioration in the overall economy, with expected annual gross loan charge-offs in a more normalized rage of 40 to 70 basis points.

Third, we expect net interest income to grow approximately 10%. Fourth, we expect core fee income to grow in the mid single digits. And fifth, we are forecasting expense growth in the mid to high single digits.

At SVB, we have 1 mission, which is to help our clients succeed. That requires us to build deep relationships, solve our client's problems, give them advice, and make it easy to do business with us, so that we can be the best partner to them.

When I think about what differentiates us, this approach to helping our clients is it. As a CEO said to me after our recent CEO accelerator event, "this is the reason I bank with you", which is exactly the message we want to deliver on. It's not always easy to stick to the discipline of making decisions for the long-term, but everything we're doing now and everything we're planning for the future is designed to fulfill that mission.

We have a unique client base and we're building a global platform to support our growth and our client growth. In our experience, the payoff of that long-term focus is considerable and well worth it, as evidenced by our solid growth in today's market.

For that reason, we will continue to execute on our strategy by making decisions we believe will help drive our client's success, our growth trajectory, and long-term shareholder value in the future. Thank you. And now I'm going to turn it over to our CFO, Mike Descheneaux.

Thanks, Greg. And thanks, everyone for joining us today, especially all the SVBers out there for helping us have yet again another great quarter.

We delivered strong results in the third quarter, thanks to our solid execution, continued client acquisition, and activity in our client markets. I will provide some detail on the highlights Greg mentioned, as well as updates on a few other areas. Then I will talk about our outlook, before opening up the Q&A session.

Let me start with a few summary points about the quarter. First, is that our earnings power remained strong despite general economic weakness and low interest rates. In addition to strong results in the third quarter, our annualized return on equity year-to-date is greater than 10% on both a GAAP and non-GAAP basis.

Second, we grew average loan balances by 8.6% during the quarter. Average loan balances now stand at an all-time high of $6 billion. Third, our credit quality and the broader credit metrics remained exceptional during the quarter. And fourth, we remain well-positioned for continued growth thanks to our strong capital ratios, high quality balance sheet, and ample liquidity.

Now I will get into some details starting with net interest income. Net interest income reached a high of $136 million, compared to $131 million in the second quarter. The increase was driven by growth in our average loan balances and reductions of outstanding debt in the second quarter.

You will also note that net interest income was impacted by a decrease of $4.8 million from our available for sale securities portfolio, primarily due to the full quarter impact of sales of securities towards the end of the second quarter of 2011, which resulted in a pretax gain of $37 million.

Interest income was driven by growth of $474 million in our average loan balances. The majority of growth came from our corporate finance and private equity buyout clients, which resulted in somewhat lower yields during the quarter. The growth is a direct result of our ongoing strategy of growing our share of larger clients.

The yields on these loans reflect their higher credit quality, and we expect continued growth in this portfolio to affect overall yields moving forward. Interest expense was lower in the third quarter as a result of the full quarter effect of the maturity of our convertible debt in April; and to a lesser extent, because of our recent debt repurchase in May. Despite growth of average deposits of $534 million to $15.8 billion, interest expense on deposits decreased modestly due to lower rates on interest-bearing deposit balances.

Let's move on to our net interest margin. Overall, our net interest margin was 3.13% for the third quarter, which is the same as our second quarter net interest margin. Our net interest margin held steady due to the significant growth in loans, despite the effect of the sale of certain investment securities in the second quarter. Investment balances held relatively steady as we use cash to fund loan growth. The duration of the portfolio was 1.6 years at September 30th.

Given the low interest rate environment, reinvestment risk on an investment portfolio, including its impact on net interest margin is a challenge for most banks. Given the size of our portfolio and our strategy of managing duration risk, market rates on reinvestment portfolio cash flow will continue to have a significant impact on our overall income and yields; however, if we achieve the loan growth that Greg outlined in his comments, we will not be as impacted by lower rates on that reinvestment.

Let's turn to capital. We continue to focus on building our capital base consistently through core earnings. Our regulatory capital ratios in the third quarter remain strong. Of particular note, is the continued improvement in our Tier 1 leverage ratio at the bank level, which has been impacted the last several quarters by our extraordinary deposit franchise and growth.

Tier 1 leverage ratio at the bank level rose by 11 basis points to 6.93%. This is the third consecutive quarterly increase. At our current earnings rate, we believe we can support growth and average assets of approximately $500 million per quarter and show increases in our bank level Tier 1 leverage ratio.

