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SVB Financial Group (NASDAQ:SIVB)

Q2 2014 Earnings Call

July 24, 2014 6:00 pm ET

Executives

Meghan O'Leary -

Gregory W. Becker - Chief Executive Officer, President, Director, Chief Executive Officer of Silicon Valley Bank and President of Silicon Valley Bank

Michael R. Descheneaux - Chief Financial Officer

Marc C. Cadieux - Chief Credit Officer

Analysts

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Joe Morford - RBC Capital Markets, LLC, Research Division

Gary P. Tenner - D.A. Davidson & Co., Research Division

Gaston F. Ceron - Morningstar Inc., Research Division

Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division

Operator

Good afternoon. My name is Sarah, 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.

Meghan O'Leary

Thank you, Sarah. 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. [Operator Instructions]

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

Gregory W. 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 1 year ago. And credit quality remained excellent, with 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 2 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, where we've been seeing some participation in late-stage venture grounds 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 trying to avoid being disrupted by investing in new companies with innovative products and delivery models. By some estimates, corporate ventures now constitutes approximately 1/3 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 5 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%, where 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 gives 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 costs 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 for media and ad tech have experienced some frothiness, 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 frothiness among small-cap biotech companies, mid- and large-cap biotechs appear 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 remain 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.

Michael R. 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 comparisons 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 dynamic 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 credits 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 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 healthy 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 redesignated $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 5.8 -- excuse me, 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 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 this factor, 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. Nonperforming loans decreased by $2.6 million to $22.4 million compared to $25.1 million in the first quarter when we resolve certain previously impaired loans. At 20 basis points of total gross loans, nonperforming loans are well below our 5-year average of 66 basis points and are at their lowest levels 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 noninterest income. Non-GAAP noninterest income, net of noncontrolling 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 noncontrolling interests. 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 noncontrolling interest of more than $50 million over the life of the investment.

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.

Net 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 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 a $1 change in FireEye stock price would equate to a $1 million valuation change net of noncontrolling interests. To be clear, this is an approximation, and of course, it can vary.

The gains on the remaining portion of our investment securities portfolio were primarily due to strong distributions 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 onetime 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. Noninterest 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 1 leverage ratio, which has been impacted by strong deposit growth, increased by 79 basis points in the second quarter, to 7.51%. Tier 1 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 1 leverage ratio of 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.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ebrahim Poonawala with Merrill Lynch.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

So I guess just a quick question in terms of deposit growth. I'm just wondering, what's visibility in terms of any look at the second half of the year, in terms of your guidance relative to the strength that you've seen in activity? And I guess it's a good problem to have, but the risk of deposit growth surpassing your expectations and the bank and leverage ratio trending closer to 7% as we sort of get closer to the end of the year. Is that a reasonable concern? Or you think it's a stretch that we get anywhere close to that?

Michael R. Descheneaux

This is Mike. It's obviously a real challenge to get visibility. And to your point, it is a high-quality problem to have. I mean, as you step back and look at the increasing sources of funds going into the VC environment, again, we continue to exceed expectations on this deposit growth. So I would admit that it is tough to see, 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.

Gregory W. Becker

Ebrahim, this is Greg. Let me just add on to it. When you look at the first half of the year, in fundings, right, you had about 9 -- 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 like $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 and for 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 in the same level we saw in Q2.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Got it. And I guess my second question is, just in terms of, Greg, if you can talk about, obviously, we see the FTE headcount again went up and has been growing over the last several quarters, just in terms of how -- what the hiring outlook is? Where we've been hiring and competitive pressures in terms of competitors taking talent from SVB?

Gregory W. Becker

Yes. So on the headcount, yes, it has been growing. But remember, 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 just take global as an example. We're adding people in the U.K., 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 6 months, 9 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 bring it in, in front-line sales support, client service. Again, we have a huge growth engine here, and we need to make sure we were 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 one area.

Operator

Next question comes from the line of Aaron Deer with Sandler O'Neill.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

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?

Gregory W. Becker

Yes. So Aaron, I'll start, then Marc Cadieux may want to add something to it. So it's really -- what's great about our business is that we have a lot of different growth opportunity. So it's not just one area. If it's just one area, I'd be more concerned, but you've got -- we got 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 4.5x, 5x, we start to ask ourselves the question is this company unique enough to really say to us that it justifies that higher 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 3 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. I don't know, Marc, if you have any...

Marc C. Cadieux

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

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

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

Gregory W. Becker

Yes. So at a high level, I'm talking 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 $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 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 the minimum time frame set 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.

Operator

Your next question comes from the line of John Pancari with Evercore.

John G. Pancari - Evercore Partners Inc., Research Division

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 book, some of the new production yields, by portfolio? I know you mentioned that certain portfolios, like the buy-out 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?

Gregory W. Becker

Yes. I'll talk at a very high-level and I'll let Marc add to it. So private equity loans, you're looking at loans 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 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 Marc add a little more color to some of the other areas.

Marc C. Cadieux

Yes. So I would add to that in our private bank, we tend to see average interests -- interest-only yields in the low-3% rate. In early-stage to 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-4s, low- to mid-4s and that gets us to an average yield across the portfolio that's in the mid-4s.

John G. Pancari - Evercore Partners Inc., Research Division

Okay, that's helpful. And then separately on the expense side, I know you mentioned that you've been investing, as you go along, in terms of regulatory compliance infrastructure. But just given the pace of growth here and given your asset level, and you still got a little ways before you get to $50 billion obviously, but 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?

