SVB Financial Group (SIVB) 2012 Q2 法說會逐字稿

Good evening, ladies and gentlemen. My name is Sheila and I will be your conference Operator today. At this time I would like to welcome everyone to the SVB Financial Group Q2 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)

Thank you. The Director of Investor Relations, Ms. Meghan O'Leary, you may begin your conference.

Thank you, Operator. And thank you, all, for joining us today. We welcome you to our second quarter 2012 earnings call. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux, are here today to talk about our second quarter results. 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'd also like to caution you that we will be making forward-looking statements during this 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 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'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.

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

Thank you, Meghan. And thank you, all, for joining us today. I'm happy to report that SVB delivered another excellent quarter with net income of $47.6 million and earnings of $1.06 per share. Excluding the securities sales from our invested portfolio and a net gain from the sale of certain assets of SVB Analytics, our core net income was $42.1 million with earnings per share of $0.94. The quarter was marked by outstanding average loan growth of 6.4%, strong credit quality, and substantial increases in client deposits and off balance sheet investments.

Our performance demonstrates that we're executing on our plan and our client base is performing well despite the appearance of growing challenges for business and the global economy. We continue to win new clients at all stages of development during the second quarter and in our entrepreneur services group, we added more than 200 early stage clients on par with the same quarter last year and slightly ahead year to date of the first half of 2011. The ability to cement these relationships early on is a key component of our strategy to grow with our clients.

We also added larger clients at a steady pace which contributed to substantial growth in loans to our corporate finance clients. Much of our loan growth during the quarter came from sponsor-led private equity buyouts as well as smaller acquisitions by existing hardware and software clients. The other major contributor to loan growth was venture capital and private equity capital call lines which grew by 25%, a sign of improved venture and private equity investment activity.

We continued to see strength in our client funding franchise. Average total client fund balance which includes both on balance sheet deposits and off balance sheet investment funds grew by 4% to $37.3 billion and period end total client funds grew 6.7% to $38.2 billion, the highest period end level in our history. On balance sheet deposit growth remains solid but higher off balance sheet client investment balances constituted the majority of the growth which as we've said in the past is good for our clients and for us. On the heels of an active quarter, our pipeline at the end of June remains strong, thanks largely to continued corporate finance activity.

While the news is filled with reports of a growing uncertainty in the broader business environment, our clients are doing well and in general they have outperformed the rest of the economy. Venture capital, private equity activity remained relatively healthy in the second quarter as firms with strong track records demonstrated their ability to raise funds. US venture capital firms raised more than $6 billion in the second quarter and fundraising is on pace to surpass 2011. Globally, US and European private equity had their best fundraising half since 2008.

Investment continued at a relatively robust pace as well. VCs invested more than $7 billion in 898 deals during the second quarter, a dollar increase of 17% and a deal increase of 11% over the first quarter. While Facebook's IPO in the second quarter dampened the appetite for IPOs, venture backed mergers and acquisitions remained stable, the same number of deals as in the first quarter and a 50% increase in average deal size. There are signs of recovery in the IPO market so far in the third quarter. Last week, two technology companies went public and did well which is a sign the IPO market is opening.

The business environment for our later stage clients remained relatively healthy as well. As in past quarters, stronger companies are looking for opportunities to use their cash in order to grow. For a large group of our clients, that translated into a healthy pace of M&A during the quarter. We are pleased our clients' markets remain bright spots in an uncertain economic environment. We are focused on executing on our strategy so that we remain the bank of choice for the innovation sector.

One important milestone towards this goal during the quarter was the opening of our UK branch in June. We had an amazing week of events in London during which I got to talk to lots of clients, potential clients, and key influencers in the market. The positive reaction to this event dramatically underscored both the immediate and long-term opportunities for us there. Immediately after we launched, more than 70 companies reached out to us to open up bank accounts, which exceeded our expectations.

To remind everyone, our strategy for opening the UK branch was really threefold. First, we want to support our clients' banking needs as they expand into the UK and Europe. Second, we want to bank local innovation companies and their investors. And third, we want to support UK and European companies as they come to the US.

In China, we continue to move forward with our joint venture bank. We're on track with that effort and still expect to reach our milestone of opening in the second half of this year. As we've said before, that step will be one of many milestones necessarily to accomplish our long-term goals.

In every geography in which we operate we remain committed to bringing value to our clients through unique networking and educational events that address the challenges specific to them. I want to briefly describe two of these events that took place in the second quarter. The first was our CEO accelerator summit in June. This was our third and largest summit ever and the fact that it has grown every year shows the appetite among our clients for the kind of support we provide.

400 client entrepreneurs and partners came to hear successful startups, startup founders, and top VCs share their real-life experiences of overcoming barriers to success. This event was scheduled to end at 6 PM and at 6.15 the room was still completely packed with people leaning forward in their chairs, listening intently to the last speaker. Now, if you've ever been to the last speaker before a cocktail party, you know how unlikely this scene was, no matter how good the event. But it shows how hungry our clients are for this sort of unique networking and educational opportunities that we deliver on.