Moving on to credit quality. Overall, our credit quality and related metrics are impressive. We had a modest loan loss provision of just $769,000 as a result of strong net recoveries and overall improvement in our credit quality. This compares to a minuscule loan loss provision of $134,000 in the second quarter.

The high quality of our loan portfolio and our disciplined underwriting continues to manifest itself in low credit costs. We had a net recovery in the third quarter of $2.3 million on very manageable gross charge-offs of $8.2 million, mostly from early-stage credit, and extremely strong recoveries of $10.6 million.

This compares to 0 net charge-offs in the second quarter, on gross charge-offs and recoveries of $4.3 million each. Going forward, our provision for loan losses will mainly be a function of gross loan charge-offs and loan growth. In other words, we do not expect to benefit significantly from recoveries, as we have, for the most part, exhausted available recoveries from prior loan charge-offs.

Non-performing loans remain very low at $40.5 million, compared to $36.3 million the prior quarter. Classified credits decreased by $75 million, primarily as a result of client M&A as well as clients closing on incremental equity rounds.

Now, I move to non-interest income on a non-GAAP basis. Non-interest income was $54.4 million in the third quarter compared to $59.8 million in the second quarter. These numbers are net of non-controlling interest and gains from the sale of certain securities from our treasury investment portfolio. Again, they're non-GAAP numbers.

Income from core fee items during the third quarter rose by $1.9 million in aggregate to $30.3 million. This was due to higher income from foreign exchange and credit cards going to increasing transaction volumes by our clients.

Net gains on investment securities from our venture capital-related investments were higher at $9.3 million, compared to $7.9 million in the second quarter as a result of increased valuations. These numbers are both net of non-controlling interest and the sale of certain securities from our treasury investment portfolio. And again, they're both non-GAAP numbers.

Gains on equity warrants were $5.5 million in the third quarter, compared to $13.9 million in the second quarter. It is important to highlight that gains in the second quarter were unusually high. Nonetheless, gains in the third quarter still reflect solid MNA activity among our clients.

Moving on to non-interest expenses, they were higher during the third quarter at $127 million, compared to $121 million in the second quarter. The increase was primarily due to the impact of a $3.1 million net gain in the second quarter from our debt repurchase and interest rate swap terminations, which reduced second quarter expenses.

This increase also included an additional $2.2 million in professional services expense related to maintenance and enhancement of our IT infrastructure, as well as a continued development of our global platform and our product offerings. We also had a $1.1 million increase in our provision for unfunded credit commitments, due to an increase in unfunded loan commitment balances as well as a slight change in the composition of the unfunded loan commitments.

Now, I'll move on to the outlook. As usual, we will note any changes in our annual guidance. Although our guidance is for the full year 2011, we recognize at this point, the ranges we provide could account for a broad set of possible outcomes in the fourth quarter.

So we recommend you consider trends in the first 3 quarters for potential annual outcomes. Starting with loans, we have raised our outlook to percentage growth in the high 20s from the mid-20s due to higher than expected loan growth in the third quarter.

We have said previously that gains on equity warrants and our venture capital-related investments are particularly difficult to forecast since the timing, magnitude, and realization of gains or losses is uncertain and highly dependent on market conditions.

Our outlook reflects what we know today and where we believe the exit markets may trend in the coming quarter. But actual results may differ. Nevertheless, we're updating our outlook for gains on equity warrants and our venture capital-related investments.

First, we have decreased the top end of our expected full year net gains on equity 1 assets by $5 million to a range of $25 million to $30 million. And second, we have increased our outlook range on net gains on investment securities by $10 million to a range of $25 million to $30 million due to higher than expected gains during the third quarter. That estimate is net of non-controlling interest and excludes gains on sales of certain securities from our treasury investment portfolio.

Again, we are very pleased with our performance during the quarter and for the year so far. Our clients in the innovation sector are doing well. We continue to see opportunities for growth ahead and believe we are very well-positioned to deliver solid performance over the long-term. Thank you. And now I will open it up for Q&A.

(Operator Instructions) Our first question comes from Aaron Deer with Sandler O'Neill and Partnerships.

Good afternoon, everyone.

Hello, Aaron.

