SVB Financial Group (SIVB) 2013 Q1 法說會逐字稿

Good afternoon. My name is Kyle and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SVB Financial Group First Quarter 2013 Earnings Conference Call. (Operator Instructions) Thank you. Ms. O'Leary, you may begin your conference.

Thank you, Kyle, and thanks everyone for joining us today for our First Quarter 2013 Earnings Call. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux, are here to talk about our first quarter results. As usual, they'll be joined by other members of management for the Q&A. I would like to remind everyone that our current earnings release is available on the Investor Relations section of our website at SVB.com.

I will caution you that we will be making forward-looking statements during this call and that actual results may differ materially. As usual, 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 may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures may be found in our SEC filings and in our earnings release. We plan to limit the length of the call, including Q&A, to one hour. As always, we ask that you limit yourself to one primary and one follow-up question during the Q&A before getting back into the queue, so everyone gets a chance to ask their question.

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

Thank you, Meghan, and thank all of you for joining us today. In the first quarter, we delivered a strong performance and continued to make progress on our growth strategy. We posted net income of $41 million and earnings per share of $0.90 versus consensus of $0.88 per share. Our performance compares favorably to the same period last year when we delivered net income of $34.8 million, or $0.78 per share.

Highlights from the quarter included 20% annualized loan growth--average loan growth. And as we expected, [Perion] loan balances were effectively flat due to pay downs of [capital call] lines of credit, which were elevated in the fourth quarter for tax motivated reasons. We also delivered very healthy credit quality, a higher net interest margin due to lower premium amortization expense, and then strong growth in FX and credit cards.

Overall, it was a very good quarter. Our clients continue to do well and we are executing on our strategy of winning clients early and staying with them as they grow, providing products, services, and solutions that can scale with our clients, and expanding globally.

Let me start with clients. SVB has built a reputation over three decades for being a great partner to innovation companies. This reputation, and our track record of helping clients succeed, give us a significant competitive advantage with clients at all stages. That advantage was clear in the first quarter as we continued to add new clients, book new loans, and expand existing relationships at a very healthy pace. For example, the first quarter was one of our strongest ever for early-stage client acquisition. We added 438 new early-stage clients during the quarter, compared to 352 in the same period last year.

We have seen no slowdown in new company formation. Our clients are benefiting from healthy levels of what we think of as innovation capital. Innovation capital comprises funding from angel investors, seed-stage funds, and corporate venturing groups, as well as traditional venture capital investing.

We are more than maintaining our strong market share of startups and we are working successfully to make sure our market share includes an even higher percentage of the best, fastest-growing, startups that will become larger growth stage and corporate finance clients.

To illustrate how this works, of the 66 venture-backed companies that went public in the last 15 months, 41 were SVB clients. These fast-growth companies use more products and services. For instance, the majority of those clients that went public invested their IPO proceeds, some $2.6 billion, into SVB's off-balance sheet products, which generate fees for us. And of course, borrowing from larger clients has driven the majority of loan growth in recent quarters as we have outlined before. So you can see how capturing companies into early stages creates a built-in pipeline for growth and capturing the best companies can accelerate that growth.

In the same vein, we have steadily improved our pace of new client wins in corporate finance, that is, clients with revenues greater than $75 million. We are winning 20 to 30 new corporate finance clients every year, effectively double the pace of three years ago. Now, that may not sound like a big number compared to our early-stage client acquisition. But if you consider that our larger client relationships are anywhere from 10 to 20 times more profitable for us, it represents important momentum. Our ability to win more of these larger clients is a result of our ongoing investment in the products and services that our clients need as they grow. We saw continued solid growth during the first quarter in two of the most in-demand products among our larger clients - foreign exchange and credit cards.

In the first quarter of 2013 versus the first quarter of 2012, foreign exchange dollar volumes grew by 6% and credit cards, which is still a young business for us, grew by an amazing 44%. Also in the first quarter, we completed the rollout of new Technology Solutions we launched in the last few months. These are part of our efforts to make things simple and scalable for our clients.

The market is recognizing the strength of our products and services. We were proud that our new business-to-business payment platform for small and midsize companies received an innovation award from a mobile payments industry group, the first of many innovation awards we hope to win over the coming years. And we were one of only seven banks to receive a prestigious Excellence Award from Greenwich Associates for international service to midsize companies. This award is based on the results of 14,000 interviews with U.S. executives at midsize companies. I think it says a lot about the power of our commitment and focus when you consider that the winners were--the other winners were banks ranging from five to 100 times our size.

We're also continuing our efforts to create unique, relevant events that help to move things forward for our clients. In the first quarter, one of the many events we held included a speed-dating event in which a group of startups presented to Turner Broadcasting's corporate venture arm. The event was a tremendous success, not only for the startups making connections that could literally make their business, but for the Turner executives who got to evaluate numerous handpicked potential investments and partnerships.

