SVB Financial Group (SIVB) 2012 Q3 法說會逐字稿

Good evening. My name is Chanelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group Third Quarter 2012 Earnings Conference Call. (Operator Instructions)

I will now turn the Conference over to Meghan O'Leary, Director of Investor Relations.

Thank you, Chanelle. And thank you all for joining us in World Series country. We welcome you to our Third Quarter 2012 Earnings Call. Our President and CEO, Greg Becker; and our CFO, Mike Descheneaux; are here today to talk about our third quarter results. They'll be joined by other members of management for the Q&A.

I'd like to remind everyone that our third 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'll 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, may be found in our SEC filings and in our earnings release.

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

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

Thank you, Meghan. And thank all of you for joining us today.

As you can see from our third quarter results, SVB's core business remains very strong. We delivered another great quarter with net income of $42.3 million and earnings per share of $0.94. Our results reflect our consistent execution on our business and growth initiatives despite interest rate headwinds.

I'm going to touch on a few notable items from the quarter on which Mike will go into greater detail later. I'm also going to give you a preview of our expectations for 2013 as we've done in prior years.

Starting with the third quarter -- first, we delivered exceptional loan growth, reaching record high average and period-end loan balances and, for the first time, exceeding the $8 billion mark in period-end loans. Secondly, we maintained superior credit quality, with a lower provision, exceedingly low net charge-offs, and a decrease in our allowance for loan losses as a percentage of loans. Third, we significantly grew our total client funds, which reflects not only our clients' solid performance but our success in adding new clients to our portfolio. Average total client funds -- that is, on-balance sheet deposits and off-balance sheet client investment funds combined -- grew by almost $2 billion to $39 billion. And fourth, we continue to acquire clients at a steady pace. This includes the early-stage companies that are strategically so important to our business and to the innovation ecosystem, as well as the later-stage clients that are driving much of our growth.

A large part of our success stems from the fact that our clients continue to do well. New companies are still getting formed. And as we've said, innovation companies are doing better than the broader economy. Investors are still deploying capital into new and growing companies through venture capital, corporate venturing, acquisitions and other investments. But in these uncertain times, it's to be expected that there will be some bumps in the road as investors adapt to changing market conditions by recalibrating where capital gets deployed.

The good news is that VC fundraising and exits remain relatively active in the quarter. And while some markets such as cleantech face fundraising and execution challenges, other categories continue to attract healthy amounts of investment. These include cloud computing models, consumer applications and biotechnology. Taken from a loan perspective, the pace of investment in new company formation, especially in areas where our clients are focused, are moving in the right direction.

So our markets and our clients are doing well. And at SVB, we remain focused on finding innovative ways to help our clients succeed. In this vein, we introduced two new products during the quarter to make it easier and more efficient for clients to do business with us and their suppliers.

One was an integrated mobile payment system called SVB PayAbility. That acts as a business-to-business paid platform for small and midsize companies. The second introduction was a solution that makes it even easier for our new clients to set up their relationships with us using a range of devices and saving hours of paperwork. Both of these solutions are about saving time for our clients, so they can focus on managing and growing their businesses.

We also continue to host the kinds of unique events that allow us to add value for our clients in a way that other banks just can't do. For instance, we hosted an event in Napa Valley that gave some of our hottest companies the opportunity to meet with top corporate venture investors in the world and, in turn, gave these large global technology firms an introduction to new companies and ideas they would not have easily uncovered on their own. The feedback from our clients and the corporate investors was incredibly positive, with a common theme being that no other institution is providing this type of value.

In another example, we hosted an event in Hong Kong for 120 of the top investors in Asia today in conjunction with one of the most important private equity fundraising events of the year, known as HK SuperReturn. The event included Asia's top venture capital and private equity general partners -- also our clients -- and the top institutional limited partners currently deploying capital in Asia. This is a group that we expect will fuel the growth of our JV bank in China, just as private equity and venture capital has done here in the United States.

These relationships with clients are critical to the way we do business. And we work hard to stay attuned to our clients' concerns and needs. During the quarter, I had more than 20 opportunities to sit down with groups of clients to hear what's on their minds and see how we can help. Not surprisingly, their biggest concerns are around finding employees with the skills they need. Yes, our clients are the companies out hiring.

They're also dealing with new rules and requirements, such as the new sales tax on medical device company revenue that is scheduled to go into effect in January. We recognize that these and other policy issues affect our clients' ability to succeed. And our goal is to be a voice and have a real impact on Washington on fundamental policy issues affecting our clients, and we're active in making this happen.

