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SVB Financial Group. (NASDAQ:SIVB)

Q3 2010 Earnings Call

October 21, 2010 06:00 pm ET

Executives

Meghan O’Leary - Director, IR

Ken Wilcox - CEO

Mike Descheneaux - CFO

David Jones - CCO

Greg Becker - President, Silicon Valley Bank and SVB Financial Group

Analysts

Steven Alexopoulos - JPMorgan

Aaron Deer - Sandler O’Neill & Partners

John Pancari - Evercore Partners

John Hecht - JMP Securities

Bobby Bohlen - KBW

Christopher Nolan - CRT Capital

Mike Zaremski - Credit Suisse

Operator

Good afternoon. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group third quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would like to introduce Meghan O’Leary, Director of Investor Relations. Ms. O’Leary, you may begin your conference.

Meghan O’Leary

Thank you, Operator. And thank you for all joining us. We welcome you to our third quarter 2010 earnings call. I’d like to remind everyone that our third quarter earnings release is available on the Investor Relations section of our website at svb.com.

I would also like to remind you that 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 the call.

We will limit the length of the call to one hour, which will include Q&A with our CEO Ken Wilcox, our CFO Mike Descheneaux and other members of management. During the Q&A section, we will ask you to limit your questions to one primary and one follow-up question before getting back in the queue to enable other participants to ask their questions.

And with that, I will turn the call over to our CEO, Ken Wilcox.

Ken Wilcox

Thank you, Meghan and thank all of you for joining us today. I’d like to start by saying I’m very happy with our results in the third quarter. We earned $0.89 per share. We delivered loan growth of 37% on an annualized basis, over half of which came from new clients. We added 423 new clients.

We maintained high credit quality. We had $3.8 million in net gains on equity warrants. And finally, we realized $6.2 million in gains net of non-controlling interests on our SVB Capital and other venture capital related investments. So all around, I think it was a pretty good quarter. Of course, Mike will give you some more details on the numbers in just a few minutes. But first, I’d like to spend some time talking about what we’re seeing in our markets, what we’re hearing from our clients and what we’re working on, what keeps me up at night and what we’re expecting in the future.

Let me start with the venture capital markets. They continue to improve, although of course, their progress is somewhat mixed. On the one hand, exits of venture-backed companies remained strong in the third quarter with 109 acquisitions and 14 IPOs. Year-to-date, there have been twice as many acquisitions of venture-backed companies than in all of 2009, and average deal sizes have continued to increase. On the other hand, venture capitalists invested 31% fewer dollars and did 19% fewer deals in the third quarter. We think the seasonality of the venture capital business has a lot to do with those numbers. Traditionally, the summer months are slow for the industry. By contrast, prospects for the fourth quarter are looking pretty good.

Our venture capital clients tell us they are expecting a stronger fourth quarter, both in terms of investments and exits. The innovation markets overall are showing clear signs of improvement even as the economy at large still struggles. At SVB we have access to information on the performance of thousands of companies every quarter.

Our clients. In these past several months and in the past year, we have seen steady improvements among our client base in sales growth, operating margins and liquidity. These improvements have come from across all major sectors, including hardware, software, life sciences and clean tech. Our clients are definitely building momentum. The latest batch of earnings reports from Bellwether Technology companies such as Apple and Google would appear to confirm these improvements.

So our outlook on our markets is positive. As our clients’ opportunities improve, we see significant opportunities for growth ahead. Our ability to take advantage of these opportunities requires us to make prudent investments in our infrastructure, in new products and in our global expansion. To this end, we are continuing our work of replacing our IT backbone so that we can operate even more effectively as a global company and position ourselves in the future. We are introducing new products for web-based banking, mobile banking and Global Treasury Management, all of which our clients have expressly requested. We continued to make strong progress in our efforts in the UK, China, India and Israel.

As you know, we have applied for banking licenses in both the UK and India, and we recently opened a new office in Beijing. We are building a global risk management business and information services infrastructure to support this expansion. We continue to develop our model for serving cleantech companies and are hiring market-facing employees to drive our growth efforts overall. We are refining on our approach to SVB capital to ensure our focus on the areas of greatest opportunity.