We hosted a similar event where we brought together a large group of our best portfolio companies with our best corporate venture partners. We first did this last year and invited one of our corporate venture clients, a major telecom company. They liked it so much, they asked us to sponsor the creation of a similar event under their name this year. Such positive client responses reinforce our believe that we are uniquely positioned to connect Fortune 1000 companies with the very best emerging companies in the world, which is a win-win for everyone.

Moving on to our global strategy, we continue to build momentum with total loan outstanding of $500 million and $2 billion in deposits, both significant milestones for us. As we approach the first anniversary of our UK branch, we have more than 200 clients banking with us. Approximately 130 of these are from the local market. The rest are U.S. clients who are bringing more of their global banking business to SVB now that we have a UK presence. We were also honored to be named UK Niche Bank of the Year in its survey of 10,000 industry professionals by Acquisitions Finance magazine.

In China, we're making steady progress in forming partnerships and winning new clients for our JV bank, although we are still in the early stages. And today, we also announced, and I know many of you noted, Dave Jones will be taking on a new strategic leadership role as President of Asia for SVB. He will be helping lead and expand our Asia strategy and will work closely with Ken Wilcox to continue building the joint venture bank. This will include adapting our lending and business model for China and implementing the JV bank's credit and risk management strategies. As you know, China is one of the most important and complex long-term and growth initiatives for SVB.

Given Dave's exemplary track record at SVB, we are extremely pleased that Dave has agreed to step into this role. We've planned for Dave to make this transition by the end of the third quarter and [Mark Cadger], our Assistant Chief Credit Officer for the past four years and a 21-year SVB veteran, will become Chief Credit Officer at that time. As you know, in 16 very successful years as Chief Credit Officer, Dave has overseen the creation of a world-class credit discipline at SVB. I think our performance through some of the very challenging market cycles speaks to his success. We're all very excited for Dave in his new role, but we're also confident in the capabilities of Mark and our seasoned credit team to fill Dave's shoes, as big as they may be.

So to wrap things up, we are pleased with our first quarter results and with our direction and momentum overall. We are effectively executing on our strategy and have a substantial portfolio of real growth initiatives that is just beginning to bear fruit, including staying with and supporting our clients as they become large public and private companies, providing personal banking to the partners and teams of our venture capital and private equity clients and increasingly to our corporate CEOs, adding more products and services, including payment solutions and stronger global cash management, and expanding globally. That is, helping our U.S. clients go overseas and supporting companies locally in our international markets.

Our challenges are industry challenges. Low interest rates continue to impact loan pricing and fee income on client investment funds. And we don't expect the interest rate environment to improve anytime soon, as we talked about before. Competition for clients remains intense. Fortunately, we have a significant advantage in our reputation, capabilities, and track record. But I can promise you, we are not the least bit complacent. We have an incredibly dedicated team of outstanding employees who work hard every day to make SVB the obvious choice for our clients.

Overall, we feel positive about the year ahead. We're expecting healthy growth in loans, fee income, net interest income, during a year when most banks have relatively low expectations. And we are even more optimistic about the long term as we build out our strategic plans for growth. And when rates eventually do rise, the benefit to us will be tremendous.

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

Thank you, Greg, and good afternoon, everyone. Let me start off with saying that we are pleased with our first quarter performance. The quarter included strong average loan growth, high credit quality, an increase in our net interest margin, and growth in certain key fee income lines. Despite continued pressure from low interest rates, we are off to a good start in 2013.

There are four items I want to highlight today. First, solid average loan growth and effectively flat period-end balances, as we expected. Second, strong growth in average total client funds despite lower average deposits. Third, higher net interest income despite having two fewer days in the quarter, and a higher net interest margin in the face of continued interest rate pressure. And fourth, high credit quality and solid trends. I will also touch on non-interest income, expenses, capital ratios, and of course, our 2013 outlook.

Let us start with the details on loans. Average loan balances increased by $406 million or 4.9% over Q4, to another all-time high of $8.7 billion. This increase reflects strong activity across the board offset by pay downs in capital call lines. This pay down activity was expected following the run-up last quarter in year-end capital call balances driven by tax-related borrowing. As a result, first quarter period-end loans were effectively flat at $8.8 billion. As we move into the second quarter, we continue to see relatively high levels of activity among our clients and our pipeline remains strong.

Now let me turn to total client funds. As a reminder, total client funds are composed of on-balance sheet deposits and off-balance sheet investments. Total client funds showed continued robust growth marked by strong growth in off-balance sheet funds and more moderate deposit growth during the quarter. Average total client funds increased by $1.1 billion or 2.8% to $41.3 billion, reflecting our continued success in acquiring new clients and a strong funding environment for existing clients. On a period-end basis, total client funds were $42.3 billion compared to $41.7 billion in the fourth quarter.

