SVB Financial 1Q17 Earnings Call Notes

Gregory Becker – CEO, President & Director

Raising money was top challenge for startup executives

“The environment for our clients remains healthy, although, not without its challenges. Raising money was the top challenge identified by startup executives in our recent annual Startup Outlook Survey. Fortunately, there is continued investor appetite and capital for good companies, especially those that can demonstrate growth. While U.S. venture capital investment in the first quarter pulled back from its 2016 highs, the number of deals in the first quarter was still healthy and dollars invested increased over the fourth quarter. Overall, we view this progression as an expected and desirable return to normalcy. With estimated levels of dry powder in venture capital greater than $100 billion, most of that raised in the last 2 years, we believe there is sufficient capital to fuel the innovation ecosystem and that good companies will continue to get funding.”

Exit markets are active, but below historic highs

“Having added more than 1,000 new clients in the first quarter, we see evidence that new company formation is still healthy, even if it’s down from historic highs. Exit markets were relatively active in the first quarter, although, they too remain below historic highs. There were 7 U.S. venture-backed IPOs in the innovation space in the first quarter, 3 of which were SVB clients. Another 7 VC-backed technology and life science companies have filed to go public in the second quarter and there is a healthy pipeline of companies that reportedly planning for an IPO later this year.”

M&A remains the most common exit for startups

“Among our clients, the pace of M&A remain brisk and M&A remains the most common exit for startups. Half of the respondents to our Startup Outlook Survey indicated they expect the pace of M&A to increase this year. We believe the current VC market conditions represent a sustainable pace of fundraising and investment. And while exits are off to a modest start, we still expect 2017 to be a better year for liquidity for our clients relative to 2016”

Competition remains intense for all banks

“Stepping back to look at the broader industry, competition remains intense for all banks. Stagnating traditional banks and lightly regulated nonbanks are all searching for growth and the innovation economy is a key target for them. This competition has continued to drive down pricing and impact the pace of loan growth. While the broader markets have been more positive and less volatile than in recent quarters, there is still uncertainty about the health of the U.S. economy, the likely pace of rate increases and tax reform. We believe this uncertainty will likely cause more volatility over the coming quarters.”

We’re now at a healthy level of funding. We should be concerned if we got back to the levels from 2015

“Yes, this is Greg. I think the important point to make is that, the level of investment that we see we would describe and many of the people in the market would describe is being a healthy level. So I wouldn’t say it’s being held back. Actually, for me, it’s a healthy discipline that actually should be in place. And I’ve said this in prior quarters. If we see – if we’ve saw what we saw in ’15 again, that pace of investment, those numbers of companies being funded, we should be a little concerned. And so I think this is a healthy level. I think it’s great.”

Seeing a lot of competition from nonbanks

“We’re seeing less competition from banks, although, it is competitive, but the main competition is coming from nonbanks, who have raised significant amount of private capital to go after sponsored buyout, both senior and junior debt. And who – quite, frankly, they don’t have the same regulatory restrictions that banks have in leverage lending. And then, of course, in private equity services, because of the low-risk nature of that client base of the target market, you see heavy competition there as well. So you’re really seeing it across the board.”

SVB Financial 4Q16 Earnings Call Notes

SVB Financial’s (SIVB) CEO Greg Becker on Q4 2016 Results

2017 will be a year of liquidity for VC investments

“As we look into 2017, we believe there are a lot of reasons to be positive. We are optimistic that 2017 will be a stronger year for VC investment and exits in 2016. If 2015 was the year of funding and 2016 was the year of recalibration, we believe 2017 has the potential to be the year of liquidity. ”

VCs have a lot of capital to deploy

“Fundraising remained extremely strong in 2016 despite the investment pull back as VCs raised $41.6 billion, the highest amount in a decade. Clearly, VCs will have a lot of capital to deploy in 2017, although later stage startups may continue to attract the lion’s share of investment at the expense of early-stage companies.”

Exit markets looking promising

“As we enter into 2017, the exit markets are looking promising. In addition to the 20 or so venture-backed companies that are formally registered for IPOs, we are aware of a growing pipeline of other companies that have file confidentially or are planning to file for an IPO. While the exit markets could remain somewhat challenging, especially for companies with high valuations, the mood has markedly improved over last year, helped by solid performance of companies that went public in the second half of 2016 and greater confidence since the US election.”

