SVB Financial Group (SIVB) 2014 Q2 法說會逐字稿

Good afternoon, my name is Sara and I'll be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group Second Quarter 2014 Earnings Conference Call. (Operator Instructions) Ms. O'Leary, you may begin your conference.

Thank you, Sara, and thanks, everyone, for joining us today. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux, are here to talk about our second quarter 2014 results. As usual, they will be joined by other members of management for the Q&A. Our current earnings release is available on the Investor Relations section of our website at SVB.com.

We will be making forward-looking statements during this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information. This disclaimer applies equally to statements made in this call. In addition, some of our discussion 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 will limit the call, including Q&A, to an hour. And with that, I will turn the call over to our CEO, Greg Becker.

Thank you, Meghan, and thanks, everyone, for joining us today. SVB delivered net income of $50.8 million and earnings per share of $1.04, reflecting another quarter of outstanding balance sheet growth, high credit quality, and strong new client acquisition.

Average total client funds grew by $6.5 billion, a 37% increase over the same period last year. Second quarter growth was due to continued healthy funding for our U.S. VC-backed clients, strong new client growth, and growth in our global business. Average loans grew by $313 million and were 23% higher than in the same period last year driven by our private equity and venture capital clients.

Core fee income remained healthy marked by growth in foreign exchange and continued strong credit card volumes, which were 31% and 35% higher, respectively, than a year ago. And credit quality remained excellent with a provision for loan losses of just $1.9 million. We estimate that losses from our FireEye-related investments reduced second quarter earnings by $0.38 per share, although it's important to note that our total gains from FireEye over the last two years have been more than $50 million.

We are performing well as a result of our focus on the innovation ecosystem where positive business conditions for our clients continue to support our strong performance while expanding the broader market opportunity. For example, sources of funding for innovation companies are expanding. Capital from angel, seed funds, incubators, crowd sourcing, peer-to-peer funding platforms, and successful entrepreneurs are funding a growing share of early stage companies. We've already been seeing some participation in late stage venture rounds from mainstream investment managers.

Venture-backed funding is expanding. In the second quarter, VC funding reached its highest level since 2001 at $13.9 billion across 974 deals. In the first half of 2014, U.S. VC funding grew to $23.9 billion, a 71% increase over the first half of 2013. And corporate venture capital activity is also flourishing in the U.S. and globally as established companies are trying to avoid being disrupted by investing in new companies with innovative products and delivery models.

By some estimates, corporate ventures now constitutes approximately one-third of all venture investing. In May, I spoke at a conference in London attended by 300 corporate executives representing more than $20 billion in venture assets under management. The view expressed by attendees was that growth in corporate venturing will only continue.

This collective expansion of capital for entrepreneurial companies has been a significant factor in increasing liquidity for our clients, which has in turn helped to drive our tremendous deposit growth.

Our continued success at winning new clients has also been a factor in deposit growth since the majority of these new clients are deposit-only. The second quarter was our best ever with 1,067 new client wins, nearly triple the quarterly rate of five years ago.

Another factor of the positive growth has been continued healthy exit markets for our VC-backed companies. There were 28 venture-backed IPOs in the second quarter. 18 of these, or 64%, were SVB client companies. Year-to-date, 59% of all U.S. venture-backed IPOs have been SVB clients. As these companies go public, we're winning a significant amount of their IPO proceeds.

In short, the level of funding activity for our clients remains healthy for portfolio companies at every stage, private equity and VC investors, and corporates.

Our position as the bank for the global innovation economy continues to develop. Let me highlight a few of these areas that give me optimism. We're adding clients at a record pace across nearly every segment as the innovation economy expands. Global loans and deposits now represent 7% and 13% of total balances, respectively. And we expect them to continue growing at a faster pace relative to the rest of our business.

We expect core fee income growth in the high teens this year, and we're working on ways to continue driving this growth. Our private bank, which we built to support the key influencers in our ecosystem, is seeing record growth in loan balances and client numbers, along with very positive feedback on our service. And we continue to support our clients through unique value-add events designed to move their business forward and create meaningful connections that we are well positioned to provide. So I'm optimistic we have the right strategy, the right market, and we are executing effectively.

We do have some challenges, as I've outlined in prior calls. Competition is intensifying. That is affecting our loan income and net interest margin. We expect this very competitive environment to continue, so we're making some hard choices about our willingness to adjust loan pricing, size, and structure. The demands of meeting regulatory requirements are another challenge. We have proactively planned for and invested in infrastructure, people, and technology, to meet expanding regulatory requirements. We will continue to do so as we expect both the regulatory bar and cost will continue to rise.