And through all of this, we continue to invest in people through new hires and through the further development of our existing employees. And we are continuing to build our reputation as an outstanding place to work in order to attract the very best people.

In short, I believe we are doing everything in our power to continue to position ourselves for success. These efforts require time, cash and capital, but we believe they will all pay off in the future. We do have a number of challenges in the near term. In particular, there are three things that I worry about.

First, is the uncertainty of the economy at large, while things are looking good for our clients and for SVB, if the economy were to experience a double dip, it could change our outlook significantly. Second is the changing regulatory environment. I think we are well-positioned to handle new regulatory requirements, whatever they may be. Still, new requirements will complicate in already challenging business environment and add to the general uncertainty in the markets in the near term. My third worry is increasing competition. Our clients are doing well and as a result they have become attractive prospects for banks whose traditional markets are not growing. We are being aggressive without taking undue risks, but it is a focused and intense effort.

As you can see from our results this quarter, we are succeeding. Despite these challenges, we are feeling confident about our future. We believe we have significant growth opportunities ahead and a clear strategy for seizing them. And while I can’t give you a specific outlook for 2011, I will give you a general sense of our expectations. We expect continued solid results as our clients’ businesses improve. We are estimating average loan growth of between 10 and 20% for the full year of 2011. Along with higher loans, we expect to see aggregate revenues from our fee based services increase at a rate in the high single or low double-digits. We anticipate continued modest improvements in venture capital fund raising and investing and significant improvements in these venture capital exit markets, primarily related to M&A. We expect low interest rates to continue to hold down our yields in our net interest margin, but our higher loan volumes should generate higher interest income.

Expenses are likely to be higher as a result of our continued investment in our business, especially if our performance continues to improve. Our preliminary estimate is that expenses in 2011 could grow at a rate similar to 2010’s growth. These expectations all assume there will not be another significant economic disruption in the year ahead. As we prepare to close out 2010, our morale here at SVB is decidedly high. We have a wonderful group of employees.

Their individual and team efforts have contributed tremendously to our success during the year, and we believe we’ll continue to do so in the future. We are all feeling good about the year ahead. Thank you. And now I will turn the call over to our Chief Financial Officer, Mike Descheneaux.

Mike Descheneaux

Thanks, Ken, and thank you all for joining us today. We had a very solid third quarter, which reflects improving business conditions for our clients. These improvements are beginning to translate into growth for us. There are few things I would like to highlight from the quarter.

First is strong loan growth. Second is continued high credit quality and improving underlying trends. Third is strong net interest income despite a lower net interest margin. Fourth is gains on our investment portfolio, owing to the sale of agency-backed securities and valuation gains on our venture related investments. Fifth is stable fee income, primarily due to an increase in foreign exchange fee income.

And finally, sixth is stable non-interest expense that reflects higher compensation costs related to new hires and our strong performance. Let us move on to the details starting with loan growth. We are pleased that our return to loan growth has played out as we predicted it would. We said in the first quarter, we expected to see average loan growth in the second half of the year. In Q2, we reported growing momentum in the pipeline and peered in loan growth. In the third quarter, we grew average loans by $387 million or 9.4% to $4.5 billion. End of period loans grew by $409 million or 9.2% to $4.9 billion, which means we are starting Q4 on strong footing.

Demand for loans came from clients in all sectors with the largest increase in loans to our software clients. Growth came from all segments from early stage to corporate finance. The number of loans booked during the quarter increased by 13% over the second quarter. These loans represented $535 million of new dollars funded from new clients. Our pipeline remained relatively strong going into the fourth quarter.

Although it was lower because we closed so many loans in Q3. With respect to loan utilization, it held steady at 45%. Moving forward, we believe that an improving environment for technology companies will ultimately lead to high utilization as well as increased commitments. Historically, utilization rates for SVB has been closer to 50%.