Repatriation could mean more M&A

“Yeah. So, two points, Ebrahim. One is, I can’t recall that far back when we actually got the change in the repatriation. So, I actually can’t off the top of my head remember exactly what the impact was. Do I believe it’s a big impact? The only place where it has a potential for an impact is from an M&A perspective. If a lot more cash comes back in, could you see more M&A from larger corporations as they now are flush with a lot of liquidity and now they’re going to be willing to put that for growth, that’s clearly a possibility.”

Michael Descheneaux

Lower tax rate will benefit shareholders

“Yeah, I think that’s a fair way to look. At this point – again, there’s been talk about what’s deductible, what’s not deductible. Again, we can’t go into that because it’s just – who knows right now. But just, all things being equal, if you drop the federal tax rate, you’re right, for the most part, at this point, we would see most of it drop into the bottom line and benefiting shareholders.”

Likely to continue to see stress in early stage

“So, it’s Marc Cadieux. Early stage was interesting in the fourth quarter, in that we saw charge-off levels in the early-stage segment that were reminiscent of 2015 best of times, but then we also saw an increase in new early-stage non-performers, indicative of that continued stress in that segment, going on from the recalibration that started last year. And given the diminished rate of investment in early-stage companies throughout 2016, it’s our conclusion that we’ll continue to see some stress in that segment.”

Silicon Valley Bank 3Q16 Earnings Call Notes

SVB Financial Group’s (SIVB) CEO Greg Becker on Q3 2016 Results

Markets are healthy, record breaking year for capital raising

“Overall, the markets for us and our clients are healthy, despite some lingering impact from the VC market recalibration in the first half of 2016. Venture capital continues to perform strongly, although activity remains concentrated on larger funds and larger later-stage investments. The National Venture Capital Association stated 2016 is on pace to be a record-breaking year for raising capital based on the $32.4 billion raised to date, a quarter of that concentrated in six funds larger than $1 billion each.”

Second biggest year for venture investment

“Likewise, 2016 is expected to be the second biggest year in a decade for venture investment, with $56 billion invested year to date in nearly 6,000 companies. This is despite the decline in completed financings in the third quarter. ”

Early stage is alive and well

“In spite of an emphasis on later-stage companies, early-stage investing is alive and well, although it has been dominated for the last few quarters by a growing group of angels and micro-funds making seed investments. In addition, corporate strategic investments are becoming mainstream as established companies invest in new technologies, products, and delivery mechanisms in order to remain relevant and competitive. In a growing number of instances, we’ve seen entrepreneurs bypass traditional venture capital altogether to accept large strategic investments from corporates.”

Expecting a recovery for early stage companies next year

“We are expecting solid performance with trends similar to those in 2016 and making the following assumptions: continued healthy activity among our clients; gradual recovery by the early-stage markets from the effects of the recent VC recalibration; stable U.S. economy and no dramatic changes in the regulatory environment. At the same time, we expect a low-rate environment and persistent competition to provide continued headwinds.”

Expecting no interest rate increases

“Consistent with our recent approach and irrespective of the forward curve, we assume no market interest rate increases between now and the end of 2017. Nevertheless, we expect solid performance with potential upside if rates do increase.”

SVB Financial 2Q16 Earnings Call Notes

SVB Financial’s (SIVB) CEO Greg Becker on Q2 2016 Results

VC fundraising was lower in Q2 but still strong

“Closer to the innovation space, the venture capital and technology markets remain mixed in Q2 although there were some bright spots. VC fund raising was lower in Q2 but still strong with limited partners committing near $9 billion to larger funds, and high performing firms with established general partners. We view this as good news for the quarters to come.”

Fundraising dominated by late stage private companies. Funding to early stage startups declined. Concern over valuation still weighing on IPO

” But the solid dollar figures were dominated by a small number of very large rounds to late-stage private companies. At the same time funding to early stage startups declined as investors opted to put their money where they perceive momentum, and staying power. VC-backed exits were only marginally better in the second quarter. Concern over late-stage valuations and uncertainty in the markets continue to weigh on IPO prospects. There were 12 venture-backed IPO in the U.S. in Q2, only three of them Tech although all performed well.”