We see our approach to working with our clients as a real differentiator, one that has relevance not only for our clients' industries but for the investment community overall. As an example, SVB was recognized as the UK Service Provider of the Year at the 2012 Investor All-Star Awards, which is known as the Oscars of the venture capital industry. The audience of 500 VCs, entrepreneurs and CEOs and others, the cream of the UK innovation ecosystem, chose SVB in a live vote at the event. Given our recent branch launch in the UK, we were gratified to receive this show of support and recognition.

We were also extremely proud to be recognized for our financial performance. SVB was included in Fortune's 2012 list of America's 100 Fastest-Growing Companies. As you may know, this particular list is a ranking of corporate earnings growth, revenue growth and total returns over a three-year period. Given that the three years Fortune used were some of the most difficult years ever for banking and the global economy, we're particularly pleased to have made this list.

Although these types of accolades are nice to get, we're careful not to let them distract us from our core mission of helping our clients and from executing on our strategy. We firmly believe we must remain focused on both of these for our success to continue.

The year ahead promises its own set of challenges. But we believe we have opportunities for continued growth. As we've done in prior years, I'd like to take this opportunity to give you a preview of our expectations for the upcoming year and some insight into our assumptions and expectations. I will add the caveat that this outlook is very preliminary. Right now, these are the best estimates we have. But we recognize that there is a lot of uncertainty ahead, and we're providing a range for certain drivers because of this uncertainty. In any case, we hope it'll give you an idea of the direction we think we're headed.

First, we expect average loan growth to remain healthy at a percentage rate in the high teens to low 20s. Second, we expect that net charge-offs will normalize to some extent at a range between 30 and 50 basis points of average total gross loans and that credit quality overall will remain strong. We expect net interest income to grow at a percentage rate in the mid-single digits. This is mainly driven by lower interest income from our investment securities portfolio. Fourth, we expect core fee income, as we define it in our press releases, to grow at a percentage rate in the mid- to high teens. And finally, we expect to limit expense growth to the mid- to high single digits.

Obviously, there are challenges ahead. Low interest rates are a headwind for us and for the banking industry in general. There's still a lot of uncertainty about the direction of the US and global economies. And significant economic downturn would certainly have a negative impact on us and our clients.

Having said all that, we believe we still have plenty of opportunity to grow revenues, to win new clients, and to continue building our position as the leading financial partner for innovation companies. Our long-term view is fundamentally positive and for good reason, given our unique strengths.

These unique strengths include our differentiated model, our powerful platform we want to leverage, a robust deposit franchise, our dedicated employees, and a thriving, resilient client base. The payoff from the investments we've made in our global platform is building and, we believe, in time will be a significant contributor to our growth. We can leverage this platform on behalf of our clients around the world in our vision to do so in a way that improves their chances to grow and succeed.

Thank you. And now, I'm going to turn it over to our CFO, Mike Descheneaux.

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

We are very pleased with the third quarter, which was marked by solid performance despite a challenging interest rate environment. We delivered strong growth and high credit quality, while keeping expenses in check and maintaining strong capital levels.

There are a few areas I want to highlight. First is robust loan growth. Second is continued growth in client funds. Third is somewhat higher net interest income, which continues to be impacted by lower yields on loans and investment securities. Fourth is exceptional credit quality. And fifth is lower non-interest income. Now, this was driven primarily by some changes to the assumptions we use to value our warrant portfolio, which I will comment on a bit later.

Let me start by commenting on our earnings per share of $0.94 versus second quarter EPS of $1.06. I want to remind you that the second quarter number included the impact of gains from the sale of certain assets related to our Equity Management Services business and the sale of $316 million of agency notes. Together, those items accounted for approximately $0.12 of second quarter EPS.

Now, let us look at loan growth. It was truly an outstanding quarter. Average loans grew by $670 million, or 9.3%, to a record high of $7.9 billion. And period-end loans increased by 5.2% to $8.2 billion, also a record high. This increase was driven primarily by growth in loans for buyouts and acquisitions, particularly in our software portfolio. This category has driven a significant amount of growth throughout the year, and we see continued opportunity there. As we head into the end of the year, our pipeline remains strong.

Moving to client liquidity -- total client funds remained strong, as evidenced by outstanding growth in deposits and off-balance sheet client funds. Average deposits grew by $852 million, or 4.9%, to $18.3 billion, primarily as a result of continued client acquisition and strong client liquidity. The majority of this increase was in non-interest-bearing DDA accounts.

Period-end deposits decreased by $326 million, or 1.8%, to $17.7 billion. We are keeping an eye on potential changes in deposit behavior, although clearly one quarter is not a trend.