Moving on to credit quality. It remains strong with continuing improvement in almost all credit metrics. We noted last quarter that we could see somewhat higher net charge-offs during Q3, primarily has a result of unusually low charge-offs in Q2 and we did. Net charge-offs were $8.4 million or 73 basis points annualized. About 95% of that figure came from our early stage portfolio, as expected. In any environment, we would consider this level of charge-offs to be a very good performance. We recorded a provision for loan losses of $11 million in the third quarter compared to $7.4 million in the second quarter, primarily due to loan growth and the low levels of net charge offs in Q2.

Our allowance for loan losses increased to $74.4 million, compared to $71.8 million in the second quarter. Although as a percentage of gross loans, it fell to 1.52% compared to 1.60% in the second quarter due to decreases in our impaired loan balances and improving credit quality. Non-performing loans decreased by $6.2 million during the third quarter to $45 million or 0.92% of total gross loans.

Since the end of the quarter, we have received payments on loans that had been reflected in our non-performing balances, including $8.8 million related to one loan that went on non-performing status in the first quarter of 2009. That payment and others have further reduced our current impaired loan balances, although they will have no P&L impact because there was no reserve associated with them, as it was not needed.

Overall, our credit trends reflect the high quality of our loan portfolio, as evidenced by a further decline of 4% in classified loans, which are now close to historical levels for a normal market cycle. These results are due to our continued emphasis on strong portfolio management and the improving business environment for our clients.

Moving to net interest income and net interest margin, net interest income remained strong in the third quarter, holding steady at $106.3 million, despite the historically low interest rate environment. The composition of our investment portfolio shifted as older higher yielding investments matured or were paid down during the quarter and we reinvested those funds at currently available yields.

We continued to invest excess liquidity from our deposit flows into our securities portfolio. Overall, these activities were accretive to net interest income, but average yield on that portfolio was 42 basis points lower for the quarter.

We made purchases totaling $1.8 billion during the third quarter, primarily in agency debentures and variable rate CMOs. As I noted earlier, we sold $493 million of certain agency-backed available for sale securities toward the end of the quarter. Overall, we increased our average available for sale of securities portfolio by $87.6 million, to $5.3 billion. The sales of security were consistent with our ongoing efforts to efficiently manage our available liquid resources and mitigate duration risk in the portfolio.

Net interest income also reflects higher interest expense of 500,000 related to our issuance of $315 million in 5.375% senior notes in September. These senior notes will also add to our interest expense in Q4 and the first quarter of 2011. Approximately $250 million of the net proceeds will be used to repay our 3.875% convertible senior notes due in April 2011, with the remaining going to general corporate purposes, including the growth initiatives that Ken described.

Average deposits held steady for the first time in 12 quarters at $11.9 billion, while period-end deposits rose by $275 million to $12.4 billion. We believe the staying power of our deposits so far reflects the continued lack of compelling yield opportunities in the market.

Average total client fund balances rose by $484 million, owing to our clients’ strong liquidity position and new client acquisitions. Our net interest margin was lower at 3.14% compared to 3.20% in the second quarter, primarily due to changes in the composition of our securities portfolio and greater competition in loan pricing.

Clearly, net interest margin compression is a common issue for everyone in this low interest rate environment. In our view, the highest and best use of our cash is for loans, and we are doing our best to deploy cash in lending. In addition, we are doing everything we can to maximize our net interest income and yield, but we do not believe it is in the best interest of anyone to chase yield and incur unnecessary duration or credit risk, and we won’t chase it.

Turning to non-interest income, it increased significantly in the third quarter to $86.2 million compared to $40.2 million in the second quarter. This increase was due primarily to two things, first with net gains of $23.6 million from our sale of agency-backed securities during the quarter.

Second was net gains of $23 million related to evaluation gains and distributions from our venture capital and private equity related investments. As Ken said earlier, net of non-controlling interest, we realized $6.2 million from these gains. That compares to net gains of $4 million on these investments in the second quarter or 400,000 net of non-controlling interest.

Our fund performance has generally improved throughout the year, thanks to the improving liquidity mainly through M&A. We also saw a $3.8 million gain from Equity One assets, thanks to a healthy M&A market. Although I would caution you not to use the third quarter as the basis for future run rates, nevertheless, we are pleased with Q3 results.