The second event had a very different profile. In this event we brought together clients in the big data space with 60 VCs and CIOs. Our clients got a chance to present their companies' end products to potential investors for their direct, candid feedback and to network with prospective customers. Our VC clients got a chance to meet with promising companies in this space where they're looking for new investments and the CIOs, many from household name companies, got a crash course in cutting edge approaches to leveraging their vast amounts of client and transactional data. Again, two very different events that added significant value to our clients. And these were just two of dozens of similar events we hosted during the quarter.

Our clients gave us a lot of great feedback and I just have a few quotes I want to share with you. The first quote -- Fantastic insights. It's rare to see that level of honesty in an open forum. Second quote -- I feel privileged to attend such a valuable event. And my favorite, which calls SVB, quote -- The best tech bank in the world and the standard for any bank in how to support their clients. And no, our marketing team did not write that.

Before Mike talks about numbers in more detail and updates our 2012 outlook, I want to share my perspective on the areas we're watching closely and why we remain optimistic. There are two main areas that we're watching closely in light of growing negativity about the economy. They are interest rates and credit quality. Like everyone else, we're feeling the pressure of historic low rates and the pricing power of credit worthy clients. An even deeper economic downturn would undoubtedly extend the outlook for low interest rates and put more pressure on margins. We're doing what we can to lower the impact of declining rates by setting floors, growing loans and in turn net interest income and we're focused on growing fee income. What we won't do is increase risk by chasing yield in our investment securities portfolio.

Regarding credit quality, our clients have demonstrated an ability to out perform the broader economy and we have demonstrated an ability to manage credit risk. This has resulted in strong loan growth and high credit quality. If the economy deteriorated significantly, that picture could change. We need to keep our credit standards high and ensure that our larger corporate finance loans continue to improve the quality of our overall portfolio. It's something we're watching out for.

So, that's what I worry about. But there are plenty of reasons that I feel confident as well. First and foremost we have a differentiated business model and a resilient client base. Those are two of the best assets any Company could have in this environment. Plus, we have a portfolio of diverse growth initiatives including corporate finance, global, our private bank, non-venture backed innovation companies, and underpenetrated products and services. The point is we're not banking on one thing. Finally, I'm optimistic because we have a great group of employees who provide an amazing level of value and support to our clients and are constantly thinking of new ways for us to improve and delivery sustainable growth over the long-term. All good reasons to be optimistic.

Thank you and now I'm going to turn it over to Mike to share other financial details of the second quarter.

Thank you, Greg. And thank you, all, for joining us today. As Greg noted, it was an excellent quarter, one that demonstrated the continued strength of our business and the unique advantage we have as a result of our focus on the innovation sector.

There are five areas I want to highlight today that really drove our results during the quarter. First is outstanding loan growth. Second is strong client liquidity. Third is modestly higher net interest income despite lower yields on loans and investment securities. Fourth is continued solid credit quality. And fifth is higher non-interest income which also included two notable items. I'll also touch on capital ratios which remain strong and expenses which were in line with our expectations.

Before I get started I would like to note that we have improved our outlook on two business drivers for the year -- loan growth and net charge offs, details of which I will provide shortly. The rest of our outlook remains unchanged.

Let's start with loan growth. Quite simply, it was an outstanding quarter. Average loans grew 6.4% to $7.2 billion. Growth stemmed from continued client wins as well as strong acquisition activity by our clients, particularly our software portfolio. Furthermore, sponsor led buy out loans grew by 22% during the quarter and now represent approximately 9% of our total loan portfolio.

VC and private equity capital call lines of credit also contributed significantly to loan growth increasing by $283 million or 25% to $1.4 billion during the quarter. This increase stemmed from strong investment activity. As a result of our performance year to date and our loan pipeline we have improved our outlook for average loan growth for the full year 2012, firm percentage growth in the mid-20s to growth in the high 20s.

Period end loan balance grew by 9.4% to $7.8 billion. As we know from history the timing of loans throughout the quarter can cause fluctuations in period end amounts which is why we consider average balances to be a more accurate reflection of loan growth. As an example, during the second quarter we saw an increase in loan pay downs earlier in the quarter, primarily venture capital call lines of credit and then the standard pace of loan growth for the last two months of the quarter. Nevertheless, we are off to a great start for the third quarter.

Our clients' strong business and financing activity drove increases in total client funds which is composed of on balance sheet deposits and off balance sheet client investment funds. Average deposit balance grew by 2.6% to $17.4 billion and period end deposits grew by 8.1% to $18.1 billion. These increases were driven by strong new client acquisitions and a positive funding environment. Average off balance sheet client investment funds grew by $1 billion to $19.9 billion due to continued client acquisition and asset growth from our existing corporate finance and growth clients.