Market dynamics led to slower client fund flows and some stress with early stage loans

“Although our results during the quarter were positive, these market dynamics continue to affect SVB primarily in three areas; slower total client funds flows, some stress with early-stage loans, and lower warrant gains. Total client funds which include on-balance sheet deposits and off-balance sheet client fund investments have decreased. Deposits decreased primarily due more challenging fund raising environment. In addition, our ongoing efforts to direct clients toward appropriate off-balance sheet products resulted in nearly $2 billion of funds flowing from deposits to off-balance sheet products in Q2.”

Still optimistic though for many reasons

“Why we’re optimistic? So we have some near-term challenges that could persist for a few more quarters but we believe they are manageable. We were seeing many positive signs and opportunities despite these challenges. So I want to tell you why we’re optimistic about the rest of 2016. First, our clients are doing well overall; second, we’re winning new clients at a very healthy pace; third, we’re building strategic partnerships to support expansion of our payments and digital efforts; and fourth, we continue to build a platform that will support our long-term growth within the innovation economy.”

Not huge impact from Brexit but maybe if we were looking at Europe again might go to Germany or Nordics

“If we were to go into Europe again what we talked about in the past is that it may be looking at branching into Germany maybe branching into the Nordics but again we don’t believe Brexit really has any impact on that.”

A little more stability makes us feel better for the second half

” what would have happened in the second quarter and the first quarter which is, you have companies again that failed to raise that next round of financing, they’ve put themselves up for sale, they can’t find a buyer. We had roughly 15 early-stage companies that weren’t able to accomplish that in the first quarter, we had 11 in the second quarter. And again, if you look at the average for 15 it was around 10. So again, feel pretty good about where we are from an outlook perspective, and its more clarity which is where we are right now.”

It’s amazing how fast markets recovered from Brexit

” There was definitely a hesitation of deal activity that we saw and now that it’s over it’s amazing how fast markets recovered with the exception of the 10-year treasury and along with interest rates and just the activity in the UK. We spent a lot of time talking to our team of clients and what’s great about our client base is that they are very resilient. They look at this, they saw it happen, they adjusted it very quickly and now they are executing on how this will impact them but in the end we don’t think it will be a dramatic impact.”

Our innovation market is still a little bit soft

“As you can hear from our remarks, although I did — our innovation market is still a little bit soft. The good news there is we feel there is a lot more clarity than working in the first quarter and that gives us kind of a more confident and in kind of what our outlook is.

Marc Cadieux

Stress in early stage portfolio is not driven by the same things as the sponsor led buyout segment. Those are one off issues

Hey, it’s Marc. The only thing that I would add to that is that there is — I think, part of your question, there is no correlation between what’s caused distress in the early-stage portfolio segment versus what’s happened in the sponsor-led buyout segment. In particular to the couple of NPLs that we have in sponsor-led buyout, those have really been company-specific issues, not indicative of any broader trend, not indicative of any stress more broadly in that part of the portfolio or elsewhere.

SVB Financial 1Q16 Earnings Call Notes

SVB Financial’s (SIVB) CEO Greg Becker on Q1 2016 Results

We believe that VC markets are experiencing a healthy shift

“In the simplest terms, we believe the VC markets are experiencing a healthy shift, one that comes with near term challenges for some companies but is positive overall. We have been talking about valuations and [indiscernible] for several quarters and we’re not really surprised about what we’re seeing. We believe there is still much to be optimistic about and we remain positive about our clients and our outlook”

Tech markets have calmed following the volatile first quarter, but valuations have pulled back and capital is tightening

“The economic landscape is unsettled. While concerns of a recession appear to have receded somewhat, market sentiment and the economic outlook seem to change day to day. The interest rate outlook is equally unclear and we’re not counting on help from rates this year. The tech markets seem to have calmed somewhat following a volatile first quarter, sparked by a long buildup of fears over a possible unicorn bubble. While those fears may have been overstated, valuations have pulled back and capital is tightening, especially for early-stage companies.”

The IPO market was all but closed

“The IPO market was all but closed in the first quarter for tech companies which had zero IPOs compared to only six life science companies, making this the slowest quarter for IPOs since the third quarter of 2011”

But there are bright spots as entrepreneurs focus more on profitability and slower burn rates

“but there are bright spots as well. First, entrepreneurs and investors are beginning to replace the growth at any cost mentality that led to high valuations of recent years with a focus on profitability and slower burn rates. This shift in focus, as well as more reasonable valuations, should make the private market healthier overall.”