Average off-balance sheet client investment funds grew by $1.1 billion, or 5.4%, to $20.9 billion due to continued client acquisition, asset growth from existing clients, and our continued efforts to encourage our clients to employ an appropriate mix of on- and off-balance sheet products.

Growth was mainly in our off-balance sheet suite product. We have been pleased with the success of this product, which has grown by $2.3 billion since the beginning of 2012. Average total client funds, which includes on-balance sheet deposits and off-balance sheet client investment funds, grew by $1.9 billion, to $39.2 billion. On a period-end basis, total client funds grew by $635 million, or 16.6%, to $38.8 billion.

Moving to net interest income -- net interest income increased modestly by $2.5 million during the quarter, to $154.9 million, another record high for us. This increase was due primarily to strong loan growth and was partially offset by lower interest income from investment securities due to lower yields.

Loan growth contributed an additional $7.5 million in interest income, although yields on loans were lower at 6.11% on average versus 6.33% in the second quarter. This decrease was primarily due to three factors -- first, tightening spreads on loans to high-quality borrows related to the changing mix of our loan portfolio as we work with larger clients; second, lower loan fees from prepayments of $4.8 million versus $7.6 million in the second quarter; and thirdly, a growing proportion of loans benchmarked to the national prime rate versus SVB prime rate as a result of the competitive environment, particularly for new borrowers. As a reminder, the national prime rate is 75 basis points lower than SVB's prime rate.

Interest income from the investment securities portfolio decreased by $5.6 million as a result of lower reinvestment yields on mortgage-backed investment securities due to a decline in market rates, increased amortization expense due to an elevated pace of actual and expected future prepayments on the mortgages underlying these securities, and lower average balances.

We expect higher prepayments and expectations for future prepayments will continue to influence amortization expense in coming periods, due in part to the Federal Reserve's quantitative easing programs.

Premium amortization expense related to investment securities has been increasing. In the first quarter, it was $10 million. In the second quarter, it was $15 million. And in the third quarter, it was approximately $17 million. As a result of these factors, yield on the investment portfolio decreased by 17 basis points to 1.50%.

Our net interest margin declined by 10 basis points to 3.12%, although our strong loan growth provided a partial offset to margin pressure, contributing nine basis points to the margin in Q3. While we anticipate continued yield headwinds on both loans and investment securities throughout the remainder of 2012 and into 2013, an improving mix of earning assets coming primarily from loan growth should benefit our margin over time.

Moving to credit quality -- it was solid and reflects the discipline with which we are growing and managing our loan portfolio, as well as the strength of the innovation sector relative to the broader economy. We had a provision for loan losses of $6.8 million, compared to $8 million in the second quarter. The provision was largely driven by our strong period-end loan growth, given extremely low net charge-offs of $3.4 million, or 17 basis points of average total gross loans annualized.

Third quarter net charge-offs reflected gross charge-offs of $4.6 million and recoveries of $1.2 million. Net charge-offs were $2.8 million in the second quarter.

A lower allowance rate also helped our provision. Our allowance for performing loans decreased from 1.18% in the second quarter to 1.16% in the third quarter, reflecting the strong performance of our loan portfolio. Nonperforming loans rose by $12.3 million during the quarter to $39.4 million, which represents 48 basis points of total gross loans. That low level is well within our acceptable range for nonperforming loans. And this increase does not, in our view, reflect any negative change in the overall quality of our loan portfolio.

Turning to non-interest income -- non-interest income net of non-controlling interests and excluding gains on asset sales was $55.6 million compared to $57.8 million in the second quarter. This number reflects higher gains from our VC-related investments, which were offset by lower net gains on warrants.

Gains on investment securities, net of non-controlling interests and net of sales of available-for-sale securities, were $7.5 million, compared to $6.4 million in the second quarter. This increase was due primarily to strong performance across a number of our venture-related funds, as well as relatively healthy M&A and IPO activity among venture-backed companies during the third quarter.

Gains on derivative instruments were $1.1 million compared to $8.7 million in the second quarter. This decrease was due primarily to lower net gains on equity warrants of $0.5 million, compared to $4.9 million in the second quarter, driven by changes in valuation related to the marketability discount and the remaining life assumption on the warrant portfolio to reflect market conditions. This change was the primary driver of valuation losses of $1.6 million in the portfolio. This was offset by some extent by strong performance on individual warrants, including gains on exercises of $2.4 million.

Core fee income continued its steady growth during the quarter, increasing by 3.4% to $34.4 million. By core, we mean client investment fees, credit card fees, foreign exchange fees, letter of credit fees and deposit service charges. Client investment fees drove the majority of the increase, while fees from foreign exchange, credit cards and letters of credit grew more modestly in the third quarter.