Moving on to net interest income and our net interest margin. Net interest income increased modestly during the quarter by $1 million to $151.9 million. The increase was driven primarily by exceptional loan growth and an increase in average investment securities balances. The increase in net interest income from volume was largely offset by lower yields on our investment securities portfolio. To clarify, when I mention our investment securities portfolio, I'm referring to our available for sale investment securities portfolio unless otherwise noted. Interest income from loans increased by $4.5 million, primarily from growth in average loans of $433 million and an increase in loan prepayment fees. Interest income from investment securities during the quarter was $3.3 million lower compared to the first quarter, despite an increase in average balances of $434 million. The decrease in interest income from investment securities was due primarily to an increase in premium amortization expense on our fixed rate mortgage securities.

Lower yields on loans and investment securities combined to lower our net interest margin by 8 basis points to 3.22%. However, we remain within our target range for 2012. The yields on loans for the second quarter was 6.33% compared to 6.47% in the first quarter. This difference is partly a reflection of the changing composition of our loan portfolio, specifically the impact of lending to later stage clients. Against the backdrop of the overall low rate environment, spreads have also been tightening somewhat and are contributing to the trend.

The yield on our investment securities portfolio was 1.67% compared to 1.87% in the first quarter. The decline in yield on investment securities was largely due to declining interest rates which impacted prepayments on our fixed rate mortgage securities and resulted in additional premium amortization expense. During the quarter, cash flows and sales from our investment securities portfolio in aggregate total $919 million and were used to fund loan growth, reduce overnight borrowings, and repay $141 million of our bank level senior debt which matured on June 1.

Now I'd like to move on to credit quality. Credit quality remained strong overall and our loan portfolio continued to perform well. We had a provision for loan losses of $8 million in the second quarter compared to $14.5 million in the first quarter. The provision was primarily driven by our strong period end loan growth.

Net charge offs for the quarter were $10.8 million, reflecting gross charge offs of $14.1 million and recoveries of $3.4 million. Gross charge offs reflect $7.1 million from an impaired credit identified in the first quarter that was restructured in the second quarter. Absent the impact of the restructured credit, gross charge offs would've been $7 million, a level consistent with gross charge offs for the prior two quarters. Recoveries are also consistent with the prior two quarters.

We also saw a decrease in classified balances which dropped by 21% due to many of our early stage clients closing on additional rounds of financing. The balance of performing loans was 1.18% compared to 1.16% in the first quarter. Given our solid credit performance we have improved our 2012 for net charge offs as a percentage of average total gross loans. We now expect net charge offs to be between 30 basis points and 50 basis points, versus our prior expectation of 40 to 70 basis points. The rest of our credit outlook remains unchanged.

Turning to non-interest income, non-interest income net of non-controlling interest was $67 million in the second quarter versus $51.4 million in the first quarter. Income from our core fee services was modestly higher than in Q1. We defined core fees as fees from foreign exchange, deposit service charges, credit cards, letters of credit, and client investment funds. However, we had gains on investment securities, equity warrants, and the sale of certain assets related to our SVB analytics business.

Gains on investment securities net of non-controlling interest totaled $11.3 million. Approximately half of these gains were from the sales of $316 million in agency notes in our investment securities portfolio which were used to reduce overnight borrowings. That sale resulted in a pretax gain of $5 million. The remaining gains were from valuation gains in our net funds and certain fund investments. We had gains of $4.9 million from equity warrant exercises and increases in value driven primarily by M&A activity. As a reminder, net gains from equity warrants is a component of total gains on derivative instruments. Another item reflected in other non-interest income was the sale of certain assets from our cap table management Company which was a part of SVB Analytics. This sale resulted in a pretax gain of $4.2 million.

Moving on to capital, we continue to generate capital through earnings in the quarter. Our overall capital outlook remains strong. Of note during the quarter was that our tier one leverage ratio improved at both the holding Company and bank level due to our solid earnings growth although our strong deposit growth continued to be a challenging headwind to growing our tier one leverage ratio. Tier one leverage at the holding Company increased by 3 basis points to 8.07% and by 7 basis points at the bank level to 7.01%. We are pleased with the fact that this quarter marks the first time that our tier one leverage ratio has exceed 7% since the third quarter of 2010.

Now let's turn to expenses which were in line with our expectations for the quarter. Non-interest expense increased by $3.9 million or 2.9% to $135.8 million in the second quarter versus $132 million in the first quarter. This increase was primarily the result of three things that equally impacted expenses. First, a larger provision for our unfunded credit commitments related to an increase in unfunded credit commitment balances. Second, increases in professional services expense related to infrastructure initiatives and to lower than expected professional services expense in the first quarter. And third, premises and equipment expense tied to continued investment in our IT infrastructure. The total impact of these items was an increase of $5.9 million during the quarter. This increase was offset somewhat by a decrease of $3.4 million in the second quarter compensation expense relative to seasonally higher expense in the second quarter.