With respect to our core fee income, that is all other fee income outside of the other category, it remained relatively stable during the quarter. One highlight for the quarter was foreign exchange income, which was slightly higher and it reached an all time high. Overall, our fee income reflects a modestly improving environment for our clients, which we expect to continue.

Moving to non-interest expense. Although, it wasn’t unchanged at $104.2 million in the third quarter, I want to point out that this number actually reflects higher compensation and benefits expenses related to two things. The first is our strong performance. We are outperforming our internal targets and expect to exceed our annual forecasts, and that resulted in increased incentive compensation accruals during the quarter.

The second driver was higher employee related expenses due to the growth initiatives Ken outlined earlier. We are investing in market-facing people to help us grow our business. Expenses overall were flat because we had lower FDIC assessments after opting out of the TAG program, as well as a lower provision for unfunded credit commitments. Our FDIC assessment expense in the future could be impacted by new requirements related to Dodd-Frank and The Consumer Protection Act, but at this point it is too soon to tell.

Now I move on to our updated outlook for the full year 2010. We are doing something a little different this quarter. We know that annual guidance can become less useful as you approach the end of the year. In the spirit of maintaining meaningful guidance where it makes sense, we have now narrowed our guidance on certain annual ranges.

Second, we have translated certain refined annual ranges into fourth quarter guidance. Our goal as we approach the end of the year is to ensure our guidance is still meaningful. This does not signal a move to quarterly guidance going forward and please keep in mind that these are our good faith estimates of where we will end up for 2010 based on what we know today. Actual results may differ. So let me start with loans.

We expect average 2010 loan balances to decrease at a percentage rate between 6.5 and 7.25%. That would translate into higher average loan balances for the fourth quarter of between $4.7 billion and $4.9 billion. We expect average deposits to increase at a percentage rate between 32% and 34% for 2010. That equates to fourth quarter average deposits of between $12 billion and 12.4 billion and is an increase from our prior 2010 outlook.

We had said before, we thought, we would see an outflow of deposits from the balance sheets of $1 billion to $1.5 billion once we opted out of the TAG extended insurance program. But the prevailing low interest rate environment has led clients to keep their deposits on balance sheets in the absence of compelling investment yields.

We expect net interest income for 2010 to increase between 10% and 11%. That is consistent with our prior outlook calling for an annual increase and a percentage increase in the low double digits. We expect our net interest margin to be between 3.1% and 3.2% for the full year 2010. That is a decrease from our prior guidance owing to continued deposit growth, the fact that the low rate environment is keeping deposits from moving off the balance sheet and the issuance of our senior notes in the third quarter. This outlook assumes fourth quarter net interest margin between 3.0% and 3.2%.

We expect net loan charge offs of less than $50 million for the full year 2010. That is a significant improvement from our prior guidance that charge offs would be less than 2009 levels of $125 million. We have not made any changes to the remaining items in our outlook that pertain to credit quality. But as we noted, we have had five successive quarters of improvements in credit quality.

Finally, we increased our outlook for non-interest expense and now expect it to increase at a percentage rate in the low 20s for the full year 2010. This increase is due to compensation and FTE increases related to our strong performance and our growth initiatives. There are a few items I have not covered in the outlook. And that is because we have not refined our guidance on those. Please refer to the outlook section of our press release for more information on those items.

Overall, we are pleased with our results in the third quarter. We are encouraged by how the technology industry is doing overall and the fact that improvements we anticipated in loans in particular have become reality. Our clients are outperforming the broader economy and they appear to be gaining momentum.

We believe we have the right business model not only for today, but for the future. We will continue to do everything in our power to remain competitive, win new clients and leverage the power of our platform to differentiate ourselves in the market.

Thank you. And now I’ll ask the operator to open the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Steven Alexopoulos from JPMorgan. Your line is now open.

Steven Alexopoulos - JPMorgan

Regarding Ken’s 2011 outlook, unless I misheard this, you’re looking for 10% to 20% loan growth. These are high single-digit, low double-digits and then expenses up low 20%. Am I misreading this that the expense growth is a bit more robust than the revenue outlook for 2011?

