SVB Financial Group (SIVB) 2013 Q2 法說會逐字稿

Good afternoon. My name is Dustin and I will be your conference Operator today. At this time, I would like to welcome everyone to the SVB Financial Group Second Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions) I'll now hand the call over to our host, Ms. Meghan O'Leary, Director of Investor Relations. Ma'am, you may begin.

Thank you, Dustin. Thanks, everyone, for joining us today for our second quarter 2013 earnings call. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux are here to talk about our second quarter results. As usual, they'll be joined by other members of management for the Q&A. I'd like to remind everyone that our current earnings release is available on the Investor Relations sections 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 a 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 in the queue so everyone gets a chance to answer their questions.

With that, I'll turn the call over to our CEO, Greg Becker.

Thank you, Meghan. And thank you, all of you, for joining us today. SVB had another strong quarter. We delivered net income of $48.6 million and earnings per share of $1.06 compared to consensus estimates of $0.94 per share. These results reflect solid performance across the business and strong activity among our clients.

A few highlights, with outstanding loan growth thanks to our success at winning larger corporate clients and our strong relationships w venture capital and private equity firms. Second quarter period-end loans grew by 9% and average loans broke the $9 billion threshold. Average total client funds which includes both deposits and off balance sheet funds grew by $540 million or 1.3% for the quarter which shows liquidity growth of our clients as well as our success with new client acquisitions. Although average deposits were down for the second quarter in a row, off balance sheet funds posted nice growth led by our off balance sheet suite fund. We had healthy gains on VC investments and warrants thanks to relatively robust exit markets and valuation increases as well as our continued emphasis on working with the best and most promising innovation companies and credit quality remains strong overall.

We're very pleased with our performance this quarter and with the year so far. The health of our client markets has been a key driver of our results and clients continue to do well. The VC backed exit market appears to be enjoying a long awaited pickup as well. There were more than twice as many VC backed IPOs in the second quarter as in the first with the strongest showing from biotechs since 2000. Of 21 venture backed IPOs in the second quarter, 57% were SVB clients, another indication that we're banking the best and the brightest. The number of VC backed M&A deals remained steady in the second quarter while we saw an encouraging increasing deal values. The level of venture capital invested picked up during the quarter as well although year to date it's roughly on par with 2012.

The recent trend toward more capital efficient business models with smaller investments has helped new company formation by creating opportunities for new kinds of investors. Innovation capital is becoming much more widely available from non-VC investors including corporates, angels, and specialized seed funds. That's good for our business. From our perspective, new Company formation remains very healthy and we're banking new startups at a record pace. We added 318 new early stage clients in the second quarter, a 30% increase over the same period last year and for the first half of the year we're at 550 new early stage clients, nearly double the number for all of 2010. These early stage client volumes are a key component of our long-term pipeline.

The pace of business for our more established clients remains strong as well with activity among our larger corporate finance clients driving the bulk of average loan growth during the quarter. These clients contributed healthy volumes in our core fee based products which increased by 10% in the second quarter over the same quarter last year. The continued expansion of our products and services is an important part of our long-term strategy to be the bank of choice for innovation companies of all sizes worldwide.

Today we have a complete set of solutions for high performance companies. On the loan side, these run the gamut from traditional working capital loans and acquisition financing to specialized and custom products such as mezzanine debt, liquidity solutions, and private banking. On the non-interest income side we're enhancing our payment systems to make it easier for our clients to do business with us and with their vendors and customers. For example, we're helping our clients who still use paper checks move to more efficient card based accounts payable systems. Near-term we're in production with our transAct Gateway, a platform to allow US clients to fully automate their accounts payable processing with SVB. And we plan to go into production in the third quarter with a mobile deposit platform. Our goal with these enhancements, with new products, and with our global expansion is to be the only bank VCs, PE firms, and entrepreneurs will ever need anywhere in the world.