Average deposits decreased for the first time in 23 quarters by $205 million or 1.1% to $18.8 billion. While it is a relatively small decrease, and it would be premature to call it a trend, we view this decrease as a result of our ongoing efforts to encourage clients to use our off-balance sheet funds when it is appropriate for them. Period-end balances increased slightly by $133 million or 0.6% to $19.3 billion. Average off-balance sheet funds increased by $1.3 billion or 6.2% to $22.5 billion, while period-end balances increased by $468 million or 2.1% to $23 billion. Growth occurred primarily in our off-balance sheet suite product which averaged $4.3 billion for the first quarter of 2013 compared to $3.7 billion in the prior quarter.

We are pleased at the continued strong growth in total client funds and encouraged to see off-balance sheet growth outpacing on balance sheet trends for the time being. Our efforts to provide our clients with appropriate off-balance sheet products are succeeding. In addition, although the expiration of the Tag Program did not result in any notable moves of client funds from the balance sheet, we are receiving feedback from clients that they are more open to off-balance sheet options than in the past. However, as long as interest rates remain low, we don't expect a material change in the mix of on and off-balance sheet client funds.

Moving to net interest income. Net interest income was $163.2 million in the first quarter, an increase of $2.6 million or 1.6% over the prior quarter. This increase was due to higher average loan balances and a reduction of premium amortization expense in our available for-sale investment securities portfolio and was offset somewhat by lower loan prepayment fees and two fewer days in the first quarter.

Premium amortization expense on our investment securities portfolio decreased to $8.3 million in the first quarter compared to $13.1 million in the fourth quarter. This decrease contributed to an improvement in the average yield on our investment securities portfolio by 15 basis points to 1.75%. While strong loan volumes contributed to higher interest income, the increase was offset by lower yields on the loan portfolio. The average yield on loans declined 20 basis points to 5.78% in the first quarter compared to 5.98% in the fourth quarter. Lower loan prepayment fees contributed 13 basis points of the decline. The remaining decrease was due to continued competition for clients and changes in our loan mix, as we added more large loans to clients with traditionally higher credit quality.

In terms of the offsetting factors, we saw a $2.5 million decrease in loan prepayment fees during the quarter after experiencing elevated loan prepayments in the fourth quarter and there were two fewer days in the first quarter, which reduced incomes from loans by approximately $2.5 million. Our net interest margin increased to 3.25%, an increase of 12 basis points compared to the fourth quarter of 2012. Lower premium amortization expense on our investment securities portfolio accounted for 9 basis points of that increase.

Overall, our expectations for net interest income and net interest margin in 2013 have improved and I will give you the details when we get to our outlook.

Turning to credit quality. Credit quality remained strong with a provision for loan losses of $5.8 million in the first quarter compared to $15 million in the fourth quarter. The first quarter provision reflected low gross charge-offs of $5.6 million primarily from our life science and hardware portfolio and recoveries of $1.4 million. Non-performing loans increased by $6.5 million to $44.3 million primarily driven by a small number of new impaired loans. Classified loans decreased by 14% driven primarily by the timing of funding rounds to our early-stage clients. Overall, our credit trends remained positive and within our expectations for the year.

Those are the highlights of the quarter. Now, I'd like to touch on a few other items before reviewing the outlook beginning with non-interest income. Non-GAAP non-interest income net of non-controlling interest was $56.1 million in the first quarter compared to $75.6 million in the fourth quarter. The primary driver of this decrease was lower net gains on our venture capital related investments net of non-controlling interest of $5.1 million in the first quarter compared to $17.2 million in the fourth quarter. You will recall that we had unusually large unrealized gains from a single investment in the fourth quarter. We noted at the time that such outsized gains were not frequent. We also noted that we could see fluctuations in the fair value of these investments from quarter-to-quarter. As expected, we did not have similar sized gains in the first quarter.

We also had lower net gains on equity warrant assets of $3.5 million. This compares to $7 million in the prior quarter, which was the most notable for a particularly large gain related to one company. Most of our gains in the first quarter were unrealized, meaning they came in the form of valuation increases rather than exercises.

Now, let us turn to core fee income, and that is aggregate fees from deposit services, letters of credit, credit cards, client investments and foreign exchange. We saw solid increases in key income streams that had delivered much of our recent fee income growth including foreign exchange, which grew by 6%, and credit card fees, which increased by 12%. In aggregate, core fee income was effectively flat in Q1 at $36.6 million. This was the result of two things. First, lower letter of credit income due to some non-recurring fees in Q4. Without the impact of those Q4 fees, letter of credit income was effectively flat. And second, lower client investment fees due to historically low yields for SVB asset management and repo products.

The decrease in client investment fees caused us to tweak our expectations for core fee income down a bit in 2013. I will comment on this a bit more later.

Now I'll move on to non-interest expense, which increased by $6 million in the first quarter to $149 million, primarily due to seasonal expenses. These seasonal expenses included higher compensation and benefits cost, particularly an increase of $5.1 million related to employee stock ownership and 401(k) matching contributions related to annual incentive compensation payouts, as well as taxes and other employee related expenses. Salaries and wages also increased by $2.2 million, primarily due to an increase in the number of average full-time equivalent employees.

We had a provision for unfunded credit commitments of $2 million, compared to a reduction of provision of $0.8 million in the prior quarter, due to an increase in unfunded credit commitment balances.

Expense increases were partially offset by a decrease of $3.9 million in incentive compensation expense relative to the fourth quarter when incentive compensation was higher due to our stronger than expected financial performance. Additionally, we had lower premises and equipment expense and lower professional services expense due to elevated levels in Q4.

On to capital. Our capital ratios increased across the board, both at the holding company and the bank. Tier one leverage increased by 33 basis points to 8.39% at the holding company, and by 29 basis points to 7.35% at the bank level primarily due to our earnings and relatively unchanged asset levels.

Our total risk based capital ratio increased by 54 basis points to 14.59% at the holding company and by 48 basis points to 13.01% at the bank level, also as a result of our earnings and an overall decrease in risk weighted assets.

Moving on to our outlook for 2013 versus the full year 2012. As I mentioned, we are improving our outlook for net interest income and net interest margin and tweaking down our outlook for the core fee income. The net of these adjustments is a positive change to our overall outlook for 2013. First, we improved our outlook for net interest income to growth in the high single digits versus the prior range of mid single digits. This improvement was driven by lower than expected premium amortization expense due to lower prepayments on mortgage backed securities.

This change in our outlook assumes that the pace of prepayments in the remaining quarters of the year will be similar to that in Q1, but ultimately that depends on interest rates. Second, we improved our outlook for our net interest margin as a result of lower premium amortization expense on our investment securities portfolio. We now expect our net interest margin to be between 3.15% and 3.25%. This compares to our prior range of 3.1% to 3.2%. And third, we decreased our outlook for our core fees, primarily due to the lower than expected client investment fees related to lower yields on certain products.

Now for a wrap. We are pleased with our results overall in the first quarter and believe we are on track to meet our expectations in 2013. While interest rates remain a challenge and competition is adding to pressure on loan pricing, we continue to execute strongly and to deliver growth in our core business. We are well positioned to deal with these challenges, both tactically and strategically. We have a high quality and liquid balance sheet. We are well capitalized. We have near term and long term growth opportunities. And few, if any, banks could even begin to build the capabilities and unique competitive position we have created over the three decades.

Rest assured we are doing everything in our power to maintain and extend that position and to continue executing on our long term growth strategy. Fortunately, for us the innovation sector is alive and well, our pipeline looks good, and we remain positive about our prospects for 2013.

Thank you, and now I'll ask the operator to open the call for questions.

(Operator Instructions) Your first question comes from the line of Herman Chan from Wells Fargo Securities. Your line is open.

Thanks. With two former high level executives of the bank now focused on Asia, what's the longer term opportunity there? If we were to fast forward say 10 years from now, what's that business going to look like?

So Herman, this is Greg. I'll answer it and my guess is Dave and Mike may want to chime in. So from a long term perspective there's really two things that I would look at as far as the opportunity in China for us. Clearly, one is the domestic business for the innovation companies, venture-backed companies, technology companies that exist and will be growing in China over the next five to 10 years. And as you know, that's what our core competency is here in the U.S. The second part, and I think sometimes we gloss over this, is that you look at companies in the United States, so technology companies, and I would say that are anywhere from small companies up to companies of a level of $400 million or $500 million plus in revenue. As they expand into Asia or have relationships in Asia, one of the things that we found that they're looking for is a strong trusted partner in the market. And if we can play that role in the joint venture, we certainly believe there is a big opportunity for that.

Now, how big is that, how big will it become? Honestly, it's hard to predict exactly what that will look like. But clearly, we believe it's a big enough long term opportunity that we have. We're committing, as you said, two very senior people to the initiative and expect to have that commitment for the long time.

Herman, this is Dave. I think that one of the things that's important for a startup, and I acknowledge that what we're doing in China as much of the startup is execution and process implementation. And that's a significant challenge for us and we do not want to regret having not dedicated enough resources to it. So my commitment is to work with Ken and make sure that we're not short the resources we need for the kind of execution the market deserves.

Understood. And my second question was with venture-backed [assets] slowing and the pace of fund raising sort of muted, it seems like the activity within your core customer base is slowing. However, in your prepared comments you did seem fairly optimistic. How do you sort of reconcile those two views?

Yes, Herman, this is Greg again. I'd say there's a couple ways to think about it. We look at it as this concept of innovation capital being one, and that's really important because it's not just venture capital. Venture capital is a core critical part of it, and I agree with your points that clearly the fund raising from venture capital has slowed down, no question about that. But when you look at the level of corporate venturing that's coming in, when you look at the seed funds that are being put out there, when you look at the level of angel funding that's coming in, all those things contribute to this innovation capital, which we again feel is very healthy.