In closing, it was an excellent quarter overall and we are very pleased with our performance. We continue to generate strong organic earnings growth while maintaining high credit quality and solid capital and liquidity despite a challenging economic and interest rate environment. While serious economic downturns here or in our global markets would likely cause us to reevaluate our prospects, for now we remain focused on the strategy of expanding our platform, products, and services to meet the growing needs of our clients. We believe the strength of our clients relative to our economy will translate into continued growth and opportunities for us.

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

(Operator Instructions) Your first question comes from the line of Brett Rabatin from Sterne, Agee. Your line is open.

Hi. Good afternoon.

Hello, Brett.

I wanted to ask a question around the securities portfolio. Just how much premium amortization did you have this quarter? Because it looks like your margin would've actually been flat if the securities portfolio yield had actually not moved.

Yes. The premium amortization runs roughly between $3 million to $5 million per month. So, you're looking at anywhere from $9 million to $15 million per quarter. So, that's roughly where it's at. It came in on the upper end this particular quarter than it has in the previous quarter.

Okay. So, more like $15 million as opposed to $9 million?

You know, I think when you deal with a normalized first quarter -- because every quarter there's ups and downs but if you went on a normal run rate I would probably estimate somewhere around the neighborhood around $3 million, a bit higher this quarter or so on average.

Okay. And then my follow-up question was just around again the margin and just thinking about where you're originating loans today versus maybe a quarter ago. Is it more competitive than it has been? And then just thinking about the impact of looking at larger loans as you go forward in the next few quarters. Does it have a more meaningful impact on the yield on the loan portfolio?

Brett, this is Greg. I'll provide some commentary and Dave Jones may want to join in as well. As far as the loans go, there's really three aspects of where the direction of where that loan margin is coming from. So, one is as I said, from our corporate finance clients, we clearly believe those have higher quality credits and they tend to command lower margins if you will. So, the more we head in that direction of driving towards corporate finance, we'll have two aspects, right? One is it's going to decline your overall margins. On flipside we hope and believe it will improve credit quality over time. So, that's one aspect.

Other aspects just in the market, we're migrating more of our loans over to Wall Street prime from the SVB prime. If you remember, that was -- we had held that SVB prime fixed at 4% versus the Wall Street Journal prime at 3.25%. Now, it doesn't mean that when we reprice at the Wall Street prime we just take a good decline of 75 basis points. It may be 25 basis points less. So, that's a little bit of an impact. But the main reason is the credit quality moving towards higher corporate finance type clients.

And this is Dave saying the same thing. It really is a function of mix. So, a lot of our incremental growth is stemming from these larger later stage companies and the venture capital lending which has a lower yield associated with it for the reasons that Greg indicated. We do have intense competition at this end of our business particularly with larger later stage technology life sciences companies but it's not because we're having to take a lower rate on existing clients as much as it is we're adding more clients at this level.

Okay. Great. That's good color. Impressive growth in the quarter.

Thank you.

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

Good afternoon, everyone.

Hi, Aaron.

If I could follow-up on Brett's question, maybe more specifically to the sponsor led buyout financing that you're doing, could you give us a sense of the size of these credits and what kind of terms and rates are on these deals?

This is Dave. So, the size of the credits for our book would typically be in the $25 million, maybe a $30 million range for our hold. Now, sometimes the total senior debt on the deal could be twice that and we would partner with somebody to support the client. The note would be a five year debt, amortizing, and the rate would tend to be a LIBOR plus a 475 or so -- some of them a little bit better than that. And we tend to be able to hold a floor on the LIBOR of 125 or 150. And we would have fees on top of that.

Okay. That's helpful. And then, Greg, a question on the liquidity you're holding on the balance sheet. Maybe it's not terribly relevant given the growth pace that you guys are putting on. But you had I think almost $1.5 billion in cash and equivalents at the end of the quarter, average balance sheet showed something like $900 million and kind of short-term stuff. I'm guessing most of that is Fed funds. If the Fed were to lower rates from 25 bps down to zero, how would that effect your thinking in terms of managing your liquidity?

You know, whether you're getting 25 basis points or 12 basis points on that, it's not a whole lot of difference. The primary focus for us is keeping liquidity range. And so we're basically targeting roughly between $500 million to $1 billion in liquid assets like that on that cash with the Fed again. A lot of it is a function as a percentage of your total balance sheet and as you noticed over the last couple quarters, we've gone over that $20 billion mark. So, it's a reasonable percentage of our balance sheet. So, that's how we would think about it.

Okay. Great. Thanks for taking my questions.

Sure.

Your next question comes from the line of Joe Morford from RBC Capital Markets. Your line is now open.

Great. Thanks. Hi there, everyone.

Hello, Joe.

I guess first question, just still trying to understand this drop in the margin a little better. I recognize loan yields were down and higher premium amortization but at the same time the earnings, half the mix improved is you funded loan growth with cash and securities and also paid off the borrowings and debt. Just also how do you see the pace of notes versus income growth in the second half given the strong growth in the loans this quarter?

I'll take a stab at this first. Joe, as you see we're still keeping with our full year guidance. I think that first and foremost at least as a guidance for you to try to understand where we're going. We don't really get in too much in the quarter but certainly if we had the continued loan growth that we expect going into next quarter and there's not a radical drop in interest rates again like we saw in this past quarter, we would certainly continue to see the net interest income go up. But again, I would just direct you to the full year guidance rather than getting into a quarter by quarter outlook.

Okay. it seems like the growth in off balance sheet funds finally started to take hold this quarter. Any in particular change with that or causing that to happen?

Yes, Joe, it's Greg. I wouldn't say it's anything in particular that changed. We have had an off balance sheet suite product we reduced, we released about a year and reintroduced and we've had extremely nice growth in that, especially in this quarter. So, I wouldn't say anything has really changed. It's more just getting the word out to our teams, getting the word out to our clients. It was nice obviously to see from our perspective during the quarter.

Okay. Thanks so much.

Thanks, Joe.

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

Hi, everyone.

Hi, Steve.

I wanted to start -- I hear what you're saying on better quality and lower risk loans putting pressure on loan yields. If you look at the average loan growth in the quarter, can you give us the approximately blended yield that new loans are coming into the portfolio?

I'm trying to think about that. This is Dave. So, I think that for the venture capital in thinking about who funded, we're talking about interest rates nd the accounting on fees complicates things on yield. Let me talk about interest rates. So, interest rates, we're probably seeing them in a Wall Street plus 25, maybe a little bit better than that. We're talking about 350. We had, what? 20%, 25% growth in the end of the quarter outstanding? And then we had good growth in the buyout portfolio and as I mentioned a little while ago, a floor of say LIBOR 125 with a spread of 475, then we're talking about interest rates of 6%. Obviously when we start getting into yield it's all about when that buyout loan booked. So, did it book the fifth day of the quarter or the 85th day of the quarter? So, those would be a couple of the buckets, maybe the third most important bucket would be the non-buyout corporate finance. And there again we're talking about something that is a Wall Street prime of 325 and a little bit. So, pretty comparable to the VC business I would say.

Okay. I guess what I'm trying to arrive at is how much downside is there in loan yields? We're at 6.3% , you were at 6.8% or so a year ago. I guess I'm just trying to get a sense for what the downside is?

Again, this will be Dave for this. My sense of it is if we have about $1.4 billion of venture capital business and if we have about $2 billion of corporate finances, we're getting close to talking about 50% of our portfolio in those two categories and if on average between those two portfolios we are going to grow it in the third and fourth quarter and I think we will, then the incremental business is going to average lower than the 6% number that you just mentioned. So, it's just the shift in the mix to the slightly lower rate that is going to bring down that gross yield on loans a little bit but I look at it and say we're still better off overall for it.

I appreciate that color. I just wanted to follow-up on Greg's comments that fundraising trends have been very good. When we look more broadly at tech companies the results have been disappointing recently. A lot of these stocks are down pretty big in response to earnings. When you talk to your customers, are they expecting any type of slowdown to hit, particularly given the capital call, or in the capital call business?

Yes, Dave. It's Greg. The difficult part to predict is the capital call facilities because first of all when you look at them, there's an average question and a period end question. I would focus more on the average than the period end. It was a nice quarter from that standpoint. You're going to see some volatility quarter to quarter but I would tell you that the venture capitalists we talk to, the companies we talk to now although there is a flight to quality, the best venture capital firms, the best companies are tending to both fund at higher amounts and receive funding in higher amounts. We're seeing positive feedback from our clients. Again, as we interact with our CEOs and CFOs, they're feeling pretty optimistic about where things are despite what you hear in the market.

Now, as I said in my comments, if the market heads down in a more significant way -- and I do mean a significant way -- that obviously could impact that, but right now it feels like we're in a pretty good place.

Okay. Thanks for all the color.

This is Dave. Let me add to that. One, as indicated, the funding activity in the second quarter was robust relative to recent numbers. But I caution the use of gross dollars. I don't think that the dollar amount indicated by NVCA or others is necessarily the better way to approach it. I think it's looking at the number of rounds that are funded. So if the dollars are down second quarter to third quarter but you still see what is then a relatively consistent ten year trend of about 800 to 900 rounds a quarter, then I feel better about that in terms of our client health than just focusing on the dollars.

Great. Thanks, Dave.

Your next question comes from the line of Julianna Balicka from KBW. Your line is now open.

Good afternoon.

Hello there.

Hi. How are you?

Very good.

Excellent. I have a couple questions. I was wondering if you could make a comment about the NPR that came out about the new risk weightings around some of the different loan categories and how it relates to your C&I kind of commitment, kind of lending.

We're still looking at those NPRs obviously but one thing, if you think about it, a lot of that is really more focused on mortgages and since mortgages is not a significant component of our overall loan portfolio it's not going to have as significant an effect as other banks that maybe focus on them. But again, long story short, we're still evaluating that and perhaps in the next quarter or so we'll come out and comment on that.

Then of course, finally any thoughts on the impact from the default insurance running out or anything on that on the North of $250,000 deposits?

At this point we don't really anything really happening with that for our clients. Time will certainly tell but again when you look at the strength our of balance sheet, be it in the form of capital and liquidity, I think people are quite confident in our bank.

That makes sense. And then, if I may, a couple quick housekeeping questions. One, you mentioned the prepayment loan fees in your remarks and in the press release. Can you reiterate the dollar amount of those in the quarter? And two, the sale of the assets for the $5 million? Is that something we should be thinking about more frequently as you balance your balance sheet size? Or is that truly a one-off?

Again that was more in response -- I'll start with your last question first. That was more in response to the overnight borrowings. You may recall at the end of the first quarter we had some overnight borrowings which was directly a result of just such a stronger increase in our loan growth and particularly that carried through this quarter as well to such a really strong growth. So, that was what was done. If you think about it, Julianna, it's only about 3% of our total portfolio. It's not really a significant one. But as far as in our heads and thinking, that's not something we really look to do quarter to quarter. We just do it as a response to do we need to balance or reposition our investment securities portfolio. So, that would be the first point.

The second one, just to clarify again on the prepayments, again, I'm trying to normalize a little bit because with prepayments, as you can imagine, they're up and down quite often and a lot of it is just on actual prepayments as well as the expectations for the future. And so what I just said a moment ago, in general on a monthly basis, we have amortization premiums somewhere around the neighborhood of $3 million to $5 million per month. So, if you multiply it out for a full quarter, that's somewhere around $9 million to $15 million of amortization. And again, coming back to this particular quarter, what was kind of the net delta, it was somewhere in the neighborhood of around $3 million or so if you were to go and normalize in the first quarter and this quarter. So, that's ballpark numbers for you.

Great. Thank you very much.

Sure.

Your next question comes from the line of Josh Levin from Citigroup. Your line is now open.

Thanks. Good afternoon. I just wanted to get some clarification on something you had talked about once or twice. Some of the larger, more diversified regional banks have been saying that over the last four to six weeks their clients are showing some reticence or hesitation about investing in their businesses given all the macro uncertainty. But in your unique corner of the world, you have not detected any reticence or hesitation from your clients in the past month or so given the macro uncertainty.

This is Dave. And the answer is no, not really. Understanding that our clients are delivering on innovation products and the efficiencies and the benefit of the new products tends to separate them. I believe that's why our clients have done much better than most companies over the last four years. I think an indication of the confidence our clients have is indicated in the merger and acquisition activity. So, clearly with the buyout portfolio and the private equity firms behind those transactions there is indicated confidence. We saw a number of existing corporate on corporate acquisitions and again that was good in the second quarter. Transactions that we would've seen late second quarter that are part of our pipeline now would indicate that there is nothing significant in a change of sentiment at our corporate level.

Okay. Greg, you said in your prepared remarks that keeping watch or being vigilant and you're thinking about credit, are there any hints of stress out there at all? What would tell you that problems might pop up if the problems do pop up?

I'll start and then Dave I'm sure will have some commentary on that as well. My comment is just really about that as good as things are and things are really good based on the numbers we described and kind of the outlook we described. The uncertainty that we all read about is real and the question is if it continues to bump along at the level that we're at, I'm not losing a lot of sleep over it but clearly if the contagion in Europe hits the US and the US is one of the only bright spots right now, that dramatic decline in the economy could have -- would have an impact on our business and we just need to be mindful of that. And we need to make sure that our credit standards aren't changing and the growth that we expect to see all fits that credit criteria, that kind of credit bar that we monitor. So, the point was that there's nothing in our crystal ball that that's driving towards. It truly is just something we watch out for and I would expect that you would want us to watch out for them.

And this is Dave. Clearly endorse all of that and add to it the level of activity in the second quarter as established by the national venture capital association numbers, 898 companies rounds funded I think was the number and also I point to the reduction in our classified loans in the second quarter was significant. And a lot of it was prompted by a number of companies closing on new rounds of equity versus the number of other companies approaching their next rounds. So, I do watch and I am extremely sensitive to investor sentiment and to shock that would immediately change that investor sentiment and clearly we have not had that shock yet and I'm thankful for that.

Thank you very much.

Your next question comes from the line of John Pancari from Evercore Partners. Your line is now open.

Good afternoon.

Hi, John. This is Mike. Can I just ask for a quick pause real quick. I just want to make a clarification from the question from Julianna from KBW. Dave just pointed out to me that I think Julianna was asking about prepayments from loan fees and what I was describing in responding to her question I was referring to the premium amortizations related to mortgage securities. So, Julianna if you're hearing this, I just wanted to clarify I was referring to related to the investment securities as opposed to loans. Anyways, sorry, John. Go ahead, John, and proceed. Thanks.

No problem. Actually on that point, Mike, do you have the prepayment fee amount that impacted of the loan interest income?