A long time commitment and focus on the innovation space is a tremendous advantage in this effort. We have global name recognition and a stellar track record in technology, life sciences, and venture capital. Moreover, the knowledge, experience, and relationships we've built over 30 years are more meaningful differentiators in a market that is increasingly appealing to traditional bank competitors. That competition and its impact on pricing is a challenge.

Interest rates are another challenge and although we're pleased to see the markets drive up long-term rates on asset sensitive rates in June, our asset sensitivity is really tied to short-term rates. The good news is the market seems to think a short-term rate increase could happen sooner than originally expected. In the meantime, despite increased competition and pricing pressure, we're working hard to win and keep the best and most promising companies as clients.

Overall, I remain excited about our growth prospects. And our clients, by virtue of being in the innovation space are creating new opportunities, new companies, products, and industries every day. We have built a very strong market position and are well positioned for continued strong performance assuming the economy doesn't deteriorate. We believe we're on track with our long-term strategy of bringing clients in early and keeping them as they mature, providing one stop shopping for VCs, PE firms, and entrepreneurs, doing what we do globally, and maintaining our focus on the client which is the most important thing.

In closing I'd like to share some recent feedback that I received from a spouse of a client of ours. Recently we hosted a multiday event with 75 venture capital and private equity financial executives. And at one of the dinners, our client's husband came up to me and thanked me. He told me that after the firm switched to Silicon Valley Bank, her job became so much simpler, more streamlined, and just easier, that she was able to spend more time with her family and he attributed that to SVB. One of our goals is making it easier for our clients to do business with us. I can't think of a better example of what success looks like than that. That success is really a testament to the dedication of our employees who are the ones taking care of our clients and helping them reach their goals. Their commitment sets us apart and ensures we keep innovating to help our clients succeed.

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

Thank you, Greg. And good afternoon, everyone. We are very pleased with our performance in the second quarter which was marked by continued loan growth and higher net interest income as well as strong gains on investment securities and warrants. There are six things I will highlight in my comments. First, outstanding loan growth and continued high credit quality; second, higher net interest income and an increased net interest margin; third, growth in total client funds despite a decline in deposits; fourth, strong gains from our VC related investments and equity warrants; fifth, lower expenses, as we expected; and six, continued strong capital ratios.

Before moving on, I do want to point out that we are maintaining our overall 2013 outlook although we have increased our net interest margin guidance and slightly decreased our expectations for core fee income.

Let us start with loan growth. Average loans reached another all-time high, increasing by $341 million or 3.9% to reach the $9 billion mark for the first time in our history. This increase reflects healthy demand among our growth stage and private equity clients. We also saw a very strong run up at the end of the quarter in our private equity capital call loans which helped drive up period-end loans by $777 million to $9.6 billion. Given the short-term nature of capital call loans, we would expect many of the capital call loans to be repaid quickly which could result in relatively flat period-end balances in the third quarter. Nevertheless we are on track to meet our full year average loan guidance and our pipeline remains healthy.

Looking at the longer-term we expect our loan growth to outpace that of the broader industry although as our portfolio increases in size, the percentage growth rate will likely trend lower. Turning to credit quality, credit quality remains strong and our underlying credit metrics were solid. Our provision for loan losses was $18.6 million in the second quarter of which approximately $9 million was due to strong period-end loan growth. This compares to a provision of $5.8 million in the first quarter. Net charge offs in the second quarter were $11.2 million or 49 basis points annualized. This reflects gross charge offs of $15.4 million. Net charge offs also reflected exceptionally strong recoveries of $4.2 million, primarily from a single loan. Net charge offs in the first quarter were $4.3 million or 20 basis points.

Our allowance for loan losses as a percentage of total gross loans was 1.23% versus 1.26% in the first quarter. Second quarter non-performing loans were at $41.2 million or 42 basis points of total gross loans, a decrease of $3.2 million from the first quarter. Classified loans remain consistent with Q1. As you can see, we continued to maintain high credit quality and we will remain confident in our credit outlook for 2013 assuming that the economy does not deteriorate.

Now let me turn to net interest income and net interest margins. Net interest income was $170.1 million, an increase of $6.9 million or 4.2% over the prior quarter. This increase was driven by strong average loan growth and higher overall loan fees, primarily pre-payment fees. We're also helped by lower premium amortization expense and our available for sale securities portfolio. These increases were offset somewhat by lower interest income from our AFS portfolio due to declining average balances were impacted by our use of portfolio maturities to fund our loan growth.

Turning to net interest margin, our net interest margin increased by 15 basis points to 3.4% in the second quarter. This increase was due to three factors. First, a favorable change in interest earning asset mix primarily as a result of loan growth; second, lower premium amortization on our available for sale securities portfolio due to a rise in long-term rates during the quarter; and finally, higher loan prepayment fees. These fees also drove the increase in overall yields on the loan portfolio by eight basis points to 5.86% in spite of lower yields on loans before fees. As a result of second quarter improvements to our net interest margin, we have raised our 2013 net interest margin outlook range by 10 basis points. While keeping in mind that net interest margin will be effected by deposit growth and premium amortization, we now expect net interest margin for the full year to be between 3.25% and 3.35%.

Now let's look at total client funds. Average total client funds, that is that some of our on balance sheet deposits and our off balance sheet client investment funds, increased by $540 million or 1.3% to $41.8 billion. This increase reflects higher average off balance sheet funds offset by a decline in average deposit balances. Average client investment funds increased by $711 million to $23.2 billion. This change was largely driven by $573 million or 14% increase in our off balance sheet suite products. Average deposit balances decreased by $171 million to $18.6 billion primarily due to lower non-interest bearing deposits. With respect to period-end balances, we saw an increase in off balance sheet funds and a decrease in deposits. However, we have seen a rebound this month in deposit levels and while it is still early in the quarter, we're off to a good start in Q3.

Now let us move on to non-interest income. Non-interest income net of non-controlling interest was $67.4 million in the second quarter compared to $56.1 million in the first quarter. Please note that this is a non-GAAP number. The increase was driven by gains on investment securities and equity warrants. Gains on investment securities net of non-controlling interest were $9.5 million compared to $5.1 million in the first quarter. These gains were primarily related to valuation increases in our fund to funds. Gains on equity funds were $7.2 million compared to $3.5 million in the first quarter. Most of these gains were due to increases in warrant valuations as a result of funding around updates.

Now let us turn to core fee income, that is fees from foreign exchange, deposit service charges, credit cards, client investments, and letters of credit. As Greg indicated, although quarterly core fee income increased by $3.2 million or 10% year over year, it was flat in Q2 at $36.5 million compared to the prior quarter due to lower volumes from foreign exchange and the challenging fee environment for our client investment funds. Accordingly, we are adjusting our full year outlook range for core fee income from the low teens to the low double digits. However, it is important to keep in mind that the dollar figures driving this change are relatively small and we remain optimistic about the longer-term growth prospects of our core fee income.

Now I will move on to expenses. Non-interest expense was $143.3 million in the second quarter, a decrease of $5.7 million or 4% from the first quarter. This decrease was driven primarily by lower compensation and benefits expense following a seasonal spike in Q1. The decrease was offset somewhat by higher incentive compensation which is a significant variable in our expenses since it is determined by our performance relative to that of our peer group and our internal goals.

Moving on to capital, our capital position is strong and is further supported by our consistent earnings growth and solid credit performance. Our bank level tier one leverage ratio increased by 31 basis points primarily due to earnings growth and to a lesser extent to lower average assets. Our bank level tangible common equity to risk weighted assets ratio decreased by 127 basis points to 11.18%. The key driver of the decrease was the significant increase in risk weighted assets driven by period-end loan growth. Additionally, the decline was affected by a decrease in other comprehensive income from the impact of long-term market rates on our AFS portfolio.

As a side note, the duration on our AFS investment portfolio was a 2.7 years at the end of the second quarter compared to 2.4 years at the end of the first quarter. This increase reflects the impact of recent increases and market rates.

In closing, we feel good about our performance in the second quarter. In almost every respect we're on track to meet our expectations and our outlook for 2013. Our clients continue to do well and there are signs of modest improvements in the overall economy. The interest rate environment remains a challenge and although we have seen a slight benefit from movements in long-term rates, increases in short-term rates will benefit us significantly. Irrespective of if and when rates improve we continue to focus on things in our control. We have meaningful near-term growth opportunities. We remain well capitalized and highly liquid with outstanding asset quality. We have talented and motivated employees and the best, most dynamic clients of any bank. Together, these advantages enable us to deal with the current market challenges and drive our long-term growth.

Thank you and now we'll be happy to take your questions.

(Operator Instructions) Steven Alexopoulos, JPMorgan.

Maybe I'll start on the securities book. It doesn't look like you added to balances this quarter just given what loan and deposits did. I'm curious as those capital call balances come back in the quarter, maybe for Mike, what's the reinvestment opportunity in terms of yield under securities given what the curve has done?

You're right. We didn't really add to our loan portfolio in the given quarter. If we do happen to have surplus or at least a view on the surplus deposits and cash to invest, we're essentially going to take the same approach with our investment portfolio as we had in the past. But again, you're not going to really see anything significant in growth this year even if we do get to reinvest it but if we were reinvesting it would probably be somewhere 225 to 250 basis points is probably what we would end up reinvesting at. It just depends what securities we chose.

That's helpful. I want some color on the UK balance, maybe the balance of the loans, how it changed versus 1Q? And can you talk about what essentially is the make up of the loan portfolio at this stage? Is it capital call lines? Software acquisition loans? Thanks.

Sure, Steve. This is Greg. I'll talk about that. We have about a little more than 300 corporate accounts opened up so far in the UK branch and about a little more than one-third of those are US clients that are doing business in the UK. So, we're setting up operations for them with the balance being local companies in the UK.

I guess first and foremost we feel very good about where we are. We're ahead of our expectations. From a loan perspective last quarter we said it was around 400. It was actually a little bit less than 400. Right now we're kind of a little bit higher than that but it's in that range. It's made up of a combination -- you take our portfolio in the United States and you just mirror that against the UK. It's pretty close. When you look at growth stage company, corporate finance, buyout, and including capital call facilities, quite honestly that's what excites us about it. We're not doing new things or different things there. We're consistently taking the profile of our clients in the United States and doing the same thing for them in the UK.

We feel very good about where we are. We're optimistic about the outlook for the balance this year. And look forward to healthy growth. It could be as much as 50% year over year.

Joe Morford, RBC Capital Markets.

I guess first a question for Mike, if you could clarify the guidance on the margin a little bit? The thing is if you hold flat here at 340 through yearend we'd be slightly ahead of the full year range. Is that because some of the loan prepayment fees booked in the second quarter might not be repeated? Or is there some move with premium amortization or price competition?

Yes. You kind of answered your question yourself. Certainly be the loan prepayments again were a bit elevated in the quarter so that will be effected and the same thing on the premium amortization. But the other factor to consider as well too is where are we coming out on the deposit growth? If we're coming out on the lower end of the range of the deposit, that would certainly perhaps hold back or would help improve the net interest margins. There are those factors to consider.

Then only because it might be the last chance I get to ask Dave a question, I'm wondering if he's there.

He's here.

Maybe, Dave, if you could provide some details on the increase in gross charge offs this quarter and also just the outlook or the pipeline for additional recoveries?

So, thanks, Joe. I will take the last opportunity. The charge offs in the quarter were the result of several months and several cases of working through some lesser quality assets. You see that with the decrease in the non-performing loans in the quarter. So, still mostly early stage companies as has been virtually a 15 year track record today. And on the recovery side we're very proud of what was accomplished in the second quarter with the $4.2 million of recoveries.

I only wish I could leave Mark with an opportunity to recover as much. But realistically it's not there. So, there are several small opportunities and recoveries for the foreseeable future, probably will reflect what you had seen over 2012 and the first quarter of 2013, much more so than what you saw in the second quarter of 2013.

Julianna Balicka, KBW.

I have a couple of questions. One to kind of follow-up on the question began by Joe on the charge offs, Dave, you said that the current charge offs this quarter came from a pace of work outs that are kind of building over several months to develop MPAs. Kind of looking forward is there more of an agreement that this is something that's finished out at this point or is this an ongoing process and there may be a couple more quarters of little bit higher charge offs before they drop back down?

So, I am thinking that in any given year there could be one quarter that kind of stands out over the others. We had one quarter in 2012 and the second quarter of 2013 could well be that one quarter. I appreciate also that in that one quarter we're talking about a 50 basis point annualized level of net charge offs. So, while we have otherwise provided guidance, net charge offs would range from 30 basis points to 50 basis points over an annual period. The idea that we could have net charge offs at 20 basis points in the first quarter as was the case and 50 basis points annualized in the second quarter feels fine and I'm thinking that if the economy holds that there's good reason to think that in the foreseeable future would hold net charge offs that might be bracketed by the first two quarters' performance.

That makes sense. And then on the AOCI declines this quarter, any thought about any changes or any thoughts on that security portfolio management going forward in terms of issuing AOCI decreases or in general can you elaborate a little bit more on that?

We've been gearing our securities portfolio to a relatively what I would call sensible shorter-term duration in expectations of some of these rate moves. Our portfolio is fairly well seasoned. So, if rates do continue to go up, I really don't think if you're getting into duration extensions, I really don't see it extending out too much further. We are at 2.7 years here currently. And again we see perhaps probably we're quite comfortable going up to the end of 3, 3.5 years as well too but we don't see it extending out too, too much further.

Jennifer Demba, SunTrust Robinson Humphrey.

My questions have really been covered but I'm curious if you can give us just an overall data on the progress of your private banking effort over the last six, nine months and how is that going according to plan and where you see it going in the next couple of years?

Sure, Jennifer. This is Greg. I'll give you my perspective on that. I would say the private bank is first of all very focused. That's kind of the most important point. We're working with our venture capital, private equity firms and the individuals that are part of those firms plus increasingly the CEOs of our high performing companies. And again, the strategy is to really be very targeted. I think that's our value proposition is when your whole product set is designed around very specific individuals you can really hopefully add a lot of more value and customize to them.

Our view is progress is going well. We saw nice growth this last quarter in the private banking loan portfolio. But again, it's going to pace itself at a pretty consistent level compared to the rest of the loan portfolio growth. You shouldn't see it grow quite honestly a lot faster or a lot slower than the rest of the loan portfolio. But it's on track. We feel good about it. And the feedback we're getting from clients, most importantly, has been exceptionally positive.

Ken Zerbe, Morgan Stanley.

In terms of your growth in the larger client side, can you just talk about how much of that came from acquisitions or buyout activity versus other types of more traditional C&I lending in the tax space? Thanks.

Yes, this is Dave. So, the majority of that growth would have come from acquisition financing, Ken. And it's simply because when we book $20 million, $25 million, $30 million for an acquisition financing we're going to enjoy that $25 million for the entire next 90 days versus when it's a working capital type of financing and it could be out for 15 days or 45 days. So, what we saw in the second quarter was the expansion of average loans primarily from acquisitions that were largely booked in the first quarter.

John Pancari, Evercore.

I'm wondering if you can you give us more color on your loan growth outlook? Your low 20s range for the year over year seems a bit conservative I guess because it implies flat balances obviously for next quarter which you've already mentioned but also for the fourth quarter. It implies flattish as well by my math. So, just wanted to so if you could give a little bit more color there, if it could be on the conservative side.