The secondary point to that is when you look at the capital that it takes to form companies today, it's a lot less. So you're seeing companies form with very little capital and get to revenue much more quickly. Literally, it could take a tenth of the level of capital that it did a decade ago. So we looked a lot at company formations, which is why, as I said in my prepared remarks, we look at the number of companies we're bringing in at the very early stage. And at the very early stage, for the third year and fourth year in a row, since we've really spent a lot of time tracking it, we've seen very strong growth in that number.

So part of our point of view is the number of companies we're bringing in. Part of our point of view is that we're doing a better job of tracking the total innovation capital. And the last part is this, what's happening in the market, which is companies are just running more efficiently with less capital. So I agree with your point on the venture capital side, but we're taking I'd say a more broad based approach to the health of the market.

And Herman, his is Dave. I think a better measure to watch as opposed to the dollars, because as Greg is indicating, depending upon what is innovative at the time, some companies require more capital than others right now, and a part of the cycle where new companies can be started and managed to cash flow breakeven off of smaller dollars, I think the number to watch instead of dollars is the number of rounds that are closed on a quarterly basis. And what you will find is that there's a long history with roughly 800 or 900 companies every quarter closing on rounds. And that indicates that the volume of opportunity is not decreasing.

Understood. Thank you very much.

Yes.

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

Good afternoon. Congratulations, Dave, on your promotion.

Thank you.

I just wanted to ask in terms of the securities portfolio, are there any new comments in terms of what--the yields on your reinvestments, how much they're decreasing each quarter, or any particular remarks on situations or anything like that?

So just two high level comments. One, the duration is about 2.4 years, so it hasn't really changed a whole lot since the prior quarter. In terms of reinvest yield, they're approximately around that 1.5%. So it's a touch below the current yield that's on our portfolio. But again, not too far off. So the downward progression that we have seen over time is seeming to be tempering. As you know, as I mentioned in the prepared remarks, we were certainly helped by the reduction in the premium amortization expense for the quarter.

Okay, very good. And then, a follow up to your remarks about the deposits being down in the quarter. And one quarter does not make a trend. But in terms of seasonality, is there any seasonality we should be thinking about in there or not really?

I'll go ahead and start off, then Greg or Dave can maybe (inaudible) that. I don't really think it is so much a seasonality at least for the deposits. But the one thing I'd perhaps suggest to consider is the run up we had in fourth quarter was so strong. And I mean, we grew several billion dollars in that fourth quarter. And so, this could be just a little bit of tempering and kind of getting back to a normal level of things after settling down after such a rampant run up. Stepping back a bit--and that's what we talked a little bit about the total client funds overall, is look, there's still a lot of cash and deposits running around our different clients.

In fact, we saw our average total client funds increased over $1 billion in the quarter. So again, it still looks very healthy. Again, as we said, one quarter doesn't make a trend. And you certainly keep an eye on it. But the positive result, as we mentioned, on the capital ratios as well, too, has certainly helped our tier one leverage ratio at the bank go up to 735 for the first time in over two years or so. So again, there's some positive results of that, but we'll certainly keep an eye on it.

Yes. The only thing I would add, Julianna, is just from the standpoint of, again, we spend a lot of time just looking at the total client funds and think it's in the right direction. If you take--try to temper the fourth quarter a little bit, and I think that's probably the way to think about it, the trend line actually would still be, from my standpoint, still headed in the right direction. Plus again, this is part of our strategy that we've been talking about that we've seen. We would expect to see some tempered deposits for quite a while and finally we started to see it. So we're not surprised by it. And again, we look at the total client funds as the indicator of the health of the overall--of the market.

Very good. Thank you very much.

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

Hey, everyone.

Hey, Steve.

Maybe my first question, many banks out there are talking about competition for lending being taken up quite a few notches here in the first quarter. Could you comment--as you continue to build out the midstage market share, you need to be more competitive on price and how should we think about this flowing through to pressure on loan yields?

Yes, Steve. This is Greg. I'll start, and then Dave will probably want to add. As I said in my comments, Mike said in his comments, clearly, we're seeing a very competitive market. And we've kind of talked about that all of last year, even part of the year before. And we clearly saw that in the first quarter. And as we sit back and from my standpoint this isn't a surprise, we've talked about the fact there really isn't a lot of growth in the consumer side of the business and the retail side of the business. And so, you're going to see a lot more competition in the commercial side or wholesale side. So that isn't a surprise to us. Again, what we've been doing for many years is building on two things. One is making sure that we're doing everything we can to add more value to be the differentiated way to our clients. That's number one.