Sure. In general we get prepayments every single quarter and for the loans, just to clarify, for the loans, that's probably somewhere in the neighborhood usually around $3 million to $5 million per quarter. Somewhere in that neighborhood, around that. This particular quarter versus last quarter, it was probably up software on average between $2.5 million and $3 million, maybe a little bit more. Somewhere around that neighborhood this quarter that we benefited from the prepayments. But again, it does move around quite frequently quarter to quarter.

Alright. And secondly on the drivers of loan growth in terms of your outlook, I may mention that this quarter and recent quarters you've seen a lot of growth coming from the M&A financing and capital call lines. In terms of the outlook, are you seeing anything in terms of any shifting in demand that would point to different drivers of that growth in coming quarters?

This is Dave. The short answer is no.

Okay. Alright. And on that one then, if I can ask one last question on yields, can you just gives us a little bit of color on the difference in the average loan yields on current yields on later stage credits versus the earlier and mez-stage credits?

So, yes. And again, let me try to deal with interest rate because I get all confused with the yield stuff on these. So, on the later stage, non-buyback portfolio we are talking about a number that is probably in the mid-3%. Buyout portfolio is closer to 6%. The middle stage has a pretty broad variety because there are a lot of companies in there with a lot of different circumstances and I would say that there all in we're probably talking about something that is in a 4.5% to 5% average. The better loans would weight down some of the other asset based structures with higher yields but I would say interest rates in a 4.5% to 5% range.

And then on the early stage, we'll see interest rates that on average are going to be above 5% and when conditions are right for it, we could be getting the high single digits on some of that, occasionally even higher than that. It's a hard question to answer given that there are so many credits and so many factors that fit into appropriate compensation for the risk taken.

Okay. But again you expect the growth in coming quarters, if you're still concentrated though in that buyout and capital call line of credit buckets?

I'm sorry. Yes. We're going to see good lending from all parts of our portfolio but frankly what we're going to find is the one that moved the dial are going to tend to be the larger loans which in turn will tend to be the latter stage companies.

Got it. That's it for me. Thank you.

Your next question comes from the line of Herman Chan from Fargo Securities. Your line is now open.

Thank you. I want to get some color on the average loan guidance which you characterized as the high 20s. The outlook seems to imply at least a slowdown in the period of loan growth in the back half of the year if you start from the Q2 period end balance. So, it seems like the outlook for loan growth is conservative. I just wanted to get your thoughts on that. Thanks.

This is Dave. It is the typical experience of our loan portfolio that we will find that loans will decrease in the early part of the quarter and then gain momentum in the later part of the quarter. Mike was describing that as what happened in the second quarter. So, that $7.8 billion for end of period isn't going to be exactly the base upon which we build going into the later parts of the third quarter. So, very hard to anticipate exactly what the loan growth is going to be and frankly I'm expecting good quality growth and we'll certainly be back in 90 days and if warranted to do so we'll be updating our forecast for that last quarter of the year.

Herman, this is Greg. I guess the only think I would add on to it is we clearly feel good about hitting that guidance for the balance of the year. It does become more difficult to give a range when you're dealing with the last two quarters. It will be even more difficult when we get to the fourth quarter for obvious reasons. The other part that makes it hard is while we have term loans that we can expect to predict in that they're stickier, we also have the volatility of working capital loans, capital call loans that jump, kind of bounce around from quarter to quarter. If you factor all those things in, that's what goes into our guidance. But the bottom line is we feel good about being able to hit that for the balance of the year.

Great. And can you also give some updated thoughts on comp and non-comp expense going forward as you transition some personnel to the new Tempe location? Thanks.

You know, our expense outlook, it's all built into our guidance and outlook for the full year so we're not necessarily going to comment in general on that. I think clearly as part of our move to Tempe in the longer-term vision and strategy, certainly over time, that will be a lower base compensation down there. It's just cheaper to do business down there as well too. So, perhaps over time you'll begin to see some of the benefits of that.

Thanks for taking my questions.

Sure. Thank you.

Your next question comes from the line of Ken Zerbe from Morgan Stanley. Your line is now open.

Good. Thanks. Just a we on the $4.2 million gain -- are you guys changing your commitment to SVB Analytics versus other parts of the business?

Yes, Ken. This is Greg. Let me start by saying that our commitment to SVB Analytics hasn't changed. If you recall historically there's really two parts to the analytics business. One was a valuation business. So, business valuations mainly centered around doing 409A valuations and we are the market leader in that space. We clearly believe we have the best team in that, best quality, and are continuing reform on that and are committed to that space.

We had a secondary part of the business which is what we called our cap table management business which was effectively a software Company. And we ended up at a point where we had to make a decision about how much money we wanted to invest in that business and really make a judgment call. And there were really a couple things. When we did the analysis it said we were managing that business to work with private companies and there's a limited amount of private companies that would need that service and so we sat back and said -- For us to make this big investment you really have to think about it going into later stage public companies which would require an even bigger investment on our part. What we said was that was too big of an investment. It's a little bit outside of the core of what we were really doing well with SVB Analytics. So, we said -- How do we find a partner that we can work with that would take over those relationships and that responsibility that we felt comfortable with and that was solely owned? So, I would say it's a strategic modification but we're very committed to SVB Analytics, specifically the evaluation side of the business. So, hopefully that helps.