Finally, let me try to preempt one of the questions I'm sure will be asked on this call, which is with all this new funding activity, higher valuations, and more start-ups than ever, are we in a bubble, and if we are, what are we doing about it? The short answer is we don't believe this is a bubble, but the valuations of some companies and a few industries reflect very high expectations. Here's what we're seeing. The pace of new company formations is high and the solutions these new companies are providing are broad-based, so the innovation economy is getting larger and that's good for all of us.

Companies today generally have better business models than companies 15 years ago, and most are performing well against revenue and growth targets, which allows them to command higher valuations. So if the media and (inaudible) have experienced some frostiness, it's mainly due to the large number of companies being funded in this space, combined with high valuations.

So called sharing economy companies, such as Uber and Airbnb, have also been--have also seen some impressive valuations. But the potential for this type of company to disrupt and dominate entire industries on a global basis appears to set them apart. Likewise, security firms may warrant higher levels of investment and exit activity, as mobile and online businesses become the norm and as security breaches become more frequent and more public.

And despite some frostiness among small cap biotech companies, mid and large biotechs appears to be appropriately valued, based on their very high growth rates. In our view, the innovation economy is thriving and it's generally the disruptive companies, the best performers, and those with the largest market opportunities that are achieving the highest valuations.

As always, we've remained focused on delivering healthy, high quality growth, regardless of the brighter--broader environment. We are disciplined about investing in our business and committed to our strategy through client infrastructure and fee income initiatives. And we believe our talented team of SVB'ers and the investments we have made to support our growth today will help us to continue growing over the long term.

Thank you and now I'll turn the call over to our CFO, Mike Descheneaux.

Thank you, Greg, and thank you all for joining us. We delivered a strong quarter of exceptional balance sheet growth, healthy fee income, and outstanding credit quality. Our results were driven by continued strong execution of our strategy and a positive operating environment for our clients, despite intensifying competition. I would like to call out a few highlights, which I will cover in more detail shortly.

First, solid loan growth. Second, exceptional growth in total client funds, which includes on balance sheet deposits and off balance sheet client investment funds. Third, higher net interest income, despite a lower net interest margin. Fourth, solid fee income with strong growth in foreign exchange fees. And fifth, excellent credit quality.

Additionally, I will comment on investment gains and losses, expenses, capital and changes to our 2014 outlook. Let me start with loan growth. Please note that these are quarter-over-quarter comparison except where noted. Average loans grew by $313 million, or 2.9%, to $11.1 billion during the second quarter. This growth was driven primarily by private equity and venture capital call lines of credit. Period end loan balances grew by $515 million, or 4.8%, to $11.3 billion, also driven by capital call lines of credit, as well as our private bank.

While we view this pace of loan growth as solid, some categories of loans are nevertheless being impacted by the intense competitive dynamics Greg referred to, especially sponsor-led buyouts. In addition, we have a growing number of loans that are beginning to mature in our buyout portfolio. While our high velocity client base has always generated relatively high turnover, the dynamics surrounding the competitive environment, coupled with the size of credit, could make it somewhat more challenging to replace these high yielding loans.

Nevertheless, our loan growth in the first half of the year, and particularly the first quarter, has been very strong. Strong enough that we are increasing our full year outlook for loan growth, which was in the high teens. We now expect loan growth in 2014 in the high teens to low 20s.

Moving to total client funds, we continue to benefit from our strong deposit franchise. Average total client funds, that is, on balance sheet deposits and off balance sheet client investment funds, increased by a phenomenal $6.5 billion, or 12.8%, to $57.3 billion during the second quarter. This tremendous growth was driven by continued strong funding and exit markets for our clients and our continued success at winning new clients.

Average off balance sheet client investment funds increased by $3 billion, or 11.1%, to $30.2 billion, primarily driven by continued growth in client funds managed by SVB Asset Management, due to a healthy IPO and funding environment for our clients.

Average deposit balances grew by $3.5 billion, or 14.8%, to $27.2 billion, primarily driven by our accelerator and private equity clients. Our deposit growth has continued to exceed our expectations and as a result we are increasing our outlook for average deposit growth for the full year of 2014. We now expect deposits to increase at a percentage rate in the low 40s, compared to our previous outlook of the high 20s.

Moving to net interest income and net interest margin. Net interest income increased by $8.6 million, or 4.4%, to $205.4 million in the second quarter, driven by a significant increase in the average balances of our fixed income investment securities portfolio. Average balances of fixed income securities, which includes available for sale securities and health and maturity securities, increased by $2.9 billion, or 24%, to $15.2 billion, resulting in an increase of $9 million in interest income in the second quarter. Period end balances increased by $4.3 billion, or 33%, to $17.1 billion. Both the average and period end increases were due to the deployment of excess deposits, which grew significantly.

Overall, yields on our fixed income portfolio decreased by 13 basis points to 1.71%, primarily due to lower reinvestment yields on new investments made during the quarter, the impact of which was offset somewhat by lower premium amortization expense. We added new investments of $4.5 billion, including $4.2 billion of U.S. treasuries, with the remainder in agency issued mortgage securities, as part of our continued focus on limiting our duration risk.

The duration of our fixed income investment securities portfolio was 3.1 years in the second quarter, compared to 3.3 years in the first quarter. During the second quarter, we re-designated $5.4 billion in available for sale securities as held to maturity. We expect that this change will help mitigate the potential impact on tangible book value of an increasing interest rate environment.

Interest income from loans decreased slightly by $492,000 to $147.7 million, driven by lower loan prepayment fees recognized in Q2, compared to Q1, which included $2.1 million in prepayments related to a single client. This decrease was partially offset by loan growth and one additional day in the quarter.

Overall, loan yields declined by 23 basis points, from 5.58% to 5.35%. Our ability to grow loans has historically driven higher overall net interest income. But we expect loan mix, competition, and the low rate environment to continue to pressure loan yields moving forward. In addition, as I mentioned, we are starting to see turnover in our sponsor led buyout portfolio due to maturities, which affects loan income, growth, and yield.

Nevertheless, we are increasing our outlook for net interest income for the full year 2014, due primarily to the impact of our exceptional deposit growth on our investment securities portfolio. We now expect net interest income to increase at a percentage rate in the low 20s, compared to our prior outlook of the high teens.

Moving to net interest margin. Net interest margin was 2.79%, compared to 3.13% in the first quarter, which represents a decline of 34 basis points. The decline was largely driven by the significant inflow of deposits deployed into our investment securities portfolio, and to a lesser extent, by changing loan mix and the competitive low rate environment.

While we expect continued loan growth to partially offset pressure on our net interest margin, as a result of these factors, we are lowering our net interest margin outlook for the full year 2014 to a range of between 2.75% to 2.85%. This compares to our prior range of 3.1% to 3.2%.

Now turning to credit quality. It remained excellent during the second quarter, marked by lower net charge-offs and continued positive underlying credit trends. We recorded a provision for loan losses of $1.9 million, compared to $494,000 in the first quarter, albeit both are exceptionally low.

Net charge-offs were $4.8 million, or 17 basis points, reflecting $6.4 million of gross charge-offs, primarily related to early stage loans in the software portfolio. Our loans for--our allowance for loan losses declined due to the continued strong performance of our loan portfolio. The allowance for performing loans was 1.02%, compared to 1.07% in the first quarter.

Non-performing loans decreased by $2.6 million to $22.4 million, compared to $25.1 million in the first quarter, when we resolved certain previously impaired loans. At 20 basis points of total gross loans, non-performing loans are well below our five-year average of 66 basis points, and are at their lowest level since Q3 2008. Likewise, criticized loans at 5.5% of gross loans, are near their all-time-low of 5.2%.

Now let us move to non-interest income. Non-GAAP non-interest income net of non-controlling interest was $49.5 million, compared to $123.5 million in the first quarter. That decline was primarily driven by private equity and venture capital related investment losses of $22.1 million, net of non-controlling interest, the majority of which were due to our FireEye-related investments. And to reiterate Greg's earlier comments, our FireEye-related investments have performed extremely well, with aggregate warrants and investment securities gains net of non-controlling interest, of more than $50 million over the life of the investments.

Notwithstanding FireEye's impact in the second quarter, the positive overall investment and exit trends that have benefited our investment securities and warrant portfolios in prior quarters continued. The highlights of the quarter included gains of $11.6 million on the remaining portion of our PE and VC-related investment securities portfolio, and gains on derivative instruments of $12.8 million, primarily driven by equity warrants. We also had slightly lower core fee income of $50 million, but it was still underpinned by stronger foreign exchange income and healthy credit card activity.

Next, investment securities losses from FireEye totaled $30.4 million in the second quarter. This number reflects an unrealized loss of $16.4 million from our managed direct venture funds, and a $14 million realized loss from the sale of all of our warrant-related FireEye shares, both due to decreases in FireEye's stock price during the second quarter.

At June 30, our managed funds still had exposure to FireEye shares. We estimate, based on their levels of exposure at June 30, that the impact of $1 change in FireEye stock price would equate to a $1 million valuation change net of non-controlling interest. To be clear, this is an approximately--approximation, and of course, it can vary.

The gains on the remaining portion of our investment securities portfolio were primarily due to strong distribution and increases in valuations.

Gains on equity warrants were $12.3 million in the second quarter, due to increases in private and public company valuations. This compares to $25.4 million in the first quarter, which benefited from $15.2 million in warrant gains related to FireEye. Now, I will move on to core fee income.

Core fee income remained healthy with a solid performance in credit cards and foreign exchange, despite a decrease of $1 million in the second quarter to $50 million. The decline was primarily driven by a $1.3 million decrease in letter of credit fees due to a one-time fee adjustment, lower fees from syndicated lending, although deal volume was higher, and higher expenses related to our card rewards program. As a reminder, core fee income includes foreign exchange, credit cards and letters of credit, deposit service charges, lending related fees, and client investment fees.

Foreign exchange fees remained strong, increasing by $732,000 to $17.9 million, due to strong growth in transaction volumes, despite a seasonally strong first quarter.

Revenue from credit cards was essentially flat quarter-over-quarter at $10.2 million, reflecting volume increases offset by higher reward expense, as previously mentioned. But it is important to point out that gross revenues from credit cards increased by approximately 10%, reflecting our continued focus on penetrating and expanding our clients' use of cards. Total card revenues were 35% higher than the same quarter last year, and transactions increased by 28% in the same period.

As a result of continued healthy momentum in fees from foreign exchange and cards, we are increasing our full year 2014 outlook for core fee income growth to the high teens, compared to our prior outlook of the low teens.

Now turning to expenses, non-interest expense increased by $1 million to $173.4 million, primarily due to an increase in the provision for unfunded credit commitments and higher FDIC expense related to asset growth. These increases were largely offset by lower compensation and benefits expense, primarily due to seasonally higher first quarter expenses and lower incentive compensation related to FireEye due to valuation decreases in the second quarter.

While we are maintaining our current full year outlook of expense growth in the low double digits, we expect to come in at the high end of that range, and could increase it if continued strong performance drives better than expected results.

Moving on to capital. Growth in our core earnings continued to increase our capital base and our capital ratios remained strong and were further supported by our capital raise in May. In particular, our bank level tier one leverage ratio, which has been impacted by strong deposit growth, increased by 79 basis points in the second quarter to 7.51%. Tier one leverage at the holding company increased by 75 basis points to 8.74%. And our total risk based capital ratio at the holding company increased by 195 basis points to a very strong 15.36%.

Looking ahead, we expect our capital raise and earnings to support a significant amount of deposit growth and continue to target a bank level tier one leverage ratio between 7% and 8%. However, given our increased outlook on deposit growth, we will continue to closely monitor the leverage ratio to ensure we are well positioned to support our future growth.

In closing, we delivered strong results in the second quarter and are well positioned as we move into the second half of the year. We have raised our full year 2014 outlook for loans, deposits, net interest income, and core fee income due to healthy growth in the innovation economy, positive business conditions for our clients, and our continued solid execution.

While the rate environment remains uncertain, we are not waiting for rising rates in order to grow. We continue to add new clients, grow interest-earning assets, building core fee income, and delivering solid performance. Competition remains intense and we are taking a measured approach where we feel it is warranted. However, we still see opportunities regardless of these challenges.

Thank you. And now, I'd like to ask the operator to open the line for Q&A.

(Operator Instructions) Ebrahim Poonawala, Merrill Lynch.

Good afternoon, guys.

Good afternoon.

So I guess just a quick question in terms of deposit growth. I'm just wondering what's the visibility in terms of any look at the second half of the year in terms of your guidance relative to the strength that you see in activity. And I guess it's a good problem to have. But is this growth--deposit growth surpassing your expectations? And the bank--leverage issue of trending closer to 7% as we sort of get closer to the end of the year, is that of reasonable concern or using--it's a stretch that we can get anywhere close to that?

This is Mike here. It's obviously a real challenge to get visibility, and to your point, it is a high quality problem to have. I mean, if you step back and look at the increasing sources of funds going into the VC environment, again we continue to exceed expectations on the deposit growth. So I would admit that it is tough to see, and to see that level of growth, but obviously when we're talking about deposit growth, a lot about what we talk about is average growth.

So being halfway through the year, you can pretty much get some visibility on some of the numbers, but clearly you can have some upside surprises to the upside. But naturally, you also want to keep aware on how the general economy is going, how the general VC funding markets are going because obviously it could change. But nonetheless, what we see as of June 30, it certainly looks extremely strong.

Ebrahim, this is Greg. Let me just add onto it. When you look at the first half of the year in fundings, right, you had about $9 billion--a little more than $9 billion, almost $10 billion in the first quarter of venture capital activity, $13.9 billion in the second quarter. So you're looking at $24 billion for the first half. My view is that number in the second quarter is not going to be repeated. It could be, but I just think it's going to slow down a little bit there in probably the second--fourth quarter as well.

So I think you'll see some tapering. Obviously we still expect to see growth in the second half, but I don't think it will be at the same level we saw in Q2.

Good. And I guess my second question is just in terms of, Greg, if you can talk about obviously we see the FTE had kind of again went up and has been growing over the last several quarters. Just in terms of what the hiring outlook is, where have you been hiring, and competitive pressures in terms of competitors taking talent from SVB.