John, this is Dave. One of the things that you would say following us for as long as you have is that we have average loan growth that tends to be below the period ends. So, it is not unusual for the average for the following quarter to be anywhere from say 3% to 5% below the period end balance of the prior quarter.

So, when you think about average we had a little over $9 billion of average in the second quarter. That average if we were to continue it for third and fourth quarter, meaning that if we'd had the last three quarters for example at $9 billion, we wouldn't get to that low 20s. We're going to need to see that we have a loan growth in the third quarter and fourth quarter not as significant obviously as the second quarter but we'll need to continue to see loan growth in the third and fourth quarter to get that low 20.

So, I would like to exceed the expectation knowing that there will be quality in the business generated but I'd also acknowledge that given the competitive environments that it would be unwise for me to bestow on people that will follow me an expectation that it is conservative. I don't believe it is. I think that Mark and others are going to have to work hard to get to that low 20s.

On the deposit side, can you give us a little more detail on the decline in deposits in the quarter, what you're seeing? Are you seeing any change in depositor behavior? Is it just a shift towards off balance sheet? And then a little bit on the outlook on the deposit side as well?

Sure, John. This is Greg. I'll start and Mike may want to add to it. We did see really an average decline in deposits on an average basis. Again we really try to stress our focus is on total client funds which grew by about $575 million, $580 million during the quarter.

So, from our standpoint it's really what we've been talking about for awhile which is from a capital ratio perspective, we're fine with directing more of the balances, excess balances off the balance sheet and that's what we saw this quarter.

As far as the outlook goes, we kind of described what the outlook is in the guidance but how we see that playing out is we think deposits will stabilize where they are and possibly grow but we expect to see total client funds to continue to see nice growth over the balance of the year. That's a function of both winning a higher wallet share of our existing clients and new client acquisitions.

Brett Rabatin, Sterne Agee.

I wanted to ask about just the loan portfolio. I noticed thinking about the linked quarter perspective, the variable percentage increased and from a 10Q disclosure perspective, you guys probably have the highest asset sensitivity to a 200 basis point parallel shift in the yield curve. What if rates just don't quite do the parallel shift and do what we've been seeing which is the short end takes longer than the longer end to move higher? Can you give us some thoughts on kind of both how your variable loan portfolio has changed and maybe thinking about NII, if the yield curve shift isn't parallel as you guys use in your analysis?

If I understand the question, I think what you're trying to drive at is where do we think loan yields are going to head if the rates stay the same? Is that what you're trying to drive at?

Just thinking about your loan portfolio yield -- I guess the easiest thing to do would be to kind of break out the prime versus LIBOR basis and then just kind of think about how you see your loan portfolio yields rising as rates do rise, whether it be the short end or the long end?

I'll start off and then Dave can chime in here. The one thing to put in perspective is there is that tendency that most of the loans we are issuing today are variable based loans and particularly as we get to some of these larger corporate clients, most of the loans that we're doing with them are LIBOR based types of loans. Again we're continuing to issue these variable basis loans here. Now, additionally a lot of our growth is also coming from the cap core lines of credit which tend to be based on national prime rate as well too. A lot of it just depends on the mix where we go from here but again I think you're going to continue to see the growth areas come from corporate finance and private equity and the associated rates with that. We'll start with that and maybe have the follow-up question on that?

I guess I'm just trying to think about your pricing normally runs off LIBOR and if LIBOR is maybe not quite as fast and maybe prime is needed with the longer end of curve from a treasury perspective. As you think about your loan portfolio yield in the next year or so I assume you're thinking about that rate continuing to maybe decline with competition? Maybe some additional thought on that?

A lot of it will depend again on where the mix comes from. If we have some buyout runs those tend to hold the yields up and you have less to deterioration in value. If the growth is going to continue to come from private equity cap call lines when that's based on the national prime call rate, that's certainly going to bring it down on the overall yield as well. Again, a lot of it just depends on where that mix is going to come from.