Gregory W. Becker

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 in the regulatory side for quite a while. And so, even getting prepared for what I would say the stress test and things like that, years in advance of where we need 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 in 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 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 leverage 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 $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.

John G. Pancari - Evercore Partners Inc., Research Division

Great. If I 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 rate -- once rates rise, under a certain scenario?

Michael R. Descheneaux

John, it's Mike. So actually, we have never put out a number about that. So no, there's 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, if that's one of the reflections of our investment securities portfolio why we maintain such a highly liquid portfolio, is in order to be prepared for that.

Operator

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

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

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?

Michael R. Descheneaux

Steve, that's a hard one to answer at this point because a fair amount of those will also be in a competitive situation, where they essentially were mature, that we're 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 or the first quarter, so to speak, and the average balances were about down almost $200 million this quarter. So as Marc 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 the number going forward, I won't have that for you at this point.

Gregory W. Becker

And Steve, the only thing I would add on to that, from the standpoint of what's maturing. The second quarter, as Mike said, was a couple of hundred million dollars 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 it could be flat, it 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 U.K. 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. 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.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

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

Gregory W. Becker

The answer is yes. So it is across the board. As we've said before, I mean, quite honestly for the last 2 to 4 years, is we're 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. They are users of fee income. And so the pie is getting bigger. And so as we look at this, although it's maybe 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 solutions 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 nonbanks. We're seeing it from a variety of different areas. And again, that's not a surprise.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

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 applies traditional VCs putting a lot more cash to work. And is that carrying into the next third quarter of the year?

Gregory W. Becker

Yes. So I mean, second quarter, honestly, I was surprised a little bit by the level that it was at. I mean, I thought the first quarter was obviously strong at roughly $10 billion. But going back to this -- and that's why I wanted to answer the question, preemptively, about the bubble. What you're seeing here, and I want to reiterate, the company's 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 is 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 but 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 haven't -- 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. Essentially, one of the reasons why we haven't seen this 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.

Operator

Your next question comes from the line of Joe Morford with RBC Capital Markets.

Joe Morford - RBC Capital Markets, LLC, Research Division

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 in the quarter? Is it really just the credit cards and FX or with the growth you're seeing off balance sheet? Is it client investment fees? Or it also looks like maybe the other category was low. Was there something unusual there?

Michael R. Descheneaux

Essentially 3 things that we're 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 whilst it looks flat in the quarter, 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, to continuing on. So, in other words, we should see next quarter probably be back up again. So again, see good traction FX and credit cards are the primary drivers for sure. And then on the line of credits, as well, as we mentioned, we had a onetime 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.

Joe Morford - RBC Capital Markets, LLC, Research Division

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 -- seeing benefits from remixing of the earning assets? Or was some of the growth more late in the quarter in terms of the loans?

Michael R. Descheneaux

Part of that, as you also -- again, a higher number in the first quarter, right. So the effect of that -- so remember, 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 health as well. And then even potentially bringing down some of the cash levels as well.

Operator

[Operator Instructions] Your next question comes from the line of Gary Tenner with D.A. Davidson.

Gary P. Tenner - D.A. Davidson & Co., Research Division

I just 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 you're credit quality is right now. Could you talk about that?

Michael R. Descheneaux

I'll take the first avenue. Comparable has a wide range and wide net, I would say. And the candid answer to you right away is we're not anticipating any significant changes in our trends. Now we did say that these are extraordinarily low credit performing levels, but again, we'll probably see our net charge-offs revert back to a more normal levels, which we've experienced in the past kind of 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. Again, just recognize that comparable has a wide net.

Operator

Your next question comes from the line of Gaston Ceron with Morningstar Equity.

Gaston F. Ceron - Morningstar Inc., Research Division

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 to 15 years ago. Because obviously, that period, the '99, 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 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?

Gregory W. Becker

Yes. Gaston, this is Greg. There's a few things that I would say are different. One is the overall cost to get a company started is a lot -- 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 '99 -- I mean, '99, 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. 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 as 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 just build the business. So from that standpoint, I think that's the biggest fundamental change from what we've seen today. The second part -- and again, with companies in the Internet space and social, et cetera, the revenue growth that they're having, I just can't recall growth as broad based -- you'd have seen some companies back in '99, 2000, that would see substantial revenue growth, but this is a much more broad based growth in revenue that what we're seeing today. So I think those 2 things are really what's driving different business models or our comfort today being higher than it was back then.

Operator

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

Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division

I have a question. Kind of thinking about, when is the rates rise sometime next year? Kind of 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 fast your 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?

Gregory W. Becker

Yes, Julianna this is Greg. So part of this depends upon what sort of rate increases you're 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, here's my view is, you're still going to see some deposit growth, but it's going to be a much, much slower level. And again, assuming that the funding environment is still relatively stable and 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 the balance sheet. And that's something we have models about and been 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, clearly, 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, what we think is going to happen.

Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division

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 as having a potential reaction stronger or less strong in react -- in response to rates?

Gregory W. Becker

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 at least see a lot of behavioral changes, from a -- whether they're going to borrow or not. I actually think that part of it is going to be what happens to the overall economy once you start to see interest rates starting to rise. Because right now, if you could see a scenario, rates start 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 happens, 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're going 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 can start to see utilization rates grow as well.

Operator

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

Gregory W. Becker

Great. Thanks. Just a few comments in closing. I just want to reiterate our -- the success we're having and the growth that we're having in our deposits and loans and fee income, et cetera, it's 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.

Operator

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

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Source: SVB Financial Group's (SIVB) CEO Gregory Becker on Q2 2014 Results - Earnings Call Transcript
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