SVB Financial Group (SIVB) 2012 Q1 法說會逐字稿

Good afternoon. My name is Tamaria, and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group first-quarter 2012 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)

I would now like to turn the conference over to Ms. Meghan O'Leary, Director of Investor Relations. Please go ahead with your conference.

Thank you, Operator. Thank you all for joining us. We welcome you to our first-quarter 2012 earnings call. Our President and CEO Greg Becker and our CFO Mike Descheneaux are here today to talk about our first-quarter results, and they will be joined by other members of Management for the Q&A.

I would like to remind everyone that our first-quarter earnings release is available on the Investors Relations section of our website, at svb.com. I would also like to caution you that we will 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 statements. This disclaimer applies equally to all statements made in this call.

In addition, some of the discussion today may 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 will limit the length of the call, including Q&A, to one hour. During the Q&A session, we ask that you limit yourself to one primary and one follow-up question before getting back in the queue, to enable all participants to ask their questions.

And with that, I will turn the call over to Greg Becker.

Thank you, Meghan, and thank you all for joining us today.

I'm proud to report that SVB had another good quarter. Our earnings per share was $0.78, versus a consensus of $0.75, and net income was $34.8 million. We achieved many positive milestones during the quarter -- average loans reached an all-time high of $6.8 billion; we recorded our highest-ever net interest income of $151 million; and average total client funds grew by $878 million to another all-time high of $35.8 billion. Credit quality across the portfolio remained very good overall, although we did record a specific provision against one larger nonperforming loan, which impacted EPS and net income.

As we help our clients grow, we expect to have the occasional issue with larger credits, even in a thriving economy, and our reserve reflects this expectation. The fact that we were able to deliver such strong results in spite of this shows the strength of our earnings power. The milestones we achieved during the quarter were driven by continued healthy activity among our clients, as well as our own strong execution. We see our performance as evidence that we are delivering on our strategy in doing what we said we would do -- specifically, continuing to build our client base, both at the startup and later stages; enhancing our products and services to support our clients and their growth; and expanding our business globally.

Let's start with clients. Throughout the first quarter, we maintained a solid pace of client acquisition, with higher growth in the number of early-stage clients in the same period last year, and increases in larger clients consistent with last year. In our early-stage portfolio, new client activity was fueled not only by a rising of brand-new company formations as a result of increasingly capital-efficient business models, but by our own increasing success at capturing the best of these early-stage clients. Among our later-stage growth in corporate finance clients, we continued to see solid loan growth, in particular for loans to finance M&A activity.

It was one of the busiest quarters for new loan activity in our history; and going into Q2, our pipeline for new clients remained healthy. To support all of these activities, we continued to enhance our products and services during the quarter. A few highlights -- we launched a pilot of a new online and mobile banking platform, expressly for our accelerator or early-stage clients, which will improve their online experience with SVB. We also completed a new online banking system that will be used by all new [kay] clients as our branch is launched. And we introduced a number of unique financial management tools for our business credit card clients that actually help to save them money, which is a meaningful differentiator in that business.

These enhancements and our continued investment in our platform have driven client activity and revenues, resulting in a 27% increase in online banking users and a 44% increase in credit card volumes during the quarter. We believe our focus on the innovation sector is a key contributor to the milestones we achieved during the quarter. While the broader economy moves slowly towards a recovery, our clients and markets are performing well. This positive perspective is based on numerous client touch points from our relationship teams and the first-person information I get directly from our clients about their performance and outlook.

At the four CEO dinners I hosted over the last few weeks around the US, most clients said their businesses are strong and getting stronger, and their biggest challenge is hiring. We may be the bank -- the only bank in the country -- where their industry segments has hiring as their biggest issue. These themes of strong performance also emerged in our annual Startup Outlook survey, the results of which will be released in a few weeks. Of 270 startup executives surveyed, two-thirds said their 2011 revenue performance was at or above target. In addition, 61% said their business conditions have improved since last year, and 75% expected continued improvement in 2012.

As in prior years, we will use this detailed information in the survey to support our efforts to help legislators understand the unique challenges faced by entrepreneurial companies that are driving much of the innovation and growth in the US, and we hope that will help shape their economic policies. The recently passed bipartisan JOBS Act is another great example of the kind of work we are doing to support our clients. The JOBS Act eases the regulatory burden on startup companies looking to raise capital. One of our board members, Kate Mitchell, led the task force that drafted the bill. SVB supported that process directly, and with the help of many of our clients. The task force succeeded in getting the bill passed in less than six months -- which, by the way, is considered lightning speed on Capitol Hill.

We are seeing similar strength among our later-stage clients. The business environment for these clients is healthy, while not being overheated. Stronger companies are looking for opportunistic ways to use the cash they have accumulated over the last couple of years, or using their improved stock prices to make acquisitions. They see meaningful opportunities to grow, either organically or by acquisition.

It's no secret that the strength of the innovation sector has attracted the attention of competitors. We have in the past, and will continue in the future, to leverage our significant competitive advantages, which include our 30 years of experience in understanding and solving the problems unique to innovation companies; establishing deep relationships, trust and credibility across all facets of the innovation economy; and building an infrastructure expressly to support those activities. Just as important, we spent those 30 years tailoring our offerings and approach to the unique needs and realities of innovation companies. That is what is behind the unique networking and education events we are known for, and it has allowed us to distill our mission into a single idea -- helping our clients succeed. Our clients have told us that this approach truly sets us apart from other banks. And we see our financial performance as proof of the value of this approach, and of our ongoing commitment to the innovation sector.

That commitment is also behind our initiatives to expand globally, to regions where our clients are doing business and where innovation is driving growth. We continued to build momentum in these initiatives in Q1. In the UK, I'm pleased to tell you that just this morning, we received approval for our branch application from the Financial Services Authority. This is a significant milestone for SVB and our clients. We are planning a soft launch of our UK branch in the coming months, and a full market launch in Q3.

And in China, we continued working with our partner to build out our joint venture bank platform there. We are pleased with our progress, and as we stated before, are hopeful for a launch later this year. Our efforts in the global front have resulted in increased client activity over the last few quarters, driving loan balances for our SVB Global clients to approximately $300 million and the deposit balances to $1.3 billion. I am more confident than ever that our global segment offers great long-term upside for our business.

At our Investor Day in February, we laid out expectations for 2012. Going into the second quarter, we remain on track with those expectations. We also talked about our high-level financial goals for the next three years. We believe we are on track with those goals as well. Moreover, we believe we have the right strategy to generate sustainable growth over the long term. We will continue to execute on our plans and make the right decisions to support our clients and deliver long-term value to our shareholders.

In closing, I just want to offer some words of thanks, as I recently finished my first year as CEO. First of all, I want to thank our clients who partner with us for their success and are truly the most interesting companies in the world. I want to thank our employees, who do an incredible job of supporting our clients, and work together to build a great and unique Company and culture. And also, I want to thank our investors for their belief in us and our business model.

Now, I will turn the call over to Mike Descheneaux, who will give you some more detail on the first quarter.

Thank you, Greg. And thank you all for joining us today.

Overall, we had a strong quarter that demonstrated the health of our clients and our core business. The highlights included outstanding loan growth, record-high net interest income and a higher net interest margin, solid core fee income, improvements in our already strong capital ratios, and a decline in expenses, even with significant seasonal expenses. As Greg mentioned, we also had a higher provision owing to one nonperforming loan, which I will talk about in a minute. Nevertheless, the quarterly results were strong.

I will start with loan growth, which was outstanding. Average loans grew by $410 million, or 6.4%, to a new record high of $6.8 billion. We saw the majority of growth in our hardware and software portfolios, particularly from semiconductor companies and companies providing software tools and applications. Continued buyout and acquisition activity among our clients was a significant driver, although we experienced growth across a broad base of clients, which resulted in a slightly lower concentration of loans greater than $20 million.

Period-end loan balances grew by $151 million, or 2.2%, to $7.1 billion; and this is on the heels of our Q4 period-end balances, which were significantly elevated due to a late-quarter spike in loans. Going into Q2, our pipeline remained healthy, and we believe we are on track to meet our loan growth outlook for the full year 2012.

Moving to deposits -- deposit growth was strong during the quarter, with average balances increasing by $454 million, or 2.7%, to $17 billion. Period-end deposits remained steady in the first quarter, at $16.7 billion. Overall, our clients' liquidity remained strong and contributed to healthy growth in total client fund balances, which includes both deposits and off-balance sheet funds.

Total client funds, on both an average and a period-end basis, grew to an all-time high of $35.8 billion. This growth was partly a result of our success in placing clients in an appropriate mix of both on- and off-balance sheet products. As a result of our efforts, average balances for our clients in off-balance sheet investment funds increased by $425 million, or 2.3%, to $18.9 billion; and period-end client investment funds increased $368 million, or 2%, to $19.1 billion. These numbers reflect particularly strong growth in average balances of our off-balance sheet sweep product, which increased by $738 million during the quarter -- an increase of 123% over the fourth quarter of 2011.

Now, turning to net interest income and our net interest margin. Net interest income grew by $11 million, or 7.8%, in the first quarter, to a new high of $151 million. Year over year, net interest income has grown by $31 million, or 25%. There were two drivers of net interest income growth in the first quarter -- the first was an increase in our available for sale securities portfolio, as a result of our continued deployment of excess cash into investments. This contributed $6.9 million to net interest income. Average available for sale securities increased $967 million to $10.5 billion during the quarter, and period-end balances increased $992 million to $11.5 billion.

The second factor was an increase in interest income from loans, which contributed an additional $4.6 million to net interest income. Our net interest margin increased by 20 basis points during the first quarter, to 3.3%. This increase was equally driven by growth in higher yields in our available for sale securities portfolio and growth in our average loan balances. The increase in net interest margin was in line with our full-year 2012 outlook for net interest margin. Yields on our available for sale securities portfolio increased by 13 basis points, to 1.83%. This improvement stemmed from new investments made during the quarter, as well as reinvestment of paydowns from lower-yielding, variable-rate securities into higher-yielding, fixed-rate securities.

We remain focused on investment strategy of limiting duration extension through the purchase of securities with stable cash flow characteristics. Portfolio duration in the first quarter was 2.1 years, compared to 1.8 in the fourth quarter. The impact from growth in average loan balances was partially offset by a nominal decrease in overall loan yields resulting from our changing loan mix, as we grew our portfolio of larger, later-stage loans that typically have lower credit risk.

Now, turning to our credit quality -- overall, credit quality remains strong, and our portfolio performed as we expected, with one exception. We had a higher provision for loan losses of $14.5 million, compared to $8.2 million in the fourth quarter. The provision was due primarily to an increase in reserve of $9.8 million for one nonperforming loan, net charge-offs of $3.6 million, and the increase in period-end loans, which accounted for $1.7 million of the provision. The nonperforming loan is a $22 million hardware credit loan that we downgraded in the fourth quarter of 2011. In the first quarter of 2012, we increased the reserve for this loan to $14.3 million, based on the information available.

As we have discussed previously, we have experienced strong growth in our loan portfolio over the past three years, including growth in loans greater than $20 million. At the same time, our allowance for loan losses has also grown, and incorporates the risk inherent in the overall loan portfolio, including our larger loans. Given this growth, it is not unexpected that we would experience an occasional credit event with a large loan. The issues with this credit are unique to this client, and are not indicative of any negative trend in our overall loan portfolio. The overall loan portfolio performed more or less as we expected; and if the economy continues at its current levels, we would expect to maintain our overall credit outlook.

Based on this continued strong credit performance, our allowance for loan losses for performing loans declined to 1.16%, compared to 1.23% at the end of the fourth quarter. The overall allowance for loan losses increased to 1.41% from 1.28%, due to the increased reserve for the nonperforming loan. As a result of the impaired hardware credit, nonperforming loan balances increased to $41.7 million, or 58 basis points of total gross loans, compared to $36.6 million, or 52 basis points, in the fourth quarter. The impact of this increase was offset somewhat by one loan paydown. If the economy continues to perform as it has, we would expect to meet our nonperforming loan guidance for the full year.

Classified loan balances increased by 28% in the first quarter, primarily as a result of the timing of funding rounds for venture-backed clients. You may recall that this dynamic resulted in a similar increase in classified balances of 20% in Q2 of 2011. We view this movement as a normal part of the venture-backed loan cycle. Based on our historical experience, we would expect a significant number of these clients to receive funding in the next two quarters, which would result in their loans moving out of classified, as they did in the second half of 2011.

Moving on to non-interest income -- I apologize, let me go back to net charge-offs. Net charge-offs were low, at $3.6 million, compared to $3.5 million in the fourth quarter. This reflected gross charge-offs of $7 million and recoveries of $3.4 million, both effectively flat compared to the fourth quarter of 2011.

Now, we are ready to move on to non-interest income. Non-interest income was $59.3 million in the first quarter, compared to $73.1 million in the fourth quarter of 2011. Net of noncontrolling interests, non-interest income was $51.4 million, compared to $62.1 million in the fourth quarter. As a reminder, these are both non-GAAP numbers. The decrease was a result of lower gains on investment securities and on equity warrants, which we expected after such strong fourth-quarter results.

Gains on investment securities were $500,000 net of noncontrolling interest in the first quarter, compared to $7.5 million in the fourth quarter of 2011. Despite the decrease quarter over quarter, the first quarter of 2012 was a record quarter for distributions received by our managed fund of funds, due to the healthier overall IPO market and a few high-profile companies coming out of a trading lockup period. Equity warrant gains were healthy at $6.9 million, compared to $14.1 million in the fourth quarter of 2011. Approximately one-third of the first-quarter gains were realized, primarily as a result of warrant exercises. The remaining unrealized gains were due to valuation increases from IPOs, acquisitions, and round updates at a handful of companies.

The strongest IPO quarter in five years drove first-quarter gains; although M&A activity, which drove high fourth-quarter gains, was at its lowest quarterly level industry-wide since 2009. It's important to note that warrant gains during the first quarter exceeded our expectations, and as you know, gains are dependent on robust M&A, IPO, and public markets. Core fee income -- that is, fee income excluding gains on investment securities, excluding gains on derivatives, and excluding gains on other -- remained healthy at $32.4 million and was essentially level with the fourth quarter of 2011, although still at all-time highs.

There were a few notable items -- one is that we had a record quarter for foreign exchange income, which grew by 5.3% to $12.1 million. Credit card fee income was also strong at $5.7 million, and volumes reached all-time highs. Our outlook for non-interest income for the full year 2012 remains unchanged, and we expect to see growth through the rest of the year, particularly in foreign exchange and credit card fees.

Now, let us turn to expenses. Non-interest expense decreased by $2.7 million, or 2%, to $132 million in the first quarter. This number had three primary components -- seasonally high compensation and benefits, partially offset by lower incentive compensation; lower professional services fees; and a lower provision for unfunded commitments. Compensation and benefits expense increased to $83.7 million. This was primarily the result of three things -- significant seasonal expenses related to our Employee Stock Ownership Plan and 401(k) contributions; seasonal time off benefits expense; and an increase the number of employees related to hiring for our operations and US banking teams.

These increases were partially offset by lower incentive compensation costs compared to the fourth quarter, during which incentive compensation was elevated owing to our outperformance. Overall, it was a good quarter, considering we had $8.3 million in seasonal compensation and benefits expense. Professional services fees decreased during the first quarter, as a result of changes in the timing of certain projects that we expect to undertake later in the year, coupled with the fact that professional services fees were higher than usual in the fourth quarter. Despite a decrease in expenses in the first quarter, our expense guidance for 2012 has not changed, in part because of projects we expect to initiate later in 2012.

Moving on to capital -- we continue to generate capital through earnings, and our overall capital levels remain strong. All of our regulatory capital ratios at both the bank and the holding company increased as a result of strong earnings. Our ratios were also helped by an increase in equity from stock option exercises and a portion of our Employee Stock Ownership Plan contribution that we made in stock rather than in cash. The Tier 1 leverage ratio at the holding company increased two basis points, to 8.04%, and increased seven basis points at the bank level, to 6.94%.

I would like to note that the remaining portion of our outstanding bank-level senior debt, totaling $141 million, matures in June; and we have no plans or need to issue additional debt to repay it, given our strong liquidity. The repayment of the debt will have a positive, albeit modest, impact on our net interest income and net interest margin. We have already factored this impact into our forecast.

Now, to wrap up -- our outlook for the full year 2012 versus the full year 2011 is unchanged, and I will refer you to the press release for the specifics on that. Aside from the single loan we talked about, we are very pleased with the quarter and the strong start to 2012. Although it is still early in the year, we believe we are performing in line with our outlook. Our clients continue to perform well overall, and their success is translating into growth for us.

We continue to expand our platform and our array of products and services to meet the growing needs of our clients. We are managing our capital and liquidity effectively, with the help of our strong, organic earnings growth. In short, we are executing on our strategy. As long as the economy continues on its current trajectory, we believe we will continue to perform well.

Thank you. And now, we would like to ask the Operator to open the call for Q&A.

(Operator Instructions) Stephen Alexopoulos, JPMorgan.

Looking at the period-end loan growth of $150 million, I know 2011 your first quarter was the lowest quarter for the year. Is 1Q seasonally slower for you guys? Or was the pipeline just a bit slower here?

Hi Steve, this is Dave, and I will at least start that. Yes, it is typical that the first quarter is slower. Sometimes, about three years in five, the first quarter actually will be down from the December quarter. So, our clients are all preparing their budgets and getting ready for the next year. As they do, then they are back into the market looking for the debt, which will reflect mostly in second, third, and fourth quarter.

Steve, the only thing I would add on to -- this is Greg -- is that when you look at Q4, we had a significant run-up at the end of the quarter. So, to some extent, when you compare the growth that you are describing, you asked Dave --. We feel very good about where we finished, period -- at the end of the Q1, given the large growth we had at the end of Q4.

Got you. That is helpful. Just for my follow-up, I know you kept the 3.20%, 3.30% NIM guidance unchanged. But if you are able to keep upward pressure on the loan-to-deposit ratio, isn't it reasonable you would see further margin expansion from here?

You know, if we outperform our guidance on the different drivers and the interest rates hold up -- and as you know, we have seen quite a lot of volatility in the interest rates here. That would be a true statement. So, again, we feel very good how we finished Q1, and particularly given our full-year guidance.

Okay, thanks.

John Pancari, Evercore Partners.

Your period-end deposit growth looks like it did slow a little bit. I know you mentioned that your off-balance sheet sweep product saw some inflows. Can you give us a little bit more color about what you are seeing there on the deposit side? Do you think this could mark the inflection there, what you are seeing in terms of your deposit flows coming on balance sheet?

John, I think the way to look at it is look at overall client funds, which were up quite significantly. I think right now, it's too early to understand if there is a trend or anything. But again, you look at Q1, it was still overall very strong average growth in deposits, as well. You may recall that we did reintroduce an off-balance sheet sweep product, which has been very successful.

Over the last -- within less than a year, we have had deposits go in that particular product, around $1.8 billion, $1.9 billion or so. So, we see a very good traction on that, ensuring that we are putting our clients in the right deposit product. Again, just to summon up -- again, it's a bit too early to understand. But again, the products we introduced are doing exactly what we anticipated they would.

John, this is Greg. Just adding onto it. When you look at the -- again, period-end balances for the off-balance sheet, those were up $350 million -- well, almost $400 million. So, again, as Mike said, it's really important to look at the whole picture. But probably more importantly, because the period-end balances, any given day you can have a lot of volatility. It's really important to look at the averages. That is why we stressed in prior quarters that, that average outlook or the average historical comparison -- and then looking at the outlook and how we described that, are really the two important things.

Just one final thing -- and that is a good point, Greg -- is just, when you look even in as recently as March, our deposit balances were well into the $17 billion number that just gave back in the -- towards the latter part of March. So, again, we will see how that plays out, going forward.

Okay. Then, in terms of the rate on the off-balance -- on that sweep account product -- has that changed materially, given any move in LIBOR or anything? Or what helped with the growth with that sweep product?

Right now, the rates are just so low. It's a matter about talking with the client and making sure they are getting into the right product. But again, these low rates, it's so hard to have such a large differential or large change right now.

Okay. Then, lastly, in terms of the -- just want to get a little bit more color, in terms of the outlook for loan growth. You seem to imply that you expect some pretty good growth, but it sounds like the M&A financing is pulling back a bit. So, where are you seeing the growth come from now, in terms of your outlook?

This is Dave. Actually, we did have a typical first quarter, in terms of loan growth and M&A activity. But we are still seeing quite a few opportunities there; so I wouldn't read into anything said that the M&A activity is trailing off.

Just adding on to that is that I think you are referencing some comments that Mike had made on the M&A activity, more related to liquidity or exit events for securities gains and losses, warrant gains, et cetera. If you think about our clients, these are companies that are doing acquisitions of $50 million, $100 million, $200 million maybe in that category. So, I would argue that those are very different markets. So, as Dave said, we didn't see a slowdown in that activity, as far as loan demand for our -- what our clients are doing from an acquisition perspective. It's more of the macro environment.

Okay great. Thank you.

Aaron Deer, Sandler O'Neill & Partners.

Greg, you touched a little bit on the competitive environment and what is going on there. Can you talk about where you are seeing the strongest competition, in terms of the stage of clients or the subsector?

Sure. Aaron, we have obviously talked about competition in prior calls. Really, if you go back over the last three years, the time when there was the least amount of competitors in the market, from our standpoint and how aggressive they were -- we are really back in '08 and '09 time period, for obvious reasons. Ever since then, you had a steady increase in competition, and it's partially from banks. You also see some venture debt players.

So, from the standpoint of where we see competition, really, it hasn't changed from the standpoint of those two categories. From a bank perspective, we all know that the overall economy, there is a few prospects for growth opportunities from a lending perspective. So, as we have said in the past, we are in one of the most attractive markets in the market. So, clearly, we are going to attract more competitors. So, we see it at the early stage, we see it at the mid-stage, and we see it, clearly, at the later stage.

As I have described in the past, for us, the most important thing that we have worked on for the last several years is differentiating ourselves from our competitors. It's both the products and it's the services that we offer, and it's the events, the value-added. It's all those things. So, it's something we have talked about internally here for literally the last several years, and saying that, given the markets we are going after, competition will increase. So, has anything dramatically changed? I would say no. It's just that we are fortunate to have a market that is doing well, and other competitors are seeing the same thing.

Okay, thanks. Then, as my follow-up -- Mike, you gave a little bit of color behind the improved yields on the -- on both the cash equivalents and the AFS securities. Was there anything new or different, in terms of the type of product that you were adding? Or was it just the extension, the duration, that you went out -- or how did you pick? Because it seems like there is --

No, Aaron, it's more or less -- it's the same policy. We have been very, very consistent in our investment policies. We just had a -- we did have some variable-rate loans that did mature, where -- sorry, variable-rate securities, that is, where we reinvested in some fixed-rates, which are actually higher, as well. Of course, up and down a little bit in the quarter, where there was some opportunities on higher interest rates. But it's more on the variable move to fixed rates.

Great. Thanks for taking my questions.

Joe Morford, RBC Capital Markets.

Congratulations on the solid quarter and getting the UK license approved.

Thanks, Joe.

Thanks, Joe.

Any -- I guess, just following up on Aaron's. I was a little curious was there any further repositioning in the securities portfolio? I'm just trying to get better sense of how much of the margin increase came from actions taken last quarter versus this quarter. Is there much more dry powder still to redeploy?

Really, the uplift for yields going forward would be if you go longer on duration. And if -- I think that is really the big, big driver. It's hard to really see a whole lot of upside; again, it's just all market-rate dependent, really. Again, we are going to continue with our investment policy. Maybe go a little bit longer, but not too, too much.

Okay. Then, the expense control was encouraging. But how should we think about the run rates in the next couple of quarters, given that upwards of $8 million of seasonal [loss] should come out, and further infrastructure spending you want to do. Since it sounds like the timing of some of these projects may have gotten pushed back a bit.

No, we were quite encouraged with a results of that. As you mentioned, there was about $8.3 million of seasonal expenses. So, when you back out that, and you actually had quite a significant increase. So, as far as the remaining traction of run rate for the rest of the year, again, when you look at our overall guidance for the year. Again, we are still -- believe that is going to fall through. So, you can work it out on a quarterly basis, what that run rate would be.

And Joe, this is Greg. On the expenses -- from the standpoint of our investments, we -- given the opportunity that we see, we are going to continue to invest in the people, products, and services. So, this is not a paring back. I would say it's just more of a -- creating a little more balance there. So, we are going to continue to invest in the right things. And to Mike's point, the guidance is unchanged. So, you can look at that on a quarterly basis, on a go-forward basis.

Okay. Thanks so much.

Herman Chan, Wells Fargo Securities.

Dave, a question on our performance in loan recoveries -- you have mentioned in the past that you expect the recoveries to taper off in 2012. Can you tell us more about what happened in the first quarter? I think the release noted that there were some software-related loans. Also, can you compare historical recovery performance on your hardware versus software portfolios? Thanks.

Yes, okay. So, yes, I continue to be pleased and surprised at the same time that the recoveries have remained as high as they have been. The first quarter, we had one transaction of about $1.2 million. That was a very high percentage recovery on one fourth quarter loan. Very surprising, based on what we knew in the fourth quarter, that there would be a recovery -- certainly, that there would be a recovery at that high level. I think that it is appropriate to continue to offer guidance that recoveries will be modest. As gross charge-offs pick up, then the net charge-offs will increase accordingly.

In terms of recovery rates between hardware and software. Off the top of my head, I describe it as not altogether that different. Most of the loan losses will come from early-stage credits. Over the last operating cycle, our early-stage clients would tend to have 25%, 26%, 27% recovery in a four- to six-quarter period following the recognition of a charge-off. I don't think that there is much difference between hardware and software in that regard.

Great, thanks. Also, you guys touched on the JOBS Act earlier. Can you give us some more color on the implications of the JOBS Act for the bank, whether it be on the lending or deposit growth side, via perhaps improved startup formation? Also, could the legislation also have a positive effect on warrant gains, by pulling forward activity? Just like to get your thoughts there. Thanks.

Yes, this is Greg. It's early in the process, and so, clearly, we don't have a deep perspective on what the implications are. I think probably the most important part about the JOBS Act is that doing the right thing to support our clients from a capital formation. Limiting the regulatory burden that we think, in some cases, is more applicable to the larger companies, makes sense.

Obviously, our hope is that -- and our clients hope is that, that is going to benefit them in both the short run and the long run. So, I think it's good for the industry, I think it's good for the venture capital industry, I think it's good for the technology innovation industry. But as far as reading anything into that about the implications for us, I think it's just too early to tell right now.

Thanks for taking my questions.

(Operator Instructions) Julianna Balicka, KBW.

I wanted to follow up a little bit more on one question on the security side, in terms of looking at your average balance sheet. Is there a baseline level of cash and equivalents that you would like to be keeping and the rest moving into securities, in terms of their redeployment from excess liquidity? Or how should we think about that?

We are pretty much been averaging around where we are going to be. You notice we were talking a little bit lower cash balances, I think it was somewhere in the neighborhood of around $1 billion this quarter or so. So, somewhere around that neighborhood, Julianna, would be a fair way to look at it. But again, it's also a function of the size of the balance sheet.

Right. Okay, that helps. And then, switching back over to the -- switching over to the deposit side, with the growth that you have had in deposits versus the total client funds. At what point, or how are you thinking about putting more pressure on keeping more deposits in the off-balance sheet products, versus letting them grow on to the balance sheet? How are you thinking about balancing that?

So, Julianna -- this is Greg. What our goal is, at the end of the day, is to find the right mix for our clients. That is most important. So, you can look at that on how you put the products together, to make sure that you are -- again, you are directing them to what we think is the best thing for them, and they would obviously agree with. So, right now, if we were to, over the coming quarters, have deposits that were -- again, stayed at this level. Maybe grew a little bit and more of it went off-balance sheet, that actually would be ideal, I think, from our perspective. I think it works for our clients, as well. So, again, we tend to look at more of the total client funds growth overall, and the mix you are going to see is still a little more of that moving to the off-balance sheet.

Okay. Thank you very much.

Gary Tenner, D.A. Davidson.

Just had a quick question regarding the UK branch. If you could talk about what immediate or initial overhead expense is associated with that undertaking?

Sure. This is Greg, Gary. The one important thing about the branch is that -- we have been working on this for a while. So, from an expense change, you are not going to see a lot of expense change. Because the way it works in the UK, unlike other markets, it's basically -- you build it first and then you get the approval. So, we have been spending money for the last 18 to 24 months getting this ready. We filed our final paperwork with all the IT systems and everything else about a month back, and then just got the final approval this morning.

So, the next steps really are to go through this pilot program, or a soft launch that we would call it, and then in the third quarter do a full market launch. So, you won't see a change -- a growth in expenses related to that. In fact, in some cases, you could see a little bit of a tail off. But I think a good way to think about it is really that we don't expect to see growth from where we are right now.

Okay. And the period-end increase in the short-term borrowings that you highlight in the press release, should those stick around? Or are those a plug for liquidity needs on the balance sheet?

Yes, it's just a matter of process of the daily cash management. In fact, when we are looking around today, the numbers have been coming down. So, we don't -- obviously don't expect to continue to borrow at those levels. Particularly given the size of our investment securities portfolio and our liquidity.

All right. Great. Thanks for taking my question.

At this time, there are no further questions. I would now like to turn the call over to the CEO for closing remarks.

Great, thank you. Just to wrap up -- obviously, it was a great quarter for us overall, and extremely pleased with the direction. As we described, the outlook remains positive. Again, from our standpoint, we achieved some really nice milestones. I think one that we have been talking about for a while is the UK branch, which was nice to happen today. So, just want to thank everyone for joining us today, and we will talk again next quarter. Thanks a lot.

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect.