SVB Financial Group
Q3 2013 Earnings Call Transcript

Published: 25 Oct 2013

[Operator:]

Good afternoon. My name is Laurel, and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group Third Quarter 2013 Earnings Call. [Operator Instructions] Thank you. I'll now turn the call over to Meghan O'Leary, Director of Investor Relations. Please go ahead.

[Meghan O'Leary:]

Thank you, Laurel, and thanks, everyone, for joining us today for our third quarter 2013 earnings call. Our President and CEO, Greg Becker; and our CFO, Mike Descheneaux, are here to talk about our third quarter results. As usual, they'll be joined by other members of management for the Q&A. I'd like to remind everyone that our current earnings release is available on the Investor Relations section of our website at svb.com. I will caution you that we'll be making forward-looking statements during this call and that actual results may differ materially. As usual, 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 a reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release. We plan to limit the length of the call, including Q&A, to 1 hour. [Operator Instructions] And with that, I will turn the call over to our CEO, Greg Becker.

[Gregory W. Becker:]

Thank you, Meghan, and thank you, everyone for joining us today. This month, Silicon Valley Bank celebrated its 30th anniversary as the bank for the global innovation economy. Looking back in all the choices we've made in those 30 years, the decision to focus on innovation companies was the most important. This quarter perfectly illustrates the power of that focus. It was a great quarter. We delivered net income of $68 million or earnings per share of $1.46. Highlights of the quarter included

[Michael R. Descheneaux:]

Thank you, Greg, and good afternoon, everyone. We are very pleased with our solid performance in the third quarter, which was marked by strong performance in loans, total client funds and our VC-related investments. There are 6 things I will highlight in my comments today. First, another quarter of healthy loan growth and continued strong credit quality. Second, higher net interest income despite a decrease in net interest margin. Third, significant growth in total client funds, meaning on-balance sheet deposits and off-balance sheet funds. Fourth, exceptional gains on our VC-related investments and equity warrants. Fifth, higher expenses, due principally to higher incentive compensation related to our strong financial performance. And sixth, continued solid capital ratios. And of course, I will update you on our full year 2013 guidance. Before I start, I want to note 3 items impacting our EPS in the quarter which we have outlined in our press release. First, gains from the FireEye IPO added $0.42 to EPS. That number reflects gains from non-marketable securities and warrants, less the associated incentive compensation expense. While gains on VC investments and warrants are part of our core business, the outsized nature of the gains related to FireEye was unique. Second, a onetime income tax adjustment related to a prior period had a negative EPS impact of $0.06. And third, the impairment of a direct equity investment had a negative EPS impact of $0.05. Now let us move to loans. We have solid loan growth during the quarter, with strength across all of our client segments. Average loans reached another all-time high of $9.5 billion, growing $524 million or 5.8%. This increase reflected continued healthy demand among our venture capital and private equity clients, as well as larger software clients, coupled with the carryover effect of high period-end corporate finance balances in Q2. Our efforts to win and retain larger clients continued to pay off. We also had a notable increase of $890 million in unfunded credit commitments which reached $10.7 billion during the quarter. Our pipeline remains healthy going into the fourth quarter, and we believe we are on track to hit the top end of the range of our full year 2013 loan outlook. Turning to credit quality. It remains very good. Our provision for loan losses was $10.6 million, driven primarily by net charge-offs of $5.5 million and by loan growth. This compares to a provision of $18.6 million in the second quarter. Gross charge-offs were lower at $8.1 million and, consistent with our historical experience, came primarily from our early-stage hardware and software portfolios. This compares to gross charge-offs of $15.4 million in the second quarter. Our loans -- our allowance for loan losses as a percentage of total gross loans increased to 1.26% from 1.23% in the third quarter, primarily due to an increase in reserves for impaired loans related to 1 loan. While classified loans increased by 16% in the quarter, driven primarily by the addition of a few larger loans, classified loans as a percentage of total loans remains consistent with our historical known. And in this quarter-to-date, we have seen improvement in some of these loans. In terms of our outlook on credit quality for 2013, we're expecting to hit our metrics, and we believe net charge-offs will be at the low end of our projected range. Now let me turn to net interest income and net interest margin. Net interest income was $177.5 million, an increase of $7 million or 4.1%. This increase was driven by strong loan volumes and was helped by 1 extra day in the third quarter versus the second quarter. It was offset somewhat by lower blended loan yields and lower balances in our available-for-sale securities portfolio. Overall loan yield was 5.81%, a slight reduction from our second quarter yield of 5.86%. This was due to our changing loan mix and continued competitive pressure, as well as growth in lower yielding private equity and venture capital call lines. Lower average balances in our available-for-sale securities portfolio resulted in a $1.1 million decrease in interest income. Average AFS balances decreased by $344 million to $10.1 billion due to the timing of our deployment of deposit inflows and our continued use of portfolio maturities to fund loan growth. On a period-end basis, AFS securities balance has increased slightly by $167 million to $10.2 billion due to new investments of $686 million, primarily on fixed-rate agency issued mortgage-backed securities and U.S. agency debentures. These new investments were partially offset by paydowns of $542 million. The