Turning to capital -- our capital ratios remain very strong. Bank-level Tier 1 leverage held steady at 7% compared to 7.01% in the second quarter, despite significant deposit growth. You will also note that our total risk-based capital levels increased due to a refinement in our methodology for calculating borrowing bases.

Turning to our 2012 full-year outlook, for what's left of it -- in general, we believe we are on track to meet our stated expectations, with two exceptions -- net interest income and net interest margin. Given the challenging interest rate environment, we are updating our outlook for these two items for 2012.

We now expect net interest income for the full year 2012 to increase at a percentage rate in the mid- to high teens. We now expect our net interest margin for the full year 2012 to be between 3.15% and 3.20%. In making adjustment to the outlook, we are making certain assumptions about prepayment rates on investment securities, one of the key reasons and drivers for the change and their impact on premium amortization expense. If market rates were to go lower, or prepayment rates on investment securities were expected to accelerate, that obviously would impact on net interest income and could bring down net interest income and the net interest margin more than anticipated.

In closing -- we are pleased with our quarterly results and our long-term trends, despite the interest rate headwinds. SVB is a consistent strong performer that is able to generate growth in a challenging environment while maintaining high asset quality and strong capital levels.

Looking out to 2013 -- we feel good about the things within our control. We are working with the right clients, building the right platform and making the right decisions for our business. And of course, we are looking forward to a more favorable interest rate environment.

With that, I will ask the operator to open it up to Q&A.

(Operator Instructions) Steven Alexopoulos, JPMorgan.

[Maybe I'll] start -- can you talk about how you invested the $1.1 billion of new cash into the securities portfolio in terms of yield and duration?

Steve, we're still following our same investment philosophy, which is [the tena view] on the mortgage-backed securities or the CMO area. And rates, unfortunately, as you know in following -- they're somewhere around 150 to 170, 180 basis points. But more or less, the overall duration is still the same. We're trying to keep that portfolio duration around that two years -- around that. We might see a little bit of increase in that area.

Okay.

And Mike, maybe to follow up -- can you help us understand why the premium amortization levels are so high, particularly given that in the past the yield on the MBS portfolio was relatively low compared to other banks?

Steve, it's just the prepayments -- the actual prepayments are coming in. It could be a function of a few things, as we mentioned. Obviously, the quantitative easing, and people buying up the securities -- it's just the refinancing that's going on as well, too. So it's just a whole host of things that are causing the market rates to drop overall.

Okay. Where did MBS yields end up for the third quarter?

We were roughly around 150.

The portfolio yield is 150?

Yes.

Okay. Thanks for taking my questions.

No problem.

Brett Rabatin; Sterne, Agee.

Wanted to ask -- first, I was just hoping for some additional color around venture capital. The Financial Times had a piece out talking about the kind of pace slowing in the third quarter in terms of investment, particularly at the earliest stages of forming. So just wanted first to get a read on that.

Hey, Brett, this is Greg. As we look at venture capital, there's a lot of different places to gather data. And we saw similar data, whether it's saying that it's a little bit lower than it was in the second quarter -- part of it is driven by -- depending on what sector you're looking at. So certain sectors -- cleantech had a more dramatic slowdown. But when you looked at software company formation -- is what we spend more time looking at -- there was a little bit of a slowdown. But I wouldn't see anything that was significant.

Part of what we look at is how many new clients we're bringing in at the various stages. And we look at the pace of investment, or pace of new company formation at that early stage, and so forth. We haven't seen a real change there, honestly.

And so we watch it. We watch it closely. But we haven't seen a big impact.

Secondly, what I would take a look at is what the fundraising activity is for venture capital funds. And when you look at that data, 2012 compared to 2011, it's actually in a better place than it was last year. So that gives me comfort that there's going to be money out there to invest in 2013. So we don't spend as much time looking at it on a quarter-by-quarter basis.

That's good color.

And then, my follow-up was just around the guidance. Want to make sure I understood -- I think Mike, you commented about the benefit to the margin over time of the mix change and the balance sheet, and your growth outlook for 2013. I'm a little confused about the guidance, or the early guidance around spread revenue, kind of given the loan growth you are expecting and the relatively low present yields of the securities portfolio. Can you help us reconcile those two things?

What I was referring to is essentially -- when basically you had securities maturing that earning, let's say, 150 basis points, you take that cash flow, and you reallocate or deploy it into loan growth, which is earning loan yields of around that 6% area. So that's where you in general pick up your net interest margin going forward. That's what you're referring to in the script.