VC have substantial amounts of capital to invest

“after a long period of robust fundraising, VCs have substantial amounts of capital to invest, alongside many new sources of non-venture capital. This is the opposite of the situation VCs and entrepreneurs faced in 2008. This ample capital should ensure good companies will still be able to get funding.”

Lower valuations could drive increased M&A even if IPO market remain weak

“while the IPO markets may remain weak for some time, lower valuations could drive an increase in M&A by corporates and private equity firms. This is a dynamic we saw emerge during the 2008 recession.”

We see healthy re-calibration, not material downturn

“In short, we see a healthy re-calibration and not the beginning of a material downturn. While the markets may slow for a few quarters as investors and entrepreneurs evaluate their next steps, we believe this is likely to be a beneficial period of adjustment.”

More investor dependent companies may fail

” More investor dependent companies may fail and we could see more early-stage charge-offs as a result, although these are not unusual in any environment.”

VCs are advising companies to lower burn rates

“we probably had more interactions with venture capitalists than anybody else. And obviously, in the first quarter, we talk to them a lot about, what is their outlook and what advice are they giving to their companies? And a lot of that advice came back that we’re hearing, it is focused on lowering cash burn, get to profitability, try to raise capital so you really don’t have to go to the market, if you have to, for 12 to 18 months and so we’re hearing that pretty consistently.”

New company formation hasn’t changed a whole lot, maybe down a little

“They haven’t changed a whole lot, Steve. I’d say if you look back over the last three or four quarters, our high water mark, on a quarterly basis, was just under 1300. So from that high water mark, you’ve definitely seen a noticeable difference. But it was a little low in the first quarter, then it ramped up in the second quarter and then it trickled down”

Expect charge offs to trend toward the higher end of the range driven by early stage

“we reiterated our expectations for net charge-offs in that 30 to 50 basis point range more toward the higher end of that and that will be driven by early-stage”

Michael Descheneaux

Silicon Valley Bank 4Q15 Earnings Call Notes

Greg Becker

Expect another strong year

” We expect another year of strong growth in loans and fee income as well as continued solid credit quality. This expectation of course assumes no material change in the business environment for our clients. While volatility and investor uncertainty, present a challenge for the markets overall and the interest rate outlook is still unclear, we believe new company formation, investments and exits among our clients will remain sufficiently healthy to fuel our growth.”

View recent volatility as healthy

“We’re keeping an eye on valuations, exits in the extreme market volatility we’ve witnessed so far in 2016. We view recent valuation pullbacks as healthy adjustments with the potential to reduce frothiness in the markets and refocus companies and investors on positive cash flow as a priority.”

Our clients continue to do well despite the “unicorn flu” going around

“we are optimistic about the year ahead based on the performance we’ve seen from our clients and their industries and our expectations that we’ll continue to execute on our strategy. Our innovation clients continue to drive their business forward regardless of the Unicorn flu that has been going around. Our long experience, relationships and insights into the markets we serve gives us access to many of the best companies and investors and enables us to deliver strong growth without compromising on quality.”

Loan growth strong at end of the year because of capital call lending

“What we saw at the end of year, as we did the prior year not to some extent was a run up in capital call lending at year end, but mainly competitive equity partners, that’s number one.”

We haven’t seen any slowdown during the recent volatility

“just over the last week as this volatility has been obviously very active and we have also experienced it, the number of rounds that we have seen closed that have been in the $25 million to $50 million to $75 million levels of activity, actually is consistent with what we saw in the third quarter and the fourth quarter of last year, although it’s just a much very short time period. So that’s a very recent data point kind of to give you an example. We haven’t seen any slowdown, that’s number one.”

Investors have raised funds

“Number two is, as we spend time talking to investors and to capitalists, they have raised funds. But last year was a good fund raising year and money is coming in from a variety of different areas and the number of innovation companies is very broad. So we do still see that the activity levels although they might slow down are still going to be very healthy, that’s kind of a broad umbrella.”

Also optimistic for loan growth because as companies get larger, they are relying more on debt financing

“The second piece is a lot of the rounds that were the big fundings last year were to these larger and later stage companies. And these are companies that historically we would have seen working capital borrowings, we would have seen acquisition financing, we would have seen other sort of borrowings that we didn’t see because there was so much equity capital going in. So from that standpoint we believe utilization could actually increase in some of the working capital facilities, as these companies get closer to profitability and are doing traditional working capital financing and not relying on equity. So those are kind of the reasons that we look at why we are still optimistic about loan growth in 2016.”