Yes. It does. Absolutely. And I guess just my last question, I suppose if you guys had warrants in Facebook it probably would've been mentioned at this point? Or would you like to comment on that now?

(laughter)

This is Greg. I'll answer. We didn't. And so the obvious answer -- the question is what was the impact? And I guess it's a couple things. I'll give a very macro answer to it. The first part is there was a lot of negativity around the Facebook IPO and I've been quoted a couple times and actually at the end of the day I think it was healthy for the environment because if you looked at where the market was heading, especially with these social networking companies and other internet companies, if the Facebook IPO was an absolute homerun you could've ended up having a very, very frothy market which I think at the end of the day would've come back and impacted us in a negative way over time. So, the fact that it actually was not as successful I think tempered the market more and I actually think for the long-term that is a healthy outcome.

Now, clearly it had some benefit because some of the funds we bank were investors in Facebook and so we had a few days of some substantial growth in deposits as the IPO proceeds flowed through our balance sheet. But it was temporary as it distributed back to their limited partners. So, yes, there was some positive impact, but no, there were no warrant benefits.

Thank you very much.

Your next question comes from the line of Casey Haire from Jefferies. Your line is now open.

Hey, guys. Good afternoon. Just a couple quick questions on the guidance. First one on margin. Can you give us a sense of what some of the underlying assumptions are for the rate environment in terms of what are you baking in for ten year yields as well as prepaid speeds for the balance of the year?

Yes, Casey. This is Mike. As far as interest rates, unfortunately we're not forecasting any increases in interest rates. To your point it really needs to try to keep an eye on the marketing rates, interest rates. We certainly watched the ten year -- it's not necessarily the most ideal one but certainly it does have an impact on prepayment speeds. So, in our outlook, we basically had just re-baselined our outlook for the net interest margin based on the currently available prepayment speeds going forward. So, in other words what we know as of June 30 for those particular securities. We obviously baked that in there and obviously it's reflected in our guidance as well. So, again, we don't have anything that really deviates from the broader market expectations.

Okay. So more or less the current rate environment is kind of baked into the guidance more or less?

That's right. Unfortunately it's not a high rate environment.

Okay. And then switching over to the loan rates guidance, the high 20s, I know you guys have talked about growing responsibly but what is the max level? If the loan pipeline picks up pretty meaningfully here in the next couple of quarters beyond what you guys had expected, what would be sort of the max that you would feel comfortable growing the loans? How high would that high 20s number, how high can it go?

This is Dave and I haven't even bothered to try to calculate what that number would be. My sense of it is the rate of growth that we had in the second quarter is as high as we should expect. I expect it would be. And I'm still looking for the good loan growth we've been talking about all afternoon but the combination of having another $300 million growth in venture capital just I would say isn't at all very likely and there's no reason to think that we could or should have a faster rate of growth on the buyout lending than we had in the same quarter. We had a great quarter in the second quarter in that context.

Okay. Thank you.

Your last question in queue comes from the line of Gary Tenner from D.A. Davidson. Your line is now open.

Thanks. And good afternoon. Just one quick question in terms of the balance sheet, in terms of the funding side. Are there any additional opportunities to repay or prepay any debts used from that excess liquidity?

As far as I see it, there's debt at two levels, the holding Company and the bank level debt and you just saw here recently that the senior debt matured, we paid the remaining amounts. What we have left at the bank level would be the subordinated debt which is due at 2017 and you may recall we did a tender not too long ago to try to repay and do that as well but there's not a whole of amount left but certainly if we could buy back at a reasonable price, we would, but we certainly have not put out anything to repurchase that because again it was relatively quite small.

Okay. Thank you.

There are no more questions in queue. I turn the call back over to Greg Becker, our CEO.

Great. Thanks. Let me just wrap up quickly. In summary, obviously we feel it was a really good quarter and we are pleased with the direction of the business. I think it's important to note this quarter we had just a lot of really great milestones, whether it's the UK branch opening, the things we're accomplishing in corporate finance, just a lot of big accomplishments here in the quarter. So, really feel good about how we ended up. And I think it's especially true when you factor in the overall environment that a lot of the questions on the phone call were getting into. We still are very optimistic and I think we're optimistic for the reasons I outlined earlier which are, one is we have this unique business model that targets innovation companies which are really bucking the trend of the overall macro environment. Number one. Number two, the fact we're not banking on just one growth opportunity but multiple areas for growth and the last part and probably maybe the most important part is the group of people we have at SVB. So, we're optimistic. It's a challenging environment but we feel good about where we're going. So, thanks, everyone, for joining us today.

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