Right. But you've got the loan growth in the teens next year. But you've got the spread revenue growth in the mid-single digits. So I guess I'm curious to understand if maybe you're assuming you're going to accumulate capital, and your balance sheet overall won't grow as rapidly? And you'll grow the loan portfolio faster? Or I'm just not -- maybe I'm missing something, but I'm not quite understanding the mid-single-digit type revenue growth on the spread side.

Brett, it's Greg. Let me take a stab at it.

So we are -- there's a couple things happening. One is we expect loan growth. And that mix that Mike described is going to be a benefit to us. But if you follow the trend that we had this year, that loan margins may decline a little bit -- so that's a little bit of the impact. But offsetting that is that even though what Mike was talking about in our overall securities portfolio -- right now, what it's yielding -- the average yield for the year has been higher.

So if you take that forward, and you look at what it will be next year on the investment securities portfolio, you're going to end up with a smaller amount of investment income from your investment securities portfolio, all things being equal. So that decline in revenue, interest income from the securities portfolio, offsets the growth we're seeing and expect to see from a loan growth perspective. And so that's why our view of 2013 is only in the kind of mid-single digits for net interest income.

Great. Thanks for all the color.

Yes.

Aaron Deer, Sandler O'Neill Partners.

Mike, you touched on some of the things causing yield pressures in the loan books, [specifically note] in the rate environment, and then kind of pursuing larger, [more] rate-sensitive customers. Try to understand which of those is having what kind of influence -- I was wondering if you could maybe give us a sense of what the spread differential is between the larger credit -- say, $20 million and above -- versus those that are below that level.

Aaron, this is Dave Jones. Let me try to address that.

So the larger loans would be of two types. One would be of the sponsor-led buyout group, and the rates there are better. Ignoring the consequences of yield -- because that's hard to calculate over time -- just the interest rate -- we're tending to get 6.0, 6.25, all-in rate on the sponsor-led buyout transactions.

The more traditional, larger credit facility is one that's probably going to tend to be closer to a Wall Street prime 3.25% interest rate yield. And in this last quarter, that part of our portfolio had about 50% from the sponsor-led buyout and 50% from the other.

And then, for the less than $20 million portfolio, there's a wide variety of credit. The early-stage clients are still providing a yield in the upper single digits all-in, and then for mortgage and other lesser rates on that.

So I think that you should probably focus on numbers that would have early-stage and sponsor-led buyout in the 6% and better. And then, most of the rest of it is in the 3.25% to 4% range, generally.

That's helpful, Dave.

And then, the off-balance sheet client funds rose by another [billion] this quarter -- I think it's over $21 billion. What's the current fee that you're collecting on those? I think it's in the single-basis point range. And what has that been historically, when we were in a higher-rate environment?

Aaron, this is Mike. Somewhere around, let's say, 5 to 7 basis points is kind of roughly where we're at. And you may recall, back in 2008, we were earning something in the neighborhood of around 25 basis points on those off-balance sheet.

Now, clearly when rates do come back, it'll be a bit more upward pressure for us to continue to get more on that. But obviously, right now, it's quite low compared to historical norms.

That's great. Thanks for taking for my questions.

Thank you.

Joe Morford, RBC Capital Markets.

First was just a couple clarifications on the net interest income and the margin guidance. Roughly, how big is that later-stage portfolio, would you say, right now?

Our later-stage portfolio, otherwise referenced as corporate finance, would be about $2.2 billion, $2.3 billion.

Okay. And does the margin guidance for the fourth quarter and 2013 take into account both the recent drop in the three-month LIBOR rates? And also, what exactly are you assuming for MBS prepayment rates in that forecast relative to where we are now?

Joe, basically, we obviously take what information we know [at] today, what the market rates are, and so basically trying to look at a glide pattern going forward into 2013. So the short answer is -- whatever information we have available, we actually have considered that in there.

Okay. Are you disclosing what kind of prepayment rates you're assuming right now, or --?

No. Just as of what we know as of today -- for the portfolio, what the expected prepayments are.

All right.

And then, the other was just -- if I could kind of just get an update on the international markets, I'd be particularly interested in getting updated numbers for loans and deposits in the UK. But also, just how are things progressing in China with the [establishment of] the JV there?

Yes, Joe, it's Greg. So I'll start with the UK. [We] talk at a high level, and I'll talk about new account openings, now that we can set up banking relationships there.

So we have a flurry of activity happening. We're looking at new accounts that are both some existing clients from the US that are opening up accounts, or transferring those relationships from banks in the UK; or new relationships domiciled in the UK. And basically, we're opening up a couple hundred accounts since we set up our operation there, the branch. And that's continued to grow nicely, lots of activity. It was great press to get and be viewed as the Service Provider of the Year. So we're getting a lot of attention there, and we expect that to continue.