Where there has been weakness it’s in earlier stage companies

“where we would see weakness, if there was, rounds that didn’t close and companies have struggled to get equity raised would be in early stage. And so from that standpoint we want to make sure to all of our members that, that’s a small portion of our overall portfolio roughly 8% of our overall loan portfolio”

Lower VC funding seen in 4Q is a healthier level

“You could look at the venture capital numbers in the fourth quarter, roughly $11 billion, depends on what data source you look from. The number was $58 billion for the year, the $44 billion annualized level, we look at that and that’s a more normal level. I wouldn’t be surprised, if you kind of see that number carry forward into 2016 on a quarterly basis. So that’s still a healthy number, number one.”

There is more corporate venturing than we’ve ever had

“There is still more corporate venturing than we’ve ever had and I believe this time, I have spent the time with several of them. And they are not — their approach isn’t a short-term from my standpoint, go in and try to make some money, it’s more strategic and here is what’s different about it this time compared to last time. Companies have to look at investing in new disruptive technologies to protect their business and to grow their business more than ever.”

Didn’t see any change in behavior in 4Q

“last point, which is your first question is, did we see any change in behavior in the fourth quarter and the answer was no we didn’t.”

Losses come from the early stage companies and only 8% of our portfolio is to early stage

“here is an important point, when we see the stress in the portfolio we keep referencing back and I’ll reiterate that 8% of the portfolio is at early stage. That’s where you see the stress. That’s when we would see a big impact. But if you look at that and even if you had a 10% loss in that, you’re looking at 80 basis points across the overall portfolio.”

The innovation economy is doing fine in China

“in the innovation economy, in China continues to be on an uptick. And you think about it, what’s happening in China actually ends up not being negative for the innovation economy. So China has got two different markets, they have innovation economy and the old economy. Old economy is one that’s struggling and they’ve got to figure how to balance that. So which means that more than likely, they’re going to reemphasize or increase their emphasis on innovation economy which from our standpoint bodes well. ”

Mike Descheneaux

Not planning for any additional rate increases

“Our outlook reflects the impact of the 25 basis point Fed funds increase we saw in December 2015 and assumes no additional rate increases in 2016. If there were any rate increases in 2016, we would adjust our guidance accordingly.”

Didn’t see anything odd from investor behavior. Did see encouraging moves from companies to prioritize cash flow over cash burn and to have more liquidity on their balance sheets

“One of the things that we did not see was anything out of pattern in connection with investor behavior. But we did see one thing that was encouraging in terms of the companies themselves and that was so to speak, an increasing number of companies starting to prioritize positive cash flow over cash burn for revenue growth. Putting back together with what on average in our borrowing client base would be a fairly robust balance sheet liquidity. The combination of prioritizing positive cash flow and having more cash on the balance sheet than usual given the fund raising environment, yes, I think helps give me some comfort that we’re not going to see anything that would hopefully impact or change our guidance for credit quality.”

We haven’t seen any down rounds really. There probably will be, but we think it’s good

“you said that we have a good visibility to up rounds and down rounds and again what we saw through the fourth quarter was no, I’ll call meaningful, and I honestly can’t even think of any or many down rounds that we saw. Do we think that’s going to change, so that’s going to change. But when you look at it, the market — these companies continue to still perform, it’s a broad statement, perform at a very high level, number one. Number two, going to back to what Mike said, they’re refocusing their efforts on growing and becoming cash flow positive. We think those are good signs and there is availability of capital. So we don’t believe it’s going to be a complete shrinking of capital in 2016. So that down rounds are going to be the norm but of course it will happen. So we expect it to be lower than last year, absolutely, but we’re still feeling okay about the outlook.”

M&A has stayed pretty healthy

“sometimes unfortunately we get some bad press or headlines that all the IPO activity has slowed down or ended, but the reality is a lot of the exits from whether its warrants or in investment gains really comes from M&A and again that has demonstrated over the past year that’s pretty healthy and is likely probably to continue at least a healthy clip.”

Silicon Valley Bank 3Q15 Earnings Call Notes

Assuming no rate rises through 2016

“Given the unusual level of uncertainty over whether the rate increases will actually materialize in 2016, we believe that it’s prudent at this time to assume no market interest rate increases between now and the end of 2016.”