You're going to continue to see a bit of pressure on the yields coming down in general but again going back to our strategy, our strategy about going to the larger corporate finance is not just about the loan but the fee income that comes associated with it.

That's good color. The other thing I was hoping to get a little clarification on is you were talking about decline adds in total deposits in the quarter. Could you talk about maybe as rates do go higher your thoughts on bringing some of the off balance sheet back on balance sheet or how you think about funding growth as rates move higher?

Brett, this is Greg. We're going through that process right now and unfortunately I guess we haven't had to think about that a whole lot since rates continue to be pushed out. But clearly what our strategy is is to build a product set that will allow us to continue to loan growth when rates pick back up and one of the risks we have is that you start to see with our very low non-interest bearing deposits is that more of that money starts to chase either interest bearing accounts or moving off balance sheet to get yield. Although we still think we're going to end up with a higher balance than a lot of other institutions with non-interest bearing we're going to have to look at what we're going to pay for our on balance sheet non-money market accounts and make sure we have the right I'll call it toggles or switches to make sure we can keep funding our loan growth.

So, we're looking at it. Clearly the margin will pick up greater with the increase in rates but we'll see some compression. We'll just have to pay a little bit for the deposits that are on balance sheet.

The only thing I would add is that maturities on the investment portfolio, the capabilities of using the maturities to fund our loan growth, right now we have a little over $600 million a quarter that's maturing for the investment portfolio which certainly has been adequate enough to fund the loan growth that we've had because that's quite a large number on an annual basis as well. Just with those maturities, that's quite a healthy amount to fund the loan growth even if it's a very modest growth in deposits on the balance sheet. For the foreseeable future we feel good about the funding of the loan growth.

Herman Chan, Wells Fargo Securities.

My questions are on fee income. You've seen core fee income flattish for a couple quarters now. Given the growth in the larger corporate finance clients, I would assume fee income would trend higher. Could you provide some color on the decline in our fee income outlook and what you're seeing specifically in foreign exchange activity? Thanks.

I'll start and Mike may want to add some color to it. So, we have seen volumes last quarter were up. This is in Q1 and in Q2 they actually declined a little bit and when you look at volumes and you look at margins they were quite honestly just a little bit sluggish in both quarters. Now that being said we still look at the outlook and that is driven by the new client acquisition, the number of corporate finance clients and even with the competitive pressure we still expect it to grow. So, the last two quarters it was a little flat but I guess right now we're not worried about it. We're still optimistic about the outlook. That's one aspect.

The second aspect is the card income and that's our overall credit card fees and those volumes have continued to increase at a very rapid rate over the last 12 months. Actually, the last couple of years. And the outlook that we have for that based on the new products we're bringing of market with a upcyle or uptick we're getting from our customers in adding these new products is actually very positive. We're positive about the outlook and we should expect to see nice growth especially in credit cards.

Understood. On the fund investment gains, are we in a stage in the investment cycle that we should expect elevated levels of gains going forward? How are you thinking about that particular item there?

That's a very, very tough question. A lot of it obviously depends on the environment that we're operating in. If there's a healthy amount of M&A activity, that's very conducive to upside gains, if the IPO activity is very healthy or the valuations on the stock market. So, again, it was a nice surprise this quarter. It was certainly a little bit more than we anticipated but we certainly do expect to have some decent gains going forward again as long as the economy holds true.

Gaston Ceron, Morningstar Equity.

I just had a question about what we can improve from the bank's performance, the company's performance as hopefully the economy continues to improve and your margin hopefully expands? What's the lever, how should we be thinking about the level of operating leverage in the business model? What can we expect? You think as the economy improves, margin expanse hopefully an increasing percentage of net revenue falls to the bottom line?