Yes. On the headcount, yes, it has been growing. But remember, you--we've got a lot of different initiatives that are not only just supporting the growth that we're having, we're continuing to invest for the future growth. What I mean by that is let's take global as an example. So we're adding people in the UK. We're adding people in China. And part of this is to support the growth that we have. But also, we want to hire ahead of what growth opportunities we're going to have in the next six months, nine months, 12 months. We need to get those people trained, up to speed, and ready to go and ready to perform.

So that's one example. But we're also bringing it in in operations. We're bringing it in in IT. We're bringing it in the front line sales support, client service. Again, we have a huge growth engine here, and we need to make sure we're supporting that. Regulatory side is part of that. But we've been hiring in that area for quite a while. So it's pretty broad based. And it's not just in one area.

Right. And thanks a lot.

Yes.

Aaron Deer, Sandler O'Neill.

Greg, you've highlighted the increased competition that you're seeing. Can you talk a little bit about what you're seeing in terms of pricing and structure, and kind of what are you seeing that would cause you to step back from a deal?

Yes. So Aaron, I'll start and then Mark Cadieux may want to add something to it. It's really--what's great about our business is that we have a lot of different growth opportunities. So it's not just one area. And if it was just one area, I'd be more concerned. But you've got in--we have growth opportunities in global. You have growth opportunities in the private bank and buyout financing in the growth stage and later stage.

So what you're seeing in certain areas such as our buyout financing, right, multiples are being pushed up from a leverage perspective. And we've been pretty disciplined about where we want to play and where we don't want to play. So when you start seeing leverage multiples above 4.5, 5 times, we start to ask ourselves the question, is this company unique enough to really say to us that it justifies that high a leverage ratio. So it's both pricing we're seeing some pressure, and again we're willing to move on that for the right company. You're looking at size of deal, and you're looking at structure.

And we're seeing, I guess, competition in kind of all three of those areas. That being said, you've got to remember, we still had growth during the quarter. We still expect to see growth for the balance of the year. But that's mainly because we have this--a bunch of growth targets we're going after, not just one area.

So lots of opportunities for us. It's just we're being more selective in which ones we're picking and choosing to be more aggressive with. I know Mark--.

--Mark Cadieux. And I think you hit all the highlights. There's nothing to add.

Okay. That, I guess, leads into my second question is, on the international front, can you give us an update on kind of where balances are, I guess in both Wellington deposits coming out of London--that office--and then also what the latest is on the joint venture with Shanghai Pudong and when we can expect to hear some more news coming from there.

Yes, so at a high level, I'm going to talk about global overall. And so it's kind of all the global businesses, both the--what we're doing in Asia at SVB, not the joint venture yet, what you're seeing in Europe. And you add all those things together, you're looking at, ballpark, nearly $900 million of loan outstandings collectively.

And what we've seen a lot of growth in is the deposit side from a global perspective. We're--we were just over $4 billion--a little bit less than that at the end of the quarter. So that has grown significantly, right? And it's both because of new client count, and similar to the U.S., you're seeing the average funding size increase as well. So we feel really good--I feel really good about what's happening from a global perspective.

Now let's talk about the joint venture. I'd say the short answer is not a lot has changed. As everyone knows, the big driver of a change in growth is going to be us getting our RMB license in the joint venture. Three years, which is the kind of minimum timeframe to submit a request to get the RMB license, will be kind of the middle of 2015.

We are hopeful--still remain a little hopeful we'll get that license earlier. But let's just say we get it at that point. That's really going to be the first point when you start to see a growth in material balances in the joint venture. So between here and there, or right now, the balances are pretty nominal. You're looking at balances below $100 million, both in deposits and clearly a lot less than that on the lending side.

So our outlook hasn't changed. Very excited about it long term. But it still is a long term proposition.

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

Yes.

John Pancari, Evercore.

On the competition front, could you help us a little bit with how to think about the yields that you're bringing on some of the loans onto the books, some of the new production yields by portfolio? I know you mentioned that the certain portfolios like the buyout portfolio is a higher yielding book, and then obviously the capital call line book is probably a lower yielding book. So can you give us some color on where the new production yields are now?

Yes. I'll talk at a very high level, and I'll let Mark add to it. So private equity loans, you're looking at loans of at prime or a little bit less than prime. I'd say on average, when you look at that being brought on board, the buyout financing is--you're looking at kind of the LIBOR plus 400 to 450, in that range generally or a little bit less than that, depending upon, again, the quality of company.

And again, that's where historically we've seen more of the growth. But the last--this quarter, as Mike articulated, it's been mainly in private equity, which is where you saw or why you saw the more dramatic decline in loan margin and net interest income. But again, that was driven by deposits as well.

So that's been the biggest catalyst. I'll let Mark add a little more color to some of the other areas.