There’s frothiness in the markets for sure, but we do not believe we’re in a bubble

“Although we are positive about 2016, there are a few areas we’re watching closely. These include valuations, VC investment levels, and exits. Our view has been consistent. There’s frothiness in the markets to be sure, but we do not believe we are in a bubble.”

The best companies are getting the most attention

“First, the best companies are getting more attention. They’re raising larger rounds of equity and are staying private longer. This, more than anything, is what’s behind the higher valuations, and one of the reasons VC investment is at such high levels, because they’ve been able to access healthy equity funding, these highly valued companies general have low leverage. In addition, many of them have significant customer and revenue traction, and many are disrupting industries and creating significant new market opportunities.”

Some companies will prove overvalued, others will grow into valuation and some will breakout

“Of course, some companies will prove to be overvalued and some will fail. Others will grow into their valuations over time, even if they’re somewhat ahead of themselves at the moment. And some will become breakout companies.”

There are signs that fewer VC rounds are being raised. At some point some companies will have trouble raising funds

“Second, despite solid overall new company formation, backed by a growing group of sources for startup capital, there are signs that fewer venture capital rounds are being raised. Although we haven’t seen a trend yet, at some point, companies with more challenging business models, less differentiation or poor traction will have more difficulty raising funds. This is more likely given some of the market pullback we’ve seen. But let’s be clear, this is the venture capital innovation model: truly innovative companies and early movers will succeed while others will fail.”

IPO activity slowed significantly in the third quarter

“Third, we’re watching exits. IPO slowed significantly in the third quarter. It’s too early to say whether this is the beginning of a longer IPO pullback, but volatility in the markets may be a reason for companies to stay private longer.”

We do not see these issues having a material impact at this point

“So we’re paying attention to these potential issues and we do not see them having a material impact at this point.”

We could experience losses if a meaningful disruption were to occur

“If a meaningful disruption were to occur, it could result in deleveraging by our clients, lower VC investment in warrant gains, and possibly unrealized losses, and higher loan losses in our early-stage loan portfolio, although it’s very important to note that early-stage loans constitute a relatively small part of our loan portfolio at less than 10% of total loans.”

Experience tells us that even if there is a problem the innovation economy will be more resilient than the broader economy

“Our experience suggests these negative impacts will be short-lived if they occurred, as the innovation economy has repeatedly proven to be more resilient and has shown higher growth over time than the broader economy.”

Larger companies have plenty of liquidity. It wont impact them if they can’t go public

“if these companies stay private longer, that’s not necessarily a bad thing. They have a lot of liquidity, whether they’re public or private, they have a lot of liquidity. And so, quite honestly, very few of them borrow money. So there isn’t that big of an impact.’

We think it could be manageable for the rest of the industry

“The question is, what happens to the rest of the industry, right, if there’s more challenges with some of these larger companies. And that could have a ripple effect. I think it’s manageable, and the question would be, if that were to happen, how severe could it be? I think right now we feel would definitely be manageable.”

Money is flowing to the higher profile companies

“We did see a drop in the number of financings in the third quarter, although the dollars were still exceptionally strong. And it goes back to what I said in my comments, money is really being more highly allocated towards the higher-profile companies, which makes sense. Again, a few of them are going public. There’s still — they’re growing revenue and they’re able to raise capital. So they’re just taking private longer.”

There is definitely a slowdown in the number of companies that are being invested in

“One of the things we’re looking at is the number of companies that are being invested in, and that is a slowdown. We are not seeing that impact our portfolio yet, either from a credit perspective or, clearly as you saw in the third quarter, from a total client funds perspective, which was incredibly strong.”

We can see a slowdown clearly but we don’t expect anything dramatic

“as I mentioned in my comments, we can see a slowdown clearly, but we don’t expect anything what I’ll call dramatic.”

It’s tough to see VC funding growing in 2016, although more companies will stay private longer

“When I look out at the 2016, for me, I’d say more of a stable number is probably what I would look at. I’m hard-pressed to see it grow from where it is right now, even though you’re going to see I think more companies stay private longer.”

Three LBO loans are now in non performing

“We’ve been in the buyout lending business for nine years now, the currently portfolio is 130 loans, of which three, to your point, are now in our non-performing. And so, yeah, hopefully that helps.”