I guess one of the questions I have is with respect to the gains you had in the quarter on the -- I should have maybe said the net investment gains that you had and the positive warrant valuations. Just kind of given where the equity markets went in the quarter, I would have expected something quite different. Can you talk a little bit about what kind of -- you mentioned M&A activity and other trends that were supportive of that. Can you talk about what helped support that?

Just as we said, Aaron. The M&A sector continues to do well for our clients and the innovation continues to perform well; whilst the IPO activity is down, there is still a healthy amount of M&A activity, which is helping to increase some valuations. Now clearly, what we have seen here in Q3 is still a challenging environment out there and that could have a little bit of an effect on the fourth quarter; but nonetheless, Q3 for us was a good quarter.

Okay. And then as a followup, it looks like you were able to direct more of your deposits into maybe some of the offbalance sheet funds, and I'm just wondering if that was reflective of pricing decisions that you made or if there was other strategic changes that you made internally to help cause that?

Hey, Aaron, this is Greg. And the real dramatic change during the quarter as far as on-and-off balance sheet. We did have an offbalance sheet sweep that we had mentioned -- we had introduced a couple of quarters back and that continues to grow. But relatively speaking to the total client funds, there wasn't a dramatic shift in balances. So from our standpoint, it was good that the deposits on the balance sheet had flattened out; which again, helps our, the overall Tier 1 leverage ratio that we've talked about before.

Okay, thank you.

Yes.

Our next question comes from John Hecht with JMP Securities.

Good afternoon. Thanks for taking my questions. You have had consistent growth in the capital line component of the loan portfolio all growth. I'm wondering, are these larger loans to establish customers or are there new customers? And what is the behavior at the VC level at this point; and is there seasonal implication, if you can remind us as well to this type of loan?

John, this is Dave Jones. I will at least open the response. First as to seasonality, no, there really isn't any seasonality. Are we seeing larger loans? No, I wouldn't necessarily describe the activity in the third quarter as larger loans.

One of the things that was indicated as a reason for the improvement in our class five loan levels was that a lot of our clients looking to close on the next round equity did so, and they did so in some part by the investors drawing on their capital call lines of credit. So I think that I would chalk up the growth as to the overall satisfying level of activity in our microenvironment.

Okay. A follow-up question, actually it's not very related; but do you know historically warrant gains related to IPOs versus acquisitions?

That is, in general, I just say a general statement that most of the gains typically come from M&A activities. Because as we've seen over the last few years, IPOs are few and far between relatively. I would say it's somewhere around that 75% is around the M&A and the rest being around -- be in the IPO area, the ballpark area -- ballpark estimate.

Okay. Thanks very much.

Our next question comes from Joe Morford with RBC Capital Markets.

Hi, everyone. I guess just following up on Aaron's question, I just wanted -- want to get a better understanding of the dynamics at work behind the slower deposit growth of this quarter; in fact, actually down in the period basis. But really, what do you attribute that to? It doesn't sound like from your comments there is really much of a slowdown going on in the VC community, and you didn't say it was a lot of it because of the efforts going off balance sheet. So really, what's at work here; and more importantly, what are the expectations going forward?

Joe, this is Greg. If you look back the last 12 months, maybe in the last 18 months, we have seen such huge growth in the deposit growth it's been from a variety of factors, right? The venture capitalists, private equity firms are coming back in and being much more aggressive and putting money to work. You have other forms of liquidity coming in. So you just had all these factors coming in together.

And what we saw in this quarter is I would say just an overall slowdown. Now, our -- to me, as we think about this, we look at two factors. One is the overall deposit growth and the second part is overall client activity or new client relationships as probably a better indicator over time. And as I mentioned in my comments, we continue to see a very nice uptick in new client activity. So we expect that overall total client funds continue to grow, and we looked at this quarter -- I look at this quarter as not a dramatic change. It's just a one quarter slowdown.

Okay. All right, that's helpful. I guess the second question is unrelated topic, probably more for Dave Jones, the larger loan exposures outlined on page 5 of the release keeps creeping up both on the percentage of loans over $20 million and the number of clients with bigger credits. I was just curious what kind of limits do you have for this; and if you -- what can you say just to kind of us some comfort with the credit risk inherent here?

Yes. So, Joe, we will, obviously, continue to see the number of loans over $20 million grow as we grow the loan portfolio. And we do have limits for what we consider big loans. It is divided, or it is broken down into component parts because there are different risk associated with different segments of our business. So, that part of our business, which has historically been low loss; and well, we save higher allotments and that which is either higher in risk or something that we otherwise don't want to see have large commitments, has a smaller dollar amount before it goes to a higher level of review for approval.