Yes. So I would add to that, in our private bank, we tend to see average interest-only yields in the low 3% range. In early stage two, the mid-stage companies, early stage tends to be one of the better ones in the mid 5% range. You get into the mid-stage or growth stage, and that tends to be in the mid fours--low to mid fours. And that gets us to an average yield across the portfolio that's in the mid fours.

Okay, that's helpful. Thank you. And then separately, on the expense side, I know you mentioned that you've been investing as you go along in terms of regulatory and compliance infrastructure. But just given the pace of growth here, and given your asset level, and you've still got a little ways before you get to $50 billion, obviously. But sitting here around $30 billion, and given your pace of growth, I'm sure there's a real emphasis around making sure you're up to snuff there, particularly given what you're seeing other banks are doing.

So can you really give us a little bit more color on the pace of investment and have you ramped that up significantly here as your pace of growth is staying brisk?

Yes, John. So I'd say one of the advantages that we've had is when we look at our business, you've got a global aspect of it. You've got a private banking aspect of it. You have a broad-based business line. So given that fact, we've been building out infrastructure around compliance on the regulatory side for quite a while.

And so, even getting prepared for what I would say the stress tests and things like that, years in advance of what where we needed to be. So from that standpoint, we've been building in expenses, regulatory resources, compliance resources for a while. That being said, as I said on the call, there's no question the bar is getting raised. And we're spending time going through and saying what are we going to need to do to get to the $50 billion level.

Now, although we're thinking about that, we're talking about that, I think it's really important from our standpoint that it's not right in front of us. We do have some time to prepare for that, and again, even though we're preparing for it there's still more work to be done.

And I think one of the other drivers is that one of the big things is that when rates do finally pick up--and again, when is that? You can look right now, it's probably--the consensus would be second quarter of next year, ballpark. That's going to give us some more levers to direct appropriately for our clients more of those deposits off the balance sheet to investment funds. And that is going to slow the overall balance sheet growth.

That being said, over time clearly we expect to achieve kind of the $50 billion at some point, and we need to be prepared for that. But we're getting ready, and we've been investing in that business for a while.

Great. If I could just ask one more quick thing--on what you just said there, with the higher rates. Have you put out an updated number on how much in deposits could move off the balance sheet as--once rates rise under a certain scenario?

Hey, John, it's Mike. So actually we have never put out a number about that, so no, there is no update. But when we think about it, though, we have to, in our minds, be prepared for large amounts going off. Not to say that they will, but again, it's--that's one of the reflections of our investment securities portfolio, why we maintain such a highly liquid portfolio in order to be prepared for that.

Okay. Thanks, guys.

Steven Alexopoulos, JPMorgan.

I wanted to start and follow up on Mike's prepared comments regarding the potential drag from the sponsor-led buyout loans. Mike, what's the balance of those loans maturing in the second half, and what's your estimate of what could run off?

Steve, that's a hard one to answer at this point, because a fair amount of those were also being in a competitive situation where they essentially were matured and we were taking out. But maybe to put it in a little bit of perspective, and we had a little bit over $2 billion of loans at the end of last quarter--well, the first quarter, so to speak. And the average balances were about down almost $200 million this quarter. So as Mark Cadieux and Greg were talking about, those tend to yield around a 5%, 5.25%. So the effect of a $200 million drag, at least in this quarter, was certainly noticeable. But as far as a number going forward, we don't--I won't have that for you at this point.

And Steve, the only thing I would add onto that from the standpoint of what's maturing, the second quarter as Mike said was $200 million of a decline. My view is that is not something you would expect to see on a go-forward basis, on a quarterly basis. So could be flat, could be up. The pipeline is still strong. I'll tell you the number of opportunities that we have is still significant. And you're also starting to see more of these opportunities be global, especially in the UK and in Europe.

So again, to me it's important. The number of opportunities are significant. And if we choose not to grow that business, it's more because we don't believe the return and the structure of those loans are appropriate. But--so I wouldn't read personally too much into the second quarter decline. I think that's a little more of an anomaly. So we expect to see that back to either flat or some growth in the future quarters.

Greg, can you talk about where this increased competition is coming from? Is this larger banks? Are there new entrants into your space? What's going on there?

So the answer is yes. So it is across the board. And as we've said, Steve, for--I mean, quite honestly, for the last two to four years, is we are in a market that is a very coveted market. It's growing at a very fast pace. You're seeing companies with lots of liquidity that are users of fee income. And so, the pie is getting bigger.

And so, as we look at this, although it may be frustrating, it's not surprising to us. And what we've been building for the last several years is a product set and a network and knowledge solution set that basically is going to be competitive where people want to come to and clients are going to get advantages they can't get any other place. And that's what we've worked on, and that's what we continue to work on.

So even though there is a competitive landscape out there that is intensifying, I would tell you that the amount of deals we're winning and the feedback we're getting from clients and venture capitalists and investors is still incredibly positive.

