SVB Financial Group (SIVB)

Q2 2010 Earnings Conference Call

July 22, 2010 6:00 PM ET

Executives

Meghan O'Leary – IR

Ken Wilcox – President and CEO

Mike Descheneaux – CFO

Dave Jones – Chief Credit Officer

Greg Becker – President, Silicon Valley Bank

Analysts

Joe Morford – RBC Capital Markets

Steven Alexopoulos – JP Morgan

Aaron Deer – Sandler O'Neill & Partners

John Hecht – JMP Securities

Bobby Bohlen – KBW

Casey (ph) – Bank of America

Michael Zaremski – Credit Suisse

Christopher Nolan – Maxim Group

Presentation

Operator

Good afternoon. My name is Mason and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group Q2 2010 earnings 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'll now turn the call over to Ms. Meghan O'Leary, Director of Investor Relations. You may begin.

Meghan O ' Leary

Thank you operator and thank you all for joining us. We welcome you to our second quarter 2010 earnings call. I would like to remind everyone that our second 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 different materially. We refer you to our reports filed with the SEC and ask you to review the disclaimer in our earnings release filling with forward-looking information.

This disclaimer applies equally to the statements made in this call. We will limit the length of the call to one hour which will include Q&A. During the Q&A section, we ask you to limit your question to one primary and one follow-up before getting back in the queue to enable other participants ask their questions.

And with that I will turn the call over Ken Wilcox. President and CEO.

Ken Wilcox

Thank you Meghan and thank you all for joining us. I'm pleased to report that we earned $21.1 million in the second quarter or $0.50 per share. We're proud of those numbers and encouraged by the fact that our performance in the second quarter was characterized by loan growth, high credit quality and increased net interest income. It appears that the positive momentums when we talked about in April is beginning to generate results.

First, there is growing evidence that despite the struggling economy our clients are moving now to pursue opportunities for growth. Period-end loans grew by $245 million, a 5.8% increase over last quarter. This was the first loan growth we've seen in six quarters and it was driven in large part by loans to our life sciences venture capital and private equity clients.

Activity in our pipeline also remains strong in the second quarter. An indication that this healthy demand maybe the beginning of a trend. Second, if our positive credit quality is any indicator, our clients are entering the recovery in a position of relative strength. Our net charge-offs dropped by 70% in the second quarter to less than $4 million. In addition, we saw a 15% decline in classified loans during the quarter and 38% decline from their peak one year ago.

While we have our underwriting expertise to think for the high quality of our loan book, we also believe the inherent resilience of our client base is a major factor. Third, our clients remains highly liquid. They added nearly $1.6 billion in total client funds during the quarter, one billion of which went to the balance sheet. These deposits allowed us to increase our average interest earning investment securities portfolio by another 30% to $5.2 billion. We have more than doubled our investment securities portfolio in the last year as a result of this solid deposit growth and our efforts have driven our net interest income to an all time high.

We are feeling encouraged by the resilience of our client base and by our solid loan momentum and good credit quality. In addition our capital and liquidity remained very strong, even after completing the repurchase of the warrant issued to the US treasury as part of our participation in the capital purchase program.

Overall SVB is well positioned to take advantage of the improvements we're seeing around us. The primary challenge we have right now is the slow pace of the broader economic recovery. While we believe we have the resources to operate effectively throughout this recovery period, we expect to realize our most significant growth potential only when the economy shows sustainable improvement and interest rates began to rise.

This recovery maybe complicated to some extent by the recent passage of the financial services reform bill. There are many questions still to be addressed by the regulators before we can say with any certainty what impact the new regulations will have on us. But I want to comment on two provisions of the bill that are of particular interest. First is the so called Volcker Rule, which puts limits on banks investments in hedge funds and private equity funds.

Clearly, this will have an impact on our funds management business SVB Capital, but it is too early to say exactly what that impact will be. We built SVB Capital as a way of delivering value to our clients and shareholders by providing clients with access to investments. They would otherwise be unable to access on their own. We do not believe the Volcker Rule is intended to restrict this kind of investment but ultimately the regulators will decided whether venture capital falls under the same umbrella as hedge funds and large private equity funds.

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