From a loan, lending perspective, in the UK -- you're looking at loans in the kind of $225 million to $250 million range. But then again, globally, you have to look at all the pieces together -- what we're doing in Israel, India. And so as I've said in the last few calls, you're north of $300 million and some there, and growing at a nice clip. So we feel good about that.

As far as China goes, the joint venture -- we had our kind of opening launch. We're really in process of [doing] the more formal launch, where we can start setting up accounts. But again, it's really important -- and we've stressed this before -- that because of the limitations on what we'll be able to do in the joint venture -- which is only the US dollars in-country -- we're going to be pretty limited by the growth, and also the impact, on the numbers, both either positive from an income perspective, or negative from a loss perspective.

And so, although we feel good about where we are, the impact on our numbers is going to be very, very nominal for awhile. But overall, things are trending very well from an international perspective.

That's helpful. Thanks, Greg.

Yes.

John Pancari, Evercore Partners.

Mike, on the margin for this quarter, can you give us how the compression during the quarter broke out by the three factors that you talked about that impacted the margin?

Well, the three factors -- you talking about with respect to the overall margin, like tightening of the spreads on the loans, and the lower fees --

Yes, I guess the loan yields compression -- really, you gave us the three factors. I guess that's what I'm most [interested in]. In other words, how much did the prepay fee decline impact the margin, and then some of the other factors you noted?

Yes. Just on the -- we saw the investment portfolio decrease by 17 basis points, which is now down to 150 basis points. But if you put that into context, our net interest margin declined by 10. And if you think about that, the loan growth actually can help contribute to a positive 9. So really, what you're looking at is the investment portfolio has probably dropped it down somewhere in the neighborhood of 15 to 19 to 20 basis points. So it's -- quite a significant drop was due to the investment securities portfolio.

All right.

And then, I guess, also on the margin, to ask Brett's question another way -- because I'm kind of struggling with the 2013 guidance as well -- can you just kind of help us -- what your '13 guidance on spread revenue implies in terms of your margin assumption? I note you didn't give margin guidance for '13, but you did give it for '12. So want to know just what your decision was there, and what color you have around the margin.

Yes, at this point, we're not going to give net interest margin guidance right now. But having said that, you can see -- more or less work out where we're probably going to end up in Q4. And then, we talked about earlier, which is -- look, all things being equal, by us moving cash into loans and loan growth, it's going to help the net interest margin a bit. But just recognizing that it's just considerable headwinds on the investment securities portfolio.

And coming back to an earlier question -- the premium amortization looks quite large. Because you got to remember the investment securities portfolio is so large, or a disproportionate size of our balance sheet compared to most other banks as well. So just keep that in mind.

But John, at this time, we're not going to comment on the net interest margin. But we will comment on it the next quarter.

Okay.

And I know you mentioned you're keeping an eye on the deposit trends. But for the quarter itself, do you have any additional detail as to why the period-end balances declined?

It's just one of those things -- our balances can move quite significantly. It's just maybe the last week of the quarter, we had just a bit of movement here and there. And can be things [with] payrolls, or doing a deal here, or deal there. But again, we see those large movements. So it's not anything that we're really banking on as a trend right now. So we'll just wait some more time to see where that's going.

Thank you.

Okay.

Julianna Balicka, KBW.

I've got two questions, or two areas of questions. One -- to kind of continue on the margin expectations, kind of moving beyond next year, the rising-rate environment seems to be a moving target. And in that context, what are some of your bigger-picture thoughts about what are some of your strategies that you can do, should you have to think about maybe restructuring the balance sheet in any way? And what would be some timing triggers? Or what would cause you to change your current strategy?

Our strategy still remains in check here. Our primary objective is always to make sure we continue to have liquidity to grow the loan portfolio. And we have probably a significant advantage over most other banks. The fact is that we do have loan growth. And so that really would be helpful, to continue to help us deploy the cash (technical difficulty) biggest thing.

Now, we might tinker a little bit with the duration a little bit, if we get a little bit more comfortable with it. But unfortunately, in this low-rate environment, even if you go out a little bit on duration, or even significant, you're just not going to pick up a whole lot of yield. So unless you're prepared to take on additional credit risk in the portfolio, there's really just not a whole lot of options. I mean, when you're looking at 150-basis point yield for mortgage-backed securities, there's just not a lot of yield out there.

So again, I'd just summarize this -- the key is to kind of grow it out. And maybe Greg can add on.

Yes. Just to add on to it -- Julianna, when you think about our strategy, we're taking the excess cash we have, and we're looking to move it into loans. And the loans are -- even though the margin on loans is coming down a little bit, it's still very attractive from a yield perspective. Obviously, that helps overall. That's number one.