There’s an aspect to this that’s the seasoning of the portfolio

“I would first say that, yeah, there’s a portfolio seasoning aspect to this that, as we’ve made more loans and they’ve been on the books for larger period of time, inevitably you’re going to have a couple of that turn out this way. Having said that, there really is little that these companies have in common. ”

There’s no systemic issue or emerging trend in this portfolio

“The two from the current quarter are from our life science segment. They both sell to hospitals. That’s really where the similarities end. I would liken these to sort of individual circumstances, company-specific issues with all three of them, which by extension is not indicative of any systemic issue or emerging trend that we can see at this time in the portfolio segment.”

We think that companies will adjust down their burn rates in 16 but we haven’t seen it yet

“it’s being talked about. Have we really seen it a whole lot? The answer is no. Yeah, I’d just say we just haven’t seen it yet. Do I expect it to occur? Yes. I do expect that companies are going to be more disciplined as they go into 2016. And we’ve seen this before where there becomes noise in the market about different people talking about high burn rates and giving advice to their portfolio companies to be disciplined, and it takes a quarter or two or three quarters for them to realize that and start incorporating it in their plans. So, do I think it’s going to happen in 2016? Yeah. I think that’ll happen. But as of yet, we haven’t seen it.”

The number of rounds being raised was lower especially at the seed and early stage

“Just to be clear, the amount of venture capital is, you know, was very strong in this quarter. When you look at the number of rounds being raised, that was lower, and that was especially true at the seed and early stage.”

It’s slow in series A and seed rounds

“when I think about the level of the series A or seed round, again it’s slow.”

We think that the rest of the PE portfolio is positioned well even though we did have rapid growth

“while we did have rapid growth that really has slowed over the last seven [ph] quarters, and I think that is a function of the discipline that we’ve maintained in terms of loan structure leverage levels, etcetera, and that’s the first point. I think that the portfolio we have today is positioned pretty well.”

A lot of clients have never seen interest rates at all so it’s difficult to know how they will react to rising ones

“it’s very difficult to understand how our clients will be thinking about what will happen when rates do go up, because nobody has been around these last few years to even understand what an interest rate is. So the behavior is a little bit uncertain.”

SVB Financial Group 2Q15 Earnings Call Notes

Highest quarter of VC investment since 2000

“The innovation markets remained strong in the second quarter saw continued robust investment in exit activity. Venture capitalist invested $17.5 billion in nearly 1,200 deals, a 30% increase in terms of dollars and a 13% increase in the number of deals compared to the first quarter. This was the sixth consecutive quarter of more than $10 billion of venture capital invested in a single quarter and the highest quarter of investing since 2000.”

Private bank is area of accelerated growth

“Our private bank is another area where we’re seeing accelerated growth. Thanks to our continued focus on delivering a differentiated client experience. Average balances of private bank loans grew at an annualized rate of 44% in the second quarter, fueled by healthy mortgage lending and significant new client growth. We expect the private bank to remain a long term growth driver for SVB.”

The competitive environment remains heated

“The competitive environment remains heated. Strong funding and exit markets have increased the amount of liquidity in the markets and borrowers have money options. As a result some vendors up here are willing to go to any length to win business regardless of whether that risk justifies that return.”

Regulatory hurdles remain high

“Finally the regulatory burden for banks of our size is significant. While we had and we’ll continue to invest our regulatory and compliance infrastructure, we expect the regulatory bar will continue to rise.”

Two loans went non-performing, but we classify as anomalous. ONe is sponsor led buyout

“the credit quality does remain solid and nonperforming loans remain we think within our normal operating range at the 70 basis points of total loans. Turning to the two loans specifically, I’d start by characterizing both of them as anomalous. As Mike mentioned, one of them is a sponsor led buyout loan. It’s the first of its kind that has become impaired, since we began the business in 2006, 2007 timeframe, that’s the first thing. The second is an asset based loan and that too is a rare event at SVB.”

Sponsor led buyouts have been a key part of our growth. It’s gotten a lot more competitive though

“the sponsor-led buyout as you know has been a key part of our growth for the last few years and it continues to be part of our growth, it will be a little bit lumpier for a lot of different reasons. But the growth will be slower than what it has been in the last couple of years, mainly for reason, which is the competitive landscape. And unlike the other business, with sponsor-led buyout you’ve competition from banks, but more increasingly you see competition from non-banks, which don’t have the same, both regulatory requirements and have quite honestly lower yield hurdles and can be even more flexible.”