And I'll give you a couple examples of some of the different events we're doing. And the second part is what we can do from a product set perspective to make it very easy for our clients to do business with us. And whether it's our net promoter scores, whether it's the feedback on the new mobile application we're rolling out, we're getting a lot of really positive feedback. Plus my comments also about some of the awards that we've won in our either international area or other cash management. So it is competitive. It's a dog fight out there, to be honest. And again, it's not a surprise to us and we're doing everything we can to make sure that we're maintaining and actually growing our market share.

And Steve, this is Dave. And I'll just expand on one thing that Greg mentioned, and that is the product side of it. So we don't want to think about the lending opportunity by solely focusing on the interest rate and the loan fees. What we want do is we want the entire banking relationship. So the companies that are going to find the better competitive environment are also the companies that are going to be producing more cash flow, more fee opportunity. So it is for us an all-in value of that client, not just strictly in the loan rate.

Okay. And maybe if I--that's helpful. If I could ask just one follow up. Greg, in your comments you said that new early stage clients acquired it looks like 25% or so year-over-year. Is the market actually growing that fast, or is just your share expanding here?

Steve, I--so, no, I don't think the market is expanding that fast, although I do think it's expanding faster than what people would believe. And it's part of what we said earlier, just the ability to start a company today is easier from a capital perspective, it's easier from a technology perspective, and so more companies from our standpoint are being started. So that's clearly a part of it. And the other part of it is I think our teams are just doing quite honestly an excellent job of being in the right place and the right market, whether it's--we had teams of people down at south--by southwest. We're getting really close to a lot of the key incubators and accelerators and just making sure that we're there and working with them, adding value, building relationships at a very early stage. So it's really the combination of both those things that's driving that 25% growth.

Okay. Thanks for the color.

Yes.

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

Thanks. Good afternoon, everyone, and first off, I too offer congratulations, Dave, on your new assignments.

Thank you, Joe.

On the lending side, I wondered if you could comment a bit more on the loan pipeline, and specifically how you saw it build through the quarter, and also if you could comment on the mix, including capital call lines are again a big part of that.

Sure. So Joe, let me at least start that. In the quarter, as expected, we saw the capital call activity fall off. Period end to period end it was roughly a $400 million decline. As you look at the period end numbers, total loans were only down $100 million. So there were $300 million of incremental loans in other areas. And an important factor for that is capital call loans, as you well know, tend to be very short. A lot of them--not all of them--but a lot of them 10 and 20 day outs, versus a lot of this other business would be out, in a lot of cases, the entire 90 days of a 90 day quarter. So having that kind of growth puts us with a good platform for the second quarter.

I also look at what we have been seeing in the loan approval--loan committee process for the last several weeks, and we continued to see good quality opportunity at that corporate financed buyout level. Now it's not all about corporate finance and buyout. Every part of our business is seeing a growth as was discussed with Steve a moment ago. Early stage are small loans. So a lot of them wouldn't necessarily make a huge difference in terms of overall volume. Middle stage are bigger, but still it takes a lot of them to make for a huge--but if we have a few of the buyout corporate finance loans that fund at a $25 million level, then it doesn't take quite so many of them to provide the kind of growth that we need in our guidance for low 20% growth.

Okay, that's very helpful. Thanks, Dave. And then the other question is for Mike. You touched on this a bit, but I just--your guidance to net interest assumes premium amortization levels similar to the first quarter. Since Perion we've seen 10-year yields down and average secured and prepayment speeds increase again, or is that already taken into account with your new guidance?

We've taken that into account at the moment. But to your point, it can move up and down but again, we obviously raised our guidance because we feel fairly confidently going forward based on the levels we're at.

Okay. Thanks.

Your next question comes from the line of Brett Rabatin from Sterne, Agee. Your line is open.

Hi, good afternoon. I wanted to get a little more color if I could, basically asking the previous question a different way. If we're thinking about link quarter loan yields, they were down 20 basis points, and if I heard correctly, 13 of that was prepay fees this quarter. Would it be reasonable to assume the pace of pressure on loan yields aside from prepay is similar going forward, or should it increase, just given the competition?

At this juncture, I think it's--you're probably going to see a fairly consistent trend going down. Again, it's partly competition but it's also a little bit of the loan mix, because when you're issuing some capital call lines, they're actually at a much lower--they're at prime or in that neighborhood as well, too. So it's a little bit of both, but again, I think you can kind of see that glide down over time as kind of that similar trend. But again, just consider the mix or the type loans we're doing.

Okay. Fair enough. And then the other thing I wanted to get a little more color on if I could was just around the fee income guidance and kind of how you changed it this quarter, given the lower yields on certain products. It doesn't seem like rates have changed too much. Can you talk a little more about just the product sets and the investment fees that you're essentially seeing decrease relative to your previous expectations?