Number two, it's about growing fee income. And as we talked about core fee income for 2013, we gave some nice growth guidance. And obviously, we expect that to continue. And we feel good about that. And the last part is making sure that we're managing our overall expenses.

And so, when you look at all those things together, that's part of the strategy that plays out, regardless of where the interest rate environment is. So that's why both Mike and I would say staying the course on our strategy is the right game plan.

Okay.

And then, I wanted to also ask a question on the loan growth, which is a key part of your strategy. You mentioned -- in your remarks, you were saying that the buyout and acquisition-led growth has been leading some of your loan growth. And you talked earlier about the fundamentals in the VC industry. But can you talk a little bit about -- as you look at the trends in the buyout and acquisition kind of activity, what are some things that you're looking for that would suggest to you a slowdown in there, and/or how long can this wave or momentum continue?

Julianna, this is Dave. We have good relationships with several of the leading private equity firms in the country, and increasingly even to include the UK. And one of the things that we can do is watch the volume of calls that our senior relationship managers are getting from the private equity firms.

So having conversations with those folks leads me to believe that the private equity firms are still feeling good about the economy, they're still feeling good about the valuation. And there seems to still be a good pipeline of opportunity there. And I think that we could expect and should expect that the corporate-on-corporate acquisition activity would reflect much the same thing.

So frankly, one of the things that I monitor is the pipeline that our buyout group has. And I also monitor the health of the general market, the stock index. And that leads me to have the confidence for the immediate, foreseeable future that there still remains good appetite, good opportunity.

Very good. Thank you.

Yes.

Herman Chan, Wells Fargo Securities.

On the deposit front, are you seeing any increased competition for deposits, especially on the venture capital and private equity client side?

Herman, this is Greg. And we've talked about this over the last 12 to 24 months. As banks look, in some cases, for deposits, you're going to have -- they're going to look and say -- who are the best places to target? And the best places to target are obviously the ones that have the most liquidity and venture capital. And private equity firms are clearly a couple of the places to look.

So I would say increased competition -- yes. But that's not surprising. What I would go back to is how we address the competition. And for us, it's incredibly important to look at these relationships holistically, which is why we've been able to have these relationships for such a long period of time and maintain them. Because it's not just about doing the banking for the firm; it's about doing the banking for the portfolio companies and adding value for the portfolio companies. And increasingly for us, in our private bank, for the individuals as well. So it's not just one thing; it's three.

And I'd add one more thing. When you think about what I said earlier about adding value to clients in different ways, we spend a lot of time on that. So how can we take our clients -- both venture capital, private equity and companies -- to different venues so they can connect with other companies to help increase their success rates? And that's something that we haven't seen any other bank do. And that's one of the hallmarks of SVB. So we really stress that.

So yes, there's increased competition. It's not just in private equity or venture capital; it's across the board. That's why we spend so much time talking about how we're different. And that's why we've been successful.

Got it.

And a question on your expectations for fee income growth next year -- what's driving that potential acceleration from 2012 levels? Is it just more client engagement? And how much of the growth can be attributed to contribution from your foreign operations, especially in the UK? Thanks.

Yes. On the fee income side, Herman, the growth is pretty broad-based across the core. So you've got -- we still expect growth in FX revenue. We expect to expand the fee income related to the investment portfolio. Obviously, we're at a very low margin -- 5 to 7 basis points, as Mike described. There may be a little bit of lift we can get there. And again, 1 or 2 basis points when you're only getting 5 to 7 is a significant percentage growth rate.

And then, the final place is on our credit cards, or merchant services. And as we've talked about in the past, we still have a very low penetration there. And we expect that to grow at a healthy pace.

So it's not just one thing we're relying on; it's really a whole portfolio of non-interest income products. Global is a little bit of it. But it's not, by any stretch, a significant part of that growth.

Thank you very much.

Yes.

[Jonathan Almay], McCleary.

Just wanted to ask you guys -- going back to your average loan growth guidance for 2012 -- just thought it was interesting that that was unchanged, sort of in the high-20s range. If I go back, and if I hold your period-end loan balances -- assuming they stayed flat in the fourth quarter -- based on my models, I calculate you'd get year-over-year growth rates closer to 30%, which is obviously above the guidance. Just based on your earlier comments, didn't sound like anything was really slowing down materially. So just wondering if I'm missing something there. Or, maybe just get some clarity around that.

Hey, John, can you go through that math one more time? I want to make sure that we -- this is Greg -- that we understand kind of where you're starting [from].