Okay. Thanks very much.

Yes.

Our next question comes from John Pancari with Evercore Partners.

Good afternoon.

Hi, John.

Can you talk a little bit about your margin expectation for 2012? Particularly if you can give us a little bit of context about how you're thinking about the margin in light of the downside risk on securities reinvestment yields and pressure on loan yields?

Yes, John, this is Mike here. As you probably noted in the release, we didn't comment on the net interest margin for 2012. But having said that, what we did comment on is give you guidance or indicative to the net interest income, which is probably the first and foremost thing to focus on.

Having said that, though, clearly as I mentioned, there is the reinvestment rate risk with the yields on investment securities going down. But fortunately for us, we have relatively, what I'd call a central duration on our investment portfolio around 1.6. So it's not being as hard hit with rates coming down as you see the 10 year treasury instruments coming down. Since we're not in that longer part of the curve, we're not hit as dramatic as perhaps some of the other banks are being hit.

But even setting that aside, when we think about the growth next year, where we're going to be helped out quite a bit, assuming deposits come in and trend normally is with our loan growth. The loan growth has a very powerful effect on the net interest margin. As so as some of our security portfolio is maturing, that is going mature in the investment securities portfolio and go into a higher yielding asset on the loan side. So right now, you could conceivably see us start to continue to improve the net interest, all things being equal and as long as we're continuing to be successful in growing our investment portfolio and that investment securities rates don't deteriorate further.

Okay. So barring any pressure on securities yields, the loan growth alone should give the margin an upward bias?

That's right. Again, you still have to consider the deposit things. Because, again, if you have a continue to have an inflow of deposits, that's obviously -- most of it is going go into lower yielding instruments, just given the nature of the rate environment. But yes, again, with the process for our growth for next year, our good and all things being equal, that is certainly going to help the upward bias, as you described into improving on net interest margin.

Okay. And then you had mentioned the -- that deposits were somewhat just weaker this quarter. So does that imply that you expect to see some growth in coming quarters; and another way of asking it, I know the other questions got to this; but was there any intentional deflection of deposits this quarter?

I'll let Greg take that in a second, but I just want to try to clarify because I think what you have going on here was that Q2 was just extraordinary strong deposit growth and even Q3 was strong. Because, again, you go back and look at the averages. So that's how I would characterize it. It was just Q2 was exceedingly strong; and so as Greg decides a little bit more tempering out, if you will. But maybe Greg can kind of clarify that for you as well.

Yes. Just to follow-up on Mike's point. You have a high balance -- huge balance growth in the second quarter; and again, those deposits can come in from capital call funding that are sitting in their account and this could be huge balances. And so again, you do see some of those quarter-to-quarter fluctuations that I wouldn't read too much in it. We still expect over the long run to see total client funds growing. Now, it will not be at the pace we have seen over the last 18 months just because of how significant it was, but there is no question we expect it to continue to grow.

Okay. And then one last question, if I can ask, the investment gains in general, how do you view them -- how sustainable do you think they are in this market -- in this environment right now given the challenges we're seeing in the capital markets?

That is a good question; but clearly, a tough one. As you kind of have guessed here or eluded to, it really just depends on how the markets are performing in general. Again, if we have up markets in the equity markets, you're going continue to see some of the gains as well too.

But even if you don't, you have to still step back and understand what is going in the innovation and what's going on in the tech sectors because you can still have a tale of two economies where the broader economy is not doing very well but the tech economy is do well. But what really -- as we got back to an earlier question, what really the key driver is keeping an eye on the M&A activity in that tech and innovation space. So again, how goes the market is in a sense going to be how goes those investment gains.

John, the only thing I would add on to it, this is Greg again, is that when you think about our strategy in the venture capital, the fund-to-funds investing, I think we demonstrated a history of investing in the top venture funds. And our belief, certainly, is that the top venture firms are going to return higher returns and kind of the average. So, if you play that out, hopefully we're going to be delivering results that will even be higher than what you would see just a general economic either upside or moderation.

Okay. Thank you.

Yes.

Our next question comes from Steven Alexopoulos with JMP Securities.

JPMorgan. Hi.

Hi, Steve.