So we are seeing it from larger banks. We're seeing it from non-banks. We're seeing it from a variety of different areas. And again, that's not a surprise.

Maybe just--thank you. Maybe just one final one regarding the 71% increase you cited in VC funding in the first half. What's your take in terms of what's driving such strong inflows year over year, right? Corporate VC is a factor, but $14 billion implies traditional VCs putting a lot more cash to work. It is carrying into the next--third quarter here. Thank you.

Yes. So I mean, our second quarter honestly I was surprised a little bit about the level that it was at. I mean, I thought the first quarter was obviously strong at roughly $10 billion. But you can go back--and this is why I kind of wanted to answer the question preemptively about the bubble. What you're seeing here, and I want to reiterate, the companies' performances that we're seeing with these growth stage and later-stage companies is incredible. I mean, it's the best performance that I've seen, highest growth collectively in my 21 years at the bank.

And I think those companies, when they're starting to hit revenue targets and they're being as disruptive as they are, are going to command higher valuations. The higher the valuation, if you want a certain amount of ownership in these companies, you're going to put a lot more money to work in these companies.

So we're seeing on a regular basis rounds of financing for private companies that are $30 million, $40 million, $50 million, $60 million, $70 million on a regular basis. That's something we haven't seen--I actually have never seen that consistent number of companies raising that level of capital. And it's for growth, it's for acquisitions. And there are a lot of these companies are just keeping it on their balance sheet for liquidity. That's--actually one of the reasons why we haven't seen as much loan growth in the corporate finance area is because that market is so liquid.

And so, they have so much liquidity and they're asking themselves why would they want to borrow money even at today's interest rates for doing acquisitions or anything else. They're just using cash to finance it.

Okay. I appreciate all the color, guys.

Yes, absolutely.

Joe Morford, RBC Capital Markets.

Congratulations on another quarter of impressive growth. I was curious, I guess, Mike, if you could talk a little bit more about the key drivers to the increased guidance on the fee income side from low teens to high teens, partly since the core was down this quarter. Is it really just the credit card and FX, or with the growth you're seeing off balance sheet, is it the client investment fees or--they also look like maybe the other category was low. Is there something unusual there?

Essentially three things that we are describing. Absolutely foreign exchange fees are driving that. Again, they've been having another record quarter and just continue to perform extremely well. Then you look at the card fees. Now while if it looks flat in the quarter, they--actually gross volumes were up. There was a little bit of a change in estimate on the rewards area which maybe held back the revenue growth a little bit. But again we don't view that as a--what's the word--continuing on. So in other words, we should see next quarter probably be back up again. So again, seeing good traction, FX and credit cards are the primary drivers for sure.

And then, on the (inaudible) credit as well, as we mentioned, we had a one-time adjustment as well. Again, not a sustainable item. So I think it's just a little bit of noise there. But again, you back that out again you would actually see some good growth in that core fee income. So that's why we're raising the guidance for the rest of the year.

Okay. And then on the margin, the--I mean, the quarter--the margin for the quarter came in not much above the low end of your guidance going forward. Is that just because going forward you think you're seeing benefits from remixing of the earning assets or was some of the growth more late in the quarter in terms of the loans?

Part of that is you also had, again, a higher number in the first quarter, right, so the effect of that. So then, when we talk about net interest margin we're talking about a full year effect. So it's partly that, but then it's also about continuing to grow the loan portfolio as well, which has a nice help as well. And then, even potentially bringing down some of the cash levels as well.

Okay. Thanks so much.

Yes.

(Operator instructions). Gary Tenner, D.A. Davidson.

I actually had a question about the outlook for the allowance that you say is comparable to 2013. It looks like by any measure the first half of the year, credit costs were very low. Allowance came down quite a bit. So to be anywhere in the ballpark of 2013 would suggest a pretty outsized provisioning back half of the year relative to what your credit quality is right now. Could you talk about that?

I'll take the first stab at it. Comparable has a wide range and wide net I would say. And the candid answer to you right away, we're not anticipating any significant changes in our trend. Now we did say that these are extraordinary low credit performing levels, but again, we'd probably see our net charge-offs revert back to more normal levels which would be expensed in the past kind of at 40 to 50 basis points. So don't read anything into it that we're expecting something big or disastrous in the second half of the year. But again, just recognize that comparable has a wide net.

Okay. Fair enough. Thank you.

Gaston Ceron, Morningstar Equity.

I know you addressed this in your prepared remarks a little bit, but I was hoping that maybe you could just talk a little bit more about the comparison between today's business models in the innovation economy space, and those of 14 or 15 years ago. Because obviously that period in 1999, 2000 kind of period, I think is what everybody kind of remembers as a touchstone when they're trying to evaluate the frothiness or lack thereof of today's environment. So, I'm curious. I mean, are you--are the business models you're seeing fundamentally more sound? Is it easier or harder to take a concept from the draft room to taking it public? Are banks like yours approaching these new companies differently than they would have 14, 15 years ago?