Oh, sure, absolutely. I guess my point was just that if I look at the growth that you guys have realized to date, in your average loan portfolio -- it seems to me that if I was to hold the period-end loan balances flat for the next quarter, your average year-over-year loan growth would already be close to 30%, without any incremental period-end loan growth. And so I'm just wondering why maybe the guidance didn't move up a little bit higher based on third quarter results for the average year-over-year loan growth rates.

John, this is Dave. I think we agree with you, in terms of your math, for 2012. Is the question about the 2013 guidance?

No, no, just the math on the 2012 guidance. I guess I just would've thought, based on those calculations, that maybe the loan growth guidance would've come up for 2012, unless you were assuming some kind of deceleration in the growth rate of period-end loans in the fourth quarter. It seemed like --

So --

-- [you're] already sort of ahead of your guidance today. So, surprised it didn't come up a little bit.

Today, I guess my calculation is we're in the 27.5 type growth, so going up over the balance of the year -- I agree with you. I also will say that based on historic patterns, a good deal of our quarterly growth tends to be weighted to the last few days, couple three weeks, of a quarter. So the impact that the expected growth would have on quarterly -- and even more so on annual -- would be diminished by the timing of that growth.

John, this is Greg. I guess the short answer to is that we don't expect any changes to the trajectory that we're on right now and have been. So that's probably the simple answer.

That's fair enough. Thanks very much for the color.

(Operator Instructions) Gaston Ceron, Morningstar Equity Research.

Thanks for taking my question. I realize it's been a long call already.

I'm a little new to the SVB story, and I'm definitely looking forward to learning more about it. But I did want to ask another quick question about the competitive environment. I know you took one earlier, kind of talking about competition for deposits. But looking at the competitive environment for loans, it seems like you really solidified your market position over the last few years, as far as catering to the innovation economy.

But as you look out further into the future, where do you see the competition kind of heating up as far as competing for loans in that community? Is it likely to come more from traditional large banks that may expand further into your back yard, or maybe more from smaller, more nimble banks or other institutions? I'm just trying to get a handle on how defensible do you see your [inviable] market position as. Thanks very much.

Yes, Gaston, this is Greg. I'll start, and then Dave can pile on.

I think if you go back over the last five to 10 years, I think people would say, in some cases, we don't have a lot of competition. But we've had consistent competition, really, for the last decade. And with that consistent competition, we continue to be able to grow loans pretty consistently over that time period.

But you really -- in answering your question about competition, you have to break it down by almost stage of company.

Yes.

And so, in the early-stage section, we tend to see more competition -- actually, it's in two buckets -- one from some venture debt players, and then just from some of the smaller banks that you had described. As you work your way up the stage of company, then the competitive landscape changes, and it does move towards the more traditional banks. And that's been pretty consistent for quite awhile.

Now, what I would say on the larger companies -- and it's been an area of growth for us -- we've been able to do a better job in competing against the larger banks, for a couple reasons. One is the value-add we provide. Number two is the product set. And number three is our ability to underwrite larger loans because of our balance sheet and how it's expanded over the last two, three, four, five years. And it's all those things combined that allows us to be more effective in competing with them.

So you really have to look at it by segment. And I would say that we've been very effective.

Dave?

Yes, I would agree with Greg on the segmentation perspective, as we are dealing with larger, more successful banks -- larger, more successful technology companies, then clearly, the probability is that the competition is going to be the larger banks, as opposed to the smaller banks, simply because the smaller banks will tend to have more issues with their lending limits and other factors. But generally, I agree with Greg's comments.

Great, thank you. I look forward to learning more about the story in the months ahead. Thanks.

Great. Thanks.

At this time, we have no further questions. I'll turn the call to Greg Becker for closing comments.

Great, thanks.

Thanks, everyone, for joining us today. Overall, as we said at the beginning, it was a great quarter -- solid performance across the board, the core business.

The results, as we talked about, are really a function of two things -- one is the fact that we continued to execute on our plan, the plan that we've talked to many of you about for the last several years. And we continue to march towards that strategic direction, number one. Number two, as we said, our success is also partially driven by the success of our clients and the resiliency they have in the market. As I said earlier, the fact that they continue to hire in this environment -- and when I meet with clients, their major issue is hiring, and how many companies out there, outside of the innovation space, do you see that? So it's those two things that are driving our success.

And then finally, despite the headwinds that we have, as we talked about -- mainly interest rates in 2013 -- we certainly believe we have lots of opportunities for continued growth, which we're excited about.

And last point is we couldn't do any of that without our employees and our clients. And we obviously thank both of them for all their efforts.

So with that, thanks to all of you guys. And have a great day.

Thank you, everyone, for joining today's Conference Call. You may now disconnect.