SVB Financial 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Grew loans by 23%!

“We grew average loans by 23% or $2.1 billion, to $11.5 billion.”

Regulatory burden grows at 50b in assets

“the regulatory burden continues to grow, particularly as we approach $50 billion in assets. But as we have said before, we’ve been preparing for this eventuality, though we expect to have some time before reaching that threshold.”

The loan growth is a bit of an anomaly

“The growth was we’ve seen the spike as we have in prior quarter — Q4s, but this was a more significant jump than we’ve seen in the past. Again, thinking about the utilization rates, kind of going from a 28% to a 38%, that’s substantial across a portfolio like that. We just believe it was a complement [ph] of events where we’ve added new clients over the years and the activity levels at the end of the year was just very strong.

As Mike pointed out though, we did see a — we’ve already seen a decline in those balances so far in the first part of the year, and we could even see period-end, at the end of Q1, period-end balances be lower as we’ve had in some prior years than we did at the end of the year. So it’s somewhat of an anomaly but it also has been an area of focus for us as you pointed out.”

Volatility in equity valuation is different from credit risk

“here’s kind of two aspects when you think about valuations. There’s the credit aspect of it. And I think sometimes people think about that valuations — if a valuation — company goes from $100 million to $250 million or $300 million and it goes back from $300 million back to $100 million, that all of a sudden the credits — there’s a risk to the credit. And for the most part, that’s actually not true. So we look at credit, and as Marc has articulated, we feel very good about where we are from a credit perspective of keeping with our underwriting standards, et cetera.”

Valuations have increased, but growth is strong

“As I said, valuations have absolutely increased. And some of the valuations are, I’ll use the words, very specifically priced for perfection. That being said, we have, in my history, have never seen the growth rates — revenue growth rates of these companies and the market opportunities they’re going after.”

Silicon Valley Bank 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Valuations admittedly reflect high expectations

“As we said in prior quarters, given the strength of these markets, we are paying close attention to today’s valuations, which, admittedly, reflect very high expectations. While some companies and industries may be overheated based on what we’re seeing, business models overall are better.”

deposit inflows have been primarily from early stage: VCs and Angels

” So when you look at where it came from, it is — predominantly, we look at the client base that’s driving that. It is more early — early stage is the biggest driver of that, and obviously, that’s driven by venture capital funding. It’s driven by corporate venturing, even angel investing in that category, which was, for the third quarter, was incredibly strong.”

You also see T Rowes and Fidelities getting active at later stages

“And then you see additional dollars flowing in from later-stage companies as the T. Rowe Prices and Fidelities get more active in putting more money at the later stage”

Seeing aggressiveness in price, size and structure

“When I think of the competitive landscape and we compete on a debt basis, you’re looking at price, size and structure being the 3 components. As I’ve said in prior calls, you can look at all 3 of those components, and we’re seeing a very aggressiveness in all 3 of those areas.”

The longer you see intense competition, the less it makes you want to keep playing

“Has anything changed dramatically? No, but the longer you see that intense competition at a certain level, that’s just — it becomes more challenging to figure out where you want to play and where you don’t want to play. ”

Hot areas

“I’d say higher valuations in software service, cloud computing, security companies, marketplaces, social. I’d say those are general categories that we either — probably all wouldn’t surprise us.”

A lot of liquidity

” we have $20 billion of investment securities versus a $36 billion balance sheet. So as you know, you got to be very cautious because if interest rates move, the rates gap up. That obviously can cause some challenges. So for us, the primary area that we are going for is liquidity. And obviously, in the low rate environment, pretty much across the curve, rates are just low, and you just don’t get paid to going out for any longer duration. ‘

Why would you need to borrow when you have so much money in the bank?

“You’re seeing competition also from the amount of liquidity in the market, right? When you see these companies that are raising massive rounds of equity financing, you sit back and you say even though you may have availability of a term loan or even acquisition financing in some cases, you sit back and you say why would I even spend, rates are low, money to borrow if you have this excess liquidity that isn’t earning a whole lot. So our utilization rates have dropped down a little bit, but we are seeing, again, competition pretty consistent across the board.”