Yes. So Gaston, this is Greg. And there's a few things that I would say are different. One is just the overall cost to get a company started is a lot less. So on I would say a relatively small amount of money these companies can get formed, funded with a little bit of money, and all of a sudden hit revenue relatively early. And being back here in 1999 and 2000, I mean, it would take a fair amount of money and they would say, okay, we're going to raise $20 million, $30 million, $40 million and we're going to build something. And the valuation would be high, and they also wouldn't have any revenue yet.

And so, when you're either lending money in that scenario, or if the market turns down and the money goes away from an equity perspective, so people aren't willing to invest in these businesses, there's nothing left in the business, right? So the business goes away.

What my view is of the business models today, again, as they get--revenue picks up, they get further along, now the valuation may come down if the market corrects. But the company that's generating revenue is still going to have a value in general. And that's a big distinction. I mean, a huge distinction from what it was a long time ago.

And the costs, again, to go global are a lot less. The cost to do--just build the business. So from that standpoint I guess the biggest fundamental change from what we've seen today. The second part, and again, with the companies in the internet space and social, et cetera, the revenue growth that they're having, I just can't recall the growth as broad-based. You'd have seen some companies back in 1999, 2000 that would see substantial revenue growth, but this is a much more broad-based growth in revenue that we're seeing today. And so, I think those two things are really what's driving different business models, or our comfort today being higher than it was back then.

Great. Thanks for the color.

Yes.

Julianna Balicka, KBW.

I'm thinking about when--if the rates rise sometime next year, I'm thinking about the pace of growth that you have seen. When you think about your deposits potentially flowing off balance sheet in a higher rate environment, are you thinking more realistically that simply your deposit--net deposit growth on balance sheet will slow down, but you won't necessarily see a negative balance sheet deposit growth trend? Or do you think given how faster deposits have grown, we might actually have to start thinking about negative deposit growth on balance sheet, which would not be necessarily negative for profitability?

Yes, Julianna, this is Greg. So part of it depends upon what sort of rate increases you are seeing and if it's one question, how fast it picks back up. If it's a gradual interest rate growth, so you look at 25 basis points here or there in a given quarter, I think it's going to be slow enough that your--my view is you're still going to see some deposit growth, but it's going to be a much slower level. And again, assuming that the funding environment is still relatively stable in general from where it is today. If you start to see a more material pickup, then it's going to be what we decide--I would say mainly what we decide to do from an interest rate perspective and what we want to pay on balance sheet.

And that's something we have models about and thinking about, but we haven't communicated I guess externally yet as far as what we think would happen to those rates. That's something as we get closer to that we'll be articulating to you and other investors and--so we can lay that out there. But it's still far enough away right now that we're not ready to kind of be public and open about what our plans are and what we think is going to happen.

Okay, that makes sense. And to follow up on that--to ask the other side of that question, when thinking about your loan growth, one could say that some of the momentum to your loan growth could be driven by the ready availability of cheap money for VCs, et cetera. So as you think about rising rates, do you think about any of your growth segments of having a potential reaction, stronger or less strong, in react--in response to rates?

I think--again, it almost--it goes back to the same question before with deposit rates. If you're going to see a few--25 basis points here or there, I don't think you're going to really see a lot of behavioral changes from a whether they're going to borrow or not. I actually think that part of it's going to be what happens in the overall economy once you start to see interest rates starting to rise. Because right now, if you could see a scenario, right, rates are to pick back up, the funding environment starts to slow down because there's a question about where the economy is a little bit.

And if that happened, you could actually see some more borrowings as people start to think about free money, free new equity isn't as available, therefore, we want to borrow some money to do--finance acquisitions, we want to borrow money to finance working capital.

So our utilization rates over the last several quarters have actually gone down. If you start to see rates pick back up, you could start to see utilization rates grow as well.

Okay, very good. Thank you very much.

Yes.

And at this time there are no further questions. I will turn the call back to Mr. Greg Becker for closing comments.

Great. Thanks. Just a few comments in closing. I just want to reiterate our success we're having and the growth that we're having in our deposits and loans and fee income et cetera is really a combination of a couple of things that are all about our strategy. Number one, we're executing our strategy to be the bank of the global innovation economy. But secondly, we're fortunate. We're in a market that is absolutely thriving on almost every level. So it's great to be here. We're not taking it for granted. We're continuing to invest in our business for the long term and we want to continue to see that growth continue.

I just want to thank all the SVB'ers for doing such a great job of taking care of our clients and helping us deliver the results, and also for our clients in trusting us and giving us the faith and being a great partner.

So thanks for joining us today and have a great day.

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