Mike Descheneaux

Yeah, that’s right. Just to try and maybe tweak that or clarify that a bit. So our expectation is not, we’re not going to see the 20% low, 20% growth. What he was really referring to is some of the core line items, ex-compensation of those areas. But again, we’re not expecting expense growth of that 20%. With our fourth quarter results, we will certainly tweak that number. So no, don’t be alarmed that we’re going to grow expenses at 20% again in 2011.

Steven Alexopoulos - JP Morgan

Mike, maybe a follow-up, given the sharp increase in securities you saw again this quarter, I understand why the yield would be flowing, but why would interest income on the securities be falling? Did you have higher yielding securities called away from you?

Mike Descheneaux

Primarily you have quite a fair amount that are maturing, as well as we opted to sell some of the securities we mentioned, the $500 million. So those were little bit higher yielding securities, so you would see some decrease in interest income from the securities.

Steven Alexopoulos - JPMorgan

Pretty impressive loan growth this quarter.

Mike Descheneaux

Thanks, Joe.

Steven Alexopoulos - JPMorgan

I had actually several questions on the loan growth, and I guess first is I recall the growth last quarter was somewhat lumpy particularly with the few large credits, was the increase much more granular this quarter?

David Jones

Joe, this is Dave. And our loan growth was more granular in terms of there were several accounts of more moderate size that contribute to it. I would characterize acquisition financing as a core theme in that. So, in some cases buying corporates, in some cases our private equity friends making acquisitions and I’d also characterize the fact that there was as much money spent in acquisitions as a good read of private equity venture capital’s opinion of the economy.

Steven Alexopoulos - JPMorgan

I guess on that, Dave, I did see, in that large loan table, that the venture capital private equity piece was up. Is that this acquisition financing you’re talking about, or is that also a return to some of the capital call line business that you’ve done?

David Jones

So, the acquisition financing would be outside of that venture capital, capital call. What you’re seeing there, Joe, is the capital call drills.

Steven Alexopoulos - JPMorgan

So that business is starting to pick up again, it sounds like?

David Jones

Yes, it is.

Steven Alexopoulos - JPMorgan

Okay. And then lastly, I guess trying to get a little more sense of where the growth comes from. It sounded like you added several new clients, over 400 new clients, in the quarter. Who are you taking market share from? Is it primarily banks or some of the non-bank players? At the same time, you’re saying you’re seeing increased competition, so maybe it’s fair amount of growth just from existing clients drawing down existing lines. So I guess, if you could give us a little more color on all that, Dave, thanks.

Greg Becker

Yes, Joe, so it’s Greg Becker. Let me answer that and then Dave can get on to it. So the number that Ken talked about, as far as new client growth, that’s both borrowing clients and non-borrowing clients. And that’s a very broad section of company that comes in with the largest number coming in from the very early stage. And as you will hear about venture capital activity and stuff, there is still a lot of pre-venture backed companies that our teams are able to bring in the door, angel-backed companies.

So I’d just say overall, client acquisition has gone very well. Where those companies come from, it is traditional commercial banks, mainly. Those are obviously almost all coming over from traditional banking clients or banks. As far as the growth overall, it is broad-based. We had, as we said in the past, some of the growth continues to come from global and we expect that to continue. And then the rest of it is pretty broad-based across various niches, segments and stages. As Ken and Mike both alluded to, we felt very good about the loan growth and composition in the third quarter.

Operator

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

Aaron Deer - Sandler O’Neill & Partners

Mike, I think it was in your discussion where you talked about the potential foreseeing higher FDIC cost as a result of some of the regulatory changes. I am just wondering, are you referring specifically to that you guys being put back into like a mandatory TAG program? And I’m wondering if so, what that means for your thoughts in terms of maybe trying to push some of this excess liquidity back off balance sheet?

Mike Descheneaux

Well, it’s still to be seen on how all that’s going to play out. It is a little bit too early, as far as the FDIC rates or entering mandatorily into the program. But as far as our thoughts on moving deposits off and yes that is certainly going to play into that and help us consider the economics of deposits overall, if we have to continue to pay a higher levels of deposit cost on that. So that is something we’re very, very attuned to and we’re waiting to see how that’s going to play out.

Aaron Deer - Sandler O’Neill & Partners

Okay. And then maybe just following up on Steven’s question regarding the securities. The securities were sold in the quarter, what was kind of the rationale for taking that gain, given that there is really no great place to redeploy that, notwithstanding the loan growth and such that you’ve seen?

Mike Descheneaux

Yeah. First overall, it was actually very good for us. As you can see, that we recorded a $23.6 million gain. But if you go back to kind of the higher level with the way we’ve been positioning our portfolio, both from a credit perspective and a duration perspective, and goes back to Q2, where we sold off all of our non-agency securities all we have left at least theoretically in a credit risk is the municipal securities.

So this was just part of that process to continually enhanced the credit and liquidity position. A lot of what we sold off, Aaron, was some of the smaller lots, odd lots, $100,000, $200,000, $300,000 types of bonds. So it just helped us also operationally and logistically, and in end of the day, also, these securities were priced very, very rich, if you will, for lack of a better term. So again, all-in-all, for us, overall both from a quantitative and qualitative perspective, it was a very sensible thing for us to do.

Operator

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

John Pancari - Evercore Partners

In terms of the securities transactions, can you talk about how that impacted the margin in the quarter? Just particularly given what yields they came off at and then the reinvestment yields?

Mike Descheneaux

Yes, John, those securities were sold towards the end of the quarter. So it had, I would say, a marginally, a small impact. I think the bigger impact will be going forward in the Q4.

John Pancari - Evercore Partners

Then, in terms of your outlook for the margin, just given how the securities transaction impacts it, would you say that this kind of resets the margin at a kind of a trough level, just given what you’re doing on the securities book? And could we assume that we could see some upside through 2011 as loan growth materializes, or it accelerates?

Mike Descheneaux

I think that’s a very good way to look at it. I think what plays out in Q2. If you look at our guidance for Q4, where essentially we’re saying between 3% and 3.2%. I’d like to say that that is kind of the trough. And as you know, there’s quite a few things that do impact our net interest margin. So if deposits continue to run up, that obviously has a play on it. But yes, going to 2000 level, we are hopeful that loans will continue to grow, because that has a very positive impact on the net interest margin.

So answer to your point and answer to your question is yes, I’d like to see Q4 as kind of that trough, if you will. But that’s assuming that deposits won’t continue to increase. And again, that’s assuming that loans are going to hold their own and continue to grow. So yeah, we’re hopeful that that’s going to be the trough.

John Pancari - Evercore Partners

And this is also lastly, just assumes what you’ve done in the portfolio, the repositioning of the bond book, I’m assuming it helps you mitigate the risk of, if quantitative easing is more sizable than what some of us fear.

Mike Descheneaux

Yeah, I think so. I mean the way we’re positioned in that portfolio, we’re bringing down the duration extension risk and the things of that nature. So I think we are positioning ourselves very, very nicely for these types of things.

Operator

Your next question comes from the line of John Hecht from JMP Securities. Your line is now open.

John Hecht - JMP Securities

How are you? A little bit more on the loan growth. I understand it was somewhat balanced on a size and a sector basis, but you would think around 40% was in loans larger than $20 million. Can you just talk about the competitive framework in that lending market, and maybe give us some perspective on spreads and terms there?

David Jones

This is Dave. So, most of those transactions that would have met that criteria in the disclosure of above 20, I would describe them as very, very marginally above 20, in terms of size. And most of them, as I indicated earlier, would have been in acquisition financing. We are enjoying in that business a spread that is above our prime and I will remind you that our prime is 4%. It is compressed from what it was 18 months ago, 12 months ago, further in the trough of the economy, but we’re still enjoying good spreads at above our prime rate.

John Hecht - JMP Securities

And my last question would be, Mike, you talked about 45% loan utilization rate and historical average of 50. Can you quantify what that would mean if you moved? I know nothing is going to happen overnight. But if you moved from 45 to 50% utilization, what would that mean in terms of potential loan add?

David Jones

This is Dave. And we have calculated that and there are a lot of assumptions to be input into that calculation. But ballpark it with a number that is 200, maybe $400 million if we in one period, to go from 45% to 50%.

Operator

Your next question comes from the line of Bobby Bohlen from KBW. Your line is now open.

Bobby Bohlen - KBW

Thanks for taking my questions. You mentioned competition on the loan side. I’m wondering if you’re seeing competition on the side of lenders too. I mean, Silicon Valley obviously has a premiere franchise and it’s harder for new banks to break in. What are you seeing on competition there?

Ken Wilcox

This is Ken. Let me start and make a couple of comments and then pass it on to Greg perhaps, with some more detail. But what we are seeing, basically, is that a number of banks that really have never taken any interest in this market in the past are drawn into it simply because it’s probably the only good market left in the U.S. economy. Just about everything else other banks have focused on in the past is suffering in one way or another. Who really wants to be in residential real estate? Who really wants to be in commercial real estate? Where is American manufacturing? All of these markets are suffering and, as a result, because we’ve done as well as we have over the years, we’re starting to attract some banks that really have never thought about this before.

Exactly how that plays out remains to be seen, but I will say that we are definitely winning more than we’re losing. It’s just that there are a lot more dog fights than would have been true a couple of years ago. Yeah, and with that, I would like to pass it to Greg, maybe to put a little color around it with some more detail.

Greg Becker

Yeah maybe, just a little more color. As we’ve said in the past, being a market leader and being in a sector that is doing well, obviously as people think about places to go, we are a natural place for that to look. Clearly, we have a lot of strengths that has kept our employees here over a long period of time. And that goes from the culture that we have, the product set, the growth nature of our business, the fact that we are different in many other things.

So that being said though, we have to be competitive when how we approach our employees, and make sure that we’re competitive across the board. And that, in some cases means that, from a compensation perspective, we have to be competitive and very competitive, but at the same time, create opportunities for our clients. So, it is something we’re very sensitive to. I think we’ve done a very good job of that to-date. And we need to remain vigilant on that in the coming years.

Bobby Bohlen - KBW

And then as a follow-up to that. As you’re building out your global lending, who do you compete with for lenders globally?

Greg Becker

The one major market that we’re really looking to build out right now is in the UK. And we have a combination of both people there that we’re moving from the U.S. over to London, as well as hiring some very strong talent in market. The advantage we have there, as we look at bringing people in, I think all of us have read about the challenges that the UK banks have had. And the fact that they are not growing, the fact that they’re having challenges in getting credits approved and are very internally focused.

So if you contrast that with our strategy, we present a very appealing platform for strong individuals to come onboard. And so we’re able to attract so far some extremely strong talent to our platform in the UK. Now again, we’re talking about small numbers overall, but we feel very good about our ability to attract the talent in UK, and I think that will be the case in other markets as well.

Bobby Bohlen - KBW

And I hope you’re able to keep up the strong momentum you’re showing.

Operator

Your next question comes from line of Christopher Nolan from CRT Capital. Your line is now open.

Christopher Nolan - CRT Capital

Quick question on the unrealized gains, Mike, how much for the gains from the funds and funds so forth? Was that all from SVB capital?

Mike Descheneaux

Chris that’s primarily came from the funds that we had to manage funds that are roughly a little bit over $6 million from those funds. There was nothing that really stood out that was significant. Each fund had some evaluations gains from $500,000 to $1 million. So, it was pretty much across the board and very reflective of the financial markets that we’re seeing. We’re very pleased at the moment on that progress.

Christopher Nolan - CRT Capital

A couple quarters ago, you guys mentioned for SVB, capital’s approaching the inflection point of the J curve. Are we starting to see that?

Mike Descheneaux

It goes by different funds. But overall, I would say we are right at that or crossing on that. And again, we’re hopeful to continue on the upward movement. It’s been a while that we’ve been down in there and so it’s kind of nice to start to begin to poke our head above water.

Christopher Nolan - CRT Capital

So you’re more optimistic that we would see repeat gains on this for quarters...

Mike Descheneaux

And assuming the economy continues to move forward and the technology sector in particular continues to experience a little bit more resilience and a little bit more confidence that going forward that growth is going to come.

Christopher Nolan - CRT Capital

And I guess for Ken, any update on the status for SVB capital vis-à-vis the Volcker rule?

Ken Wilcox

Not really. I would say that we are about as actively engaged as anybody else out there in terms of providing the kind of information and background to the people that are transforming legislation into regulation as anybody. And I think that our opinion is valued because we arguably know quite a bit more about the space than most people do.

But, we’re still as an industry, I would say quite away from knowing exactly how it’s all going to play out. Having said that, there are scenarios and I think probable scenarios under which, if anything, this could be construed as a benefit to us in the long haul. But, it’s way too early to tell. But it really is. And anything I said would be guesswork at this point.

Operator

(Operator Instructions). Your next question comes from the line of Mike Zaremski from Credit Suisse. Your line is now open.

Mike Zaremski - Credit Suisse

I’m going to try and ask one on loan growth, I know there has been a bunch asked already. But outside from a double dip, is there one or two major assumptions you’re making in your 2011 loan growth estimates that could I guess maturely change your assumptions, like for example, acquisition related financing outlook or maybe a jump in the utilization rates or overseas loans?

David Jones

That’s a good question. I think that clearly if there was a sentiment from the portfolio companies that might be buying other companies if there was a sentiment within the private equity environment, that things were less certain, but the same has almost fall back on the presumption about the economy. So I think that we are going to experience a good growth, plenty of opportunities to do so, both domestically and internationally.

Ken Wilcox

So let me weigh in with my own view on that which corresponds to Dave and I’m probably saying the same thing Dave saying, but in my own words here. And that is that when we talk about loan growth in the potentially 10% to 20% range, that is not just because we feel good or because we are shooting in the dark.

There are a number of identifiable trends that would support that contention and I would just like to list five of them for you, a couple of which you already mentioned for me, thank you. A one would be as there continues to be M&A activity growing in our market, which there is ample evidence of, then the potential for appropriately sized acquisition financing, it is a greater rather than smaller. That’s number one.

Number two is, we have witnessed in these past few quarters identifiable positive trend lines in our portfolio with respect to revenue growth. And that usually leads to a modest re-leveraging. So a re-leveraging or in other words, higher utilization rates on existing facilities can contribute to loan growth.

Number three would be as we expand our activities overseas, and I know you mentioned that yourself, but we anticipate that there’s going to be measureable loan growth in that arena as well. Number four would be we have a lot more competition we did before, but we’re also winning more than we are losing. So taking market share could contribute to increased loan growth as we believe or know that it did this quarter.

And then number five would be our basic business model, because as you know our basic business model in short, with over-simplified order would be that we bring as high percentage of companies in at the onset as we possibly can and then we keep them as they grow. So you could say and of course these are general numbers, but you could say that 80%, 90% of our new business development activity focuses on raw startups and a disproportionately large percentage of our revenues come from larger companies.

So in the natural course there will be many smaller companies that will survive and become larger companies and as they become larger companies, their capacity for leverage increases. And all five of those are objectively identifiable trends of which we’ve seen evidence in these past couple of quarters. So unless there is a dramatic change in the overall economic environment, we would anticipate that all five of these could contribute to increased loan growth and we are estimating between 10% and 20%.

Operator

And at this time there are no further questions. I would now like to turn it back to Ken Wilcox for closing remarks.

Ken Wilcox

Well thank you very much for attending today. I don’t have much in the way of closing remarks. I’d just like to say, we do believe it was a good quarter. We hope you do too. We believe that we not only had good earnings, but we are also using some portion of that to invest in future earnings on your behalf.

I will tell you that you can be absolutely certain that we are dedicated to producing the highest returns for you that we possibly can. And I also want to take just 10 seconds here of your time to thank our employees who worked extremely hard this quarter in this increasingly competitive atmosphere and as I’ve said a couple of times already have won a lot more them they have lost. And I think we are all grateful to them for their efforts. Thank you very much.

Operator

This concludes today’s conference call, you may now disconnect.

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