Maybe I'll start -- looking at the cash and the available for sale securities, I think it's around two-thirds of the earning assets are earning less than 1.5%. Just curious, given the comments out of the Fed, is there any appetite to get more yield on these assets?

There is always a desire, certainly, to get more yields. The question is what is the trade off and how are you going to get more yield? So we always default back to our investment portfolio strategy, which is continuing to make sure we have a very flexible, very solid, very liquid portfolio. So that is how we're going continue to look at it. Is there a little bit of room for increasing the duration given the fact that the Fed now has said rates are going to stay, what we've described as low through the middle of 2013? Yes, maybe a little bit; but again, what we always want to make sure we continue to have is that predictable cash flow and have that flexibility.

Maybe a follow-up. By providing relatively detailed 2012 guidance at this stage, is this a way of communicating this maybe you think consensus estimates are too high for 2012?

No, I wouldn't read anything into that. Again, we're just trying to give you a little bit of a look into 2012. We all know 2011 is pretty much behind us and so what is really of importance is looking forward in the longer-term vision. So that's why we try to help you guys out by giving you 2012, some insight.

Okay. Thanks.

Yes.

Our next question comes from Christopher Nolan with CRT Capital.

Hi. Quick question for Greg on the China venture. Is this going to require any sort of capital investment by the holding company that could impact capital ratios?

Yes, Chris, so eventually we will, obviously, be putting capital into the joint venture. So the important point on the approval on the 8K announcement today is that we have the approval from the CBRC, which is a really big deal, on one hand On the other hand, we have a long way to go both in building out the joint venture and contributing the capital. And if you go back to what we had talked about at the end of 2010; when we originally announced the joint venture, we said that this was a joint venture with Shanghai Pudong Development Bank, this was a 50-50 joint venture.

And at the time, we looked to capitalize the entire thing with, I believe, Mike, $1 billion of R&D, which was roughly $150 million of total capital, of which we would be contributing $75 million. That is still the plan. But again, as far as the buildout and expectations, the contributions will be longer-term and we'll be communicating a lot more detail in coming -- in coming calls. And, Mike, I guess on the capital question, I don't know if you want to add anything or not?

Yes. Right now, the idea or thoughts is that, Chris, it would be more or less being driven out of the bank level entity. So again, as Greg described, we'll continue to give you updates as they progress in the coming quarters.

Great. And, Mike, just a quick follow-up. The comments you just made earlier in terms of the deposit growth, it seems to be -- deposit growth can ramp up again pretty quickly. Do you anticipate to be at a level which could pressure the Tier 1 leverage ratio at the bank?

Chris, certainly it can. What a great problem to have. But as we described here, we have had three quarters consecutive increases in our bank level Tier 1. So we're feeling pretty good about what we're doing and then order to manage that and continue the upward trend.

Okay, thanks for taking my questions.

Yes.

Our next question comes from Julianna Balicka with KBW.

Good afternoon.

Hello.

Hi. How are you?

Very good, thank you.

I have a couple of follow-up questions on some of the topics that have already been brought up by some of the other participants. On the deposit costs, which were down to a very low 13 basis points, do you think about how much further you can go with those? Do you see those continuing to decrease through 2012?

This is Greg. So much of it right now is a question just of mix of deposits. So when you think about it, more of our deposits went into non-interest bearing accounts at this point. And obviously that's 0, and so the higher the mix goes towards that, the lower that number is going to go. But as far as room to lower interest-bearing deposit rates, I would say that we don't have expectations to lower them from where they are right now. So if it does change, it will be a question of mix and predicting the mix of interest bearing versus non-interest bearing is very difficult. So I wouldn't expect to see a dramatic change.

Yes, right now, the cost is around 13 basis points for the interest bearing ones. It's pretty hard to stop dropping it much, much further. There is just not a whole lot of room to drop, as you can imagine.

No, it doesn't seem like there is much more room to go there. So my follow-up is a two way hypothetical. On one hand, if your loan growth is fairly flattish, then we would anticipate margins to kind of start getting pressured versus being stable like they were this quarter, right? On the other hand, if loan growth is strong; and as you're guiding to good loan growth, then that is what would drive better margin, right?

Correct.

So my question is kind of based on the portfolios to which you lend with your growth being in buyout corporate clients today, is there a pattern by which you say next stage loan growth is going to come from clients based on the life cycle of the Company that we can look to in past history, past cycles?