I'll start off first. Without a doubt, interest rates are going to be one of the key drivers to improve the leverage ratios. But as we said we can't wait around for the interest rates to come back. We think they will come back but nonetheless they're focusing on things within our control. When you think about our operating structure and things we're doing, we've talked about we recently set up an operation center in Tempe, Arizona which again is very conducive to our model to help us scale and certainly is more attractive on a cost basis as well too. Again focusing more on the fee income as well too, trying to grow those as well to offset any challenges that we may have on the interest rates. Some of those things that we're looking at the way we do operate our model, again it's very top of mind for us just trying to manage that efficiency ratio.

Lastly on a different kind of leverage question, again kind of looking at longer-term, what's a good way to think about how you approach just overall leverage? Whether it's TE to TA or asset equity or what not or TC to TA? What's a good way to be thinking about where the bank wants to be over the longer-term?

We haven't come out with any guidance on that. One of the things we have if you're talking about leverage ratio and the tier one leverage ratio again that's something we've been trying to drive up and if we're talking about at the bank level that's certainly something we've said -- Look, we'd like to see it go above 7% and in fact we're actually already there. You saw nice improvement in that leverage as well this quarter too. Given the quality of our equity stack and given the market environments around we feel very, very comfortable with where we're at above that 7%.

Gary Tenner, DA Davidson.

I'm just curious about your provision build in the quarter. Can you talk about the amount of reserve that you allocate to new capital call draw downs as opposed to other parts of the portfolio? Is it a lower provision build relative to those lines?

This is Dave. The answer is yes. Our allowance methodology does take the individual niches and the loss experience we have recognized from the niches in determination of our ultimate recommendation. I don't want to get too far into the weeds to describe that but specifically for private equity and venture capital call facilities the required reserve is a little bit less than the 113 basis points that is the generic allocation per performing loans.

So, presuming that period-end balances in the third quarter are flat as you suggest could happen but the mix is a little bit different, there would still be some amount of reserve build but less so than what we saw this quarter? Is that fair?

If loan balances were flat across the board then all other things equal we could expect to have an allocation of 113 basis points again and presumably then the recommendation for the provision would largely be associated with the net charge off.

Casey Haire, Jefferies.

A question on the SVB prime. Just how much of the loan book is still on SVB prime, how much of a drag was it on the margin? And at what point is SVB prime fully migrated to national prime?

We're pretty much eliminating most of that in our portfolio. It's come down significantly over the last several quarters. I can't really think off the top of my head but I think it's probably somewhere around 10% of it, I'm thinking, 10% to 15%. It continues to come down as we migrate to the national prime rate.

Just thinking longer-term I know you guys have a deeper penetration of the later stage client base which obviously comes with a lower loan yield. I'm just curious how -- what's the mix, what's the composition of that later stage client base today versus, say, 2006 when last time the fed was at a higher rate policy?

This is Dave. The later stage business would be in the ballpark of say $2.25 billion. So, it is call it about 25% of our business and if you wanted to go back as far as 2006 then I would obviously have to be working off the top of my head in saying that but I would say comfortably it was substantially lower as a percent of our business in 2006 than it is today.

We seem to have no further questions at this time. I'll now hand the call back to management for closing remarks.

Great. Thanks. Just to summarize, we had a great quarter. We had strong loan growth and great client acquisition. The gains on securities and warrants were a nice positive uptick as well. So, we're overall good. I guess what I'm more excited about is the outlook and not only what we're building from a new products and solution set but what we're doing globally and how we're supporting our clients. We feel good about the outlook and are looking forward to many years to come. I also want to thank our clients for their trust in us and our employees for their commitment.

And I guess most importantly right now I want to give a big shout out to Dave Jones for 16 years of doing a fantastic job as our Chief Credit Officer and during that time period we've been through a couple big ups and downs and Dave has been a great supporter of strong loan credit quality as well as great loan growth over that time period. I know Mark's going to do a fantastic job but I just want to thank Dave and thank everyone on the phone.

Have a great day.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may all disconnect.