Let me just try to put it in perspective a little bit, because we adjusted the driver outlook from the mid-teens to low teens. So really we're talking about 2%, 2.5% decline in outlook. And when you're looking at a number, you're talking about $3 million, $4 million, $5 million, somewhere in that neighborhood, again, just kind of a range. But really the key driver is coming from that client investment fees, as I alluded in prepared remarks. But specifically, when you look at the repo transactions that we're facilitating for our clients, the yields in that area have just been down quite a lot in the first quarter. So when there's only 3, 4 basis points for our client, there's just no way you can really capture much of a fee for ourselves as well. So that's kind of the big driver.

And so when you think about that client investment fee number being down some $1.5 million, $1.6 million in the quarter, and you kind of extrapolate that out for the rest of the year, you're looking at $3 million, $4 million, $5 million a year. So again, we just wanted to just tweak it a bit. But again, it is real, [the] repo rates are absolutely down.

Okay. I appreciate the color, very helpful.

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

Thank you. Maybe just more of a broad, theoretical question. Is there anything that we sort of externally to the bank kind of look at to get even a sense of the pace of growth in the VC market or how that's trending up on any given quarter? Just given, obviously, you had the $400-ish million decline in capital call lines, is there any way that we would know that ahead of time or have an index to at least get a sense of it? Thanks.

Ken, this is Greg, and then Dave may want to add something. So we obviously have internal information that we look at that we can attract that gives us a little bit of an indication. But really, from a public perspective, the best data that you're going to look at is going to be anything related to National Venture Capital Association data, and there's some other, 2 or 3 different groups out there that kind of track it. But outside of that, honestly, there really isn't public data. And it wouldn't be something that we would obviously share within the quarter to give that information, so.

And, Ken, this is Dave. I guess one other [spot] that we've talked about in prior calls is timing's everything. Again, with capital calls tending to be out 10, 15, 20 days at a time, a transaction closed on, say December 10th, 2012, might have been repaid by December 31st. So depending upon when the transactions close, close to quarter end, it can make a big difference in terms of $100 million, $200 million, or $300 million.

I guess I'd also say that on the capital call side, we have a huge market share for the venture capital side and we have a building market share good, [but] building market share on the private equity. The difference in size is significant. So a venture capital firm making an investment could be anywhere from, say high 6 figures to high 7 figures, versus a private equity firm making an acquisition, a capital call could very easily be several 10s of millions of dollars.

So the one thing that I think can be watched with less-than-perfect information is just what may be said generally about the volume of M&A transactions and, particularly, the business involved in the private equity side.

Got it. But again, just to be super clear, you guys do feel good about the rebound in capital call lines going into the next or the rest of the year versus what we saw this quarter?

Let's put it this way, Ken. There's nothing out there that we would point to that would cause us to change our point of view about an average capital call borrowings and so forth. Again, it was just down from last quarter. But again, as we predicted, last quarter was elevated, and we expected this quarter to be down, and that's how it played out. So do we think it'll rebound? I think you have to take a little bit of an average point of view from a quarter-to-quarter, because, again, you could literally have, considering how large these deals are and they only are out for 10 to 20 days if you're looking at a period of time, [point of] period end, you could end up with some spikes.

So there's nothing that we see that would cause us to change our outlook for what we see from capital call lending.

All right. Thank you.

Next question?

Your next question comes from the line of Gaston Ceron from Morningstar. Your line is open.

Hi. Good afternoon. Thanks for taking my question. I just wanted to address one quick point, which is, I don't know if you mentioned this, but it looks like on the release you guys said that the concentration -- it looks like the concentration of loans to large clients have come down a little bit. I'm talking about the loans to any single client equal or greater than $20 million. I think that went down about -- from $3.1 billion to $3.0 billion.

I'm just curious where you're expecting that over the longer term, because I think you said earlier in your comments that in startup activity and whatnot, you're seeing companies being started with less amounts of capital these days. So would you expect then that concentration of loans to [certain kind of] larger clients is going to go down over time?

Gaston, this is Dave. So some information in terms of the clients with funded balances, $20 million and larger, for the December period, there were 103 of them. For the March period, there were 100 of them. So nearly the same number.

The significant decline, as you might expect, and as, well, I guess as you see with the disclosure, is in what happened with the private equity lines of credit. And again, that's the capital call. So as I indicated with a response to Joe, you can see that there is a little bit of growth in some of the other areas. So I think that there's nothing to read in that decline in the first quarter. I think that the kinds of trends that you would have seen first and second quarter, third quarter of last year, might be more indicative of what you could expect to see going forward.

Okay. And then very quickly, just a follow-up on [you, Dave]. A lot of your loan growth has come at a time when, frankly, the economic recovery that we've seen has been tepid to lukewarm, but, yet, you're seeing pretty nice loan growth and you say that the Asian sector continues to do well. I'm just curious, I mean, how would you -- what your expectations would be if economic recovery ever really going to pick up steam. I mean, obviously, I would think you would expect kind of loan growth to trend even higher, but it seems pretty healthy as it is, so.

Yes, this is Greg. And loan growth, from the standpoint if you look at the last several years, part of it has been clearly coming from the low point, from a lower point from a lending perspective. And part of that's kind of being built back up. If we weren't -- if this market were to stay where it is right now, again, we guided towards 20% average growth this year. Could that slow down a little bit in '15, or '14, '15, and '16? Yes, I think so. But clearly, if the market picks back up, it would be the higher end of that range.

And so we're fortunate, whether it's 20% on average or even a little bit less than that or a little bit more, the technology innovation market is the market that is outpacing the rest of the economy. And we're fortunate to be so concentrated in that space that we benefited from that. And that's really what's been driving the growth and will continue to drive the growth.

Great. Thank you for the color.

Your next question comes from the line of Jennifer Demba from Sun Trust Robinson. Your line is open.

Thank you. Just wanted to get some color on the loans outstanding you have overseas. Are the majority of those in the UK?

Yes, Jennifer, this is Greg. And, yes, they are. And again, this is rough numbers. But $500 million in outstandings, you're looking at roughly $400 million, almost $400 million is coming from the UK, a little bit less than that. And from that standpoint, again, as we've said, that's a growth area that we expect to continue to outpace the rest of the business. We feel very good about that for the reasons we've articulated in the past, that the market over there is -- the big banks that are over in the UK are still pulling back. And it's not -- we're looking across all the different segments, whether it's early stage, mid-stage, or in corporate finance, private equity services. So we're being able to grow in all those areas, and that's what's appealing, that's what's driving the growth, and that's what we believe will continue to drive the growth.

Could you envision dedicating more resources to that particular team like you are in China, given the European banks are retreating?

Yes, it's a little bit different. We have fewer people in the UK right now than we do in the China joint venture for a couple reasons. One is, if you think about it, in the joint venture, we're literally building a new bank. So you need all the infrastructure. You need all the compliance. You need all the teams of people there. And that's one aspect of it. Regarding the UK, it's a branch, so it's a little bit different, although we have dedicated a lot of resources to it. And we expect at this growth rate, that we'll continue to add resources to it, as they are not only needed, but to be able to support what we believe is going to be the growth that'll be faster than the rest of the business.

So short answer to your question is, yes, we will be allocating additional resources to the UK.

Thanks a lot.

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

I think most of my questions were answered. I just have one that I wanted to touch on. Rather than the sequential change, basis point change in the prepayment fees, Greg, can you give the actual dollar amount of what those fees were in the quarter and whether that was running maybe below what the average level is, which is typically (inaudible)?

Aaron, I'm going to let Mike answer that question. He's go the numbers in front of him [quicker] than I do.

Sorry, Aaron. Are you referring to the investment securities premium amortization or are you --?

No, actually on the loan book.

Yes, on the loan book. So we actually recently added a disclosure in our press release, which you can refer to. But this quarter, total loan fees were about $16.8 million versus last quarter of $19.5 million. So that's a delta of about $2.7 million. But the bulk of that, the $2.5 million out of that $2.7 million relates to the prepayment or acceleration of the loan fees if that's helpful.

Yes. Okay, no, that's great. And, Dave, good luck with your Mandarin, and let us know when you're ready to take [some visits over to] Shanghai.

I'd say thank you very much in Mandarin, but I can't yet.

You know you still have him for one more quarter here, Aaron, so --

This is Greg. I think we actually are done with questions, so let me just wrap up real quick.

In short summary is that from a quarter perspective, we're pleased with where we ended up for the quarter from a numbers perspective, and continue to see growth, which we are, obviously, excited about, number one. Number two, from a progress perspective on our growth initiatives, whether it's corporate finance, whether it's the globalization, building out our products and services, again, we continue to make progress along those lines. And again, as I said, what we felt good about is, not only did we feel good about our products, our clients feel good about it, but, also, we're getting some acknowledgement from the Greenwiches of the world about what our products are and how they're doing. So we feel good about that.

Regarding Dave's movement to China, I think all of us, well, I know all of us on the team are excited for us that we have such a seasoned senior person that is going to be over there with Ken to build out the Asia practice. And for those people who haven't spent as much time with Dave over the years, what's great about Dave is that what's allowed him to be so successful over the last 16 years in his role, is that he hasn't just been a Chief Credit Officer. He's been a business partner. And clearly, we believe that's what's going to allow him to be successful in Asia and allow us to be even more successful in Asia. And so we feel good about that. And the fact that he's built up an incredibly strong team of people to include Mark on the credit side. So we don't believe we're going to miss a beat on that side either. So that's great.

And the last point I will make is that all of us, again, feel really privileged to have such great clients and great employees at SVB. And again, the combination of those two things, along with our strategy, is what excites us for the long term.

So with that, want to thank everyone for joining on the call, and have a great day.

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