So this is Dave. Was the question, will we start calling it out by live stage?

Well, like right now, your loan growth is coming from the people who are funding these early stage companies. The next stage of loan growth is going to come from the early stages and then later stage companies, is there like a pattern to the loan growth that is separate and away from the general economic environment?

So, I think that our aspiration is to attract client at the early stage and keep them over the long-term. I think that what you can expect of our loan portfolio is that we will be comfortable given the risk profile making larger commitments to later-stage companies; therefore, more of our growth will come from the later stage companies.

And if loan growth doesn't materialize then we should be expecting flattish to down margins?

Yes, certainly it would definitely put pressure if you don't have that loan growth on there. Similar to a lot of the other banks.

Yes, okay. Thank you very much.

All right. Thank you.

Our next question comes from Gary Tenner with D.A. Davidson.

Hi, everybody, good afternoon.

Okay.

My questions have marginally been answered. Just as it relates to the UK branch or bank approval that's kind of in process, do you have a sense of a timeline for when you could open doors on a full branch there? And how would you look at any assumptions in terms of deposits coming in pretty rapidly as a multiple of the lending you have over there?

Gary, this is Greg and it's a little bit different than what we see in other markets. So with China as an example, you work hard to get the license and then you build out your capabilities or capacity or the infrastructure and the UK is just the opposite; which is you have to literally build the infrastructure, build all the processes, hire the people so when the license is finally granted, you're literally very close to being ready to open up your doors for business.

So, now, is there a lag? There will be a little bit of a lag because of testing and everything else. But literally, once the license is approved, I would say it's safe to say that you would be ready to open up your doors for business probably about 120 days after you get the license in kind of a rough estimate. So, that is the first part of your question. The second part of your question relates to deposits and that is an interesting question. There is two places that we would expect to drive deposits in the UK branch.

One would be from the clients that we're currently lending money to in the market already where today, the only thing we can do is lend them money; number one. Number two, the bigger growth of deposits at least in the short-term would be from the clients that are US-based clients that have subsidiaries in the UK where we have referred those clients to correspondent banks in the market. And what the feedback we have from them is once you're ready to open up your doors for the branch, they're looking to move their deposits over us to. And those balances, I'll call ballpark are in the $200 million to $300 million range. Now, we can't force those clients to move over their deposits, but my comfort is that a fair amount of that will move over to our branch.

Great, thanks for the color.

Yes.

Our next question comes from Jennifer Demba with SunTrust Robinson.

Thank you, good afternoon. I'm just wondering what you're seeing in terms of price competition these days with the banks desperate for loan growth right now.

So Jennifer, this is Greg and I will add a couple of comments; and I am sure Dave will want to add a few as well. It's a competitive landscape, and as we said this on the last several calls, has been at a heightened level. And our forecast and my forecast right now is it's going to continue to be at a heightened level for all of the obvious reasons, right.

One is all the banks out there have very few opportunities for growth, number one. And if you looking at another market to go after, clearly, this high growth innovation market would be one to go after. So the first part is that that market is getting bigger and bigger and bigger because it's an increasing part of the economy. So quite honestly, it can support more competitors in one way. And so we do see competition but a lot of our decline in margin that we had this quarter and the last quarter has been more of a mixed question than it has been from a competitive nature.

Now, we do see some competitive pricing without a doubt, but it's been more of a question of mix. And if you go back to my comments in my opening notes -- my comments, our focus is very much on figuring out how we can add more value to our client such that we don't end up in it always being about price or always being about structure. We have to be competitive, we will be competitive, but our mission is really to go out and figure out how to add more value to our clients.

And Dave is nodding his head that he would agree with that. So I guess no other comments.

Okay, thanks a lot.

(Operator Instructions)

All right. Well, if those are all the questions, I am going to turn it back over to Greg Becker for a few closing remarks.

Great. Thanks, Meghan. In closing, I just want to thank everyone for joining us today. I also want to thank all our employees for their efforts in, one, taking care of our clients and also helping us continue to build out our long-term franchise. And finally, I want to thank the shareholders for having the confidence in us in what many would consider very uncertain times and I think banks are getting a lot of pressure. So we appreciate your confidence in us. Thank you all for joining us. Take care.

Ladies and gentlemen, this does conclude today's SVB Financial Group third quarter 2011 earnings conference call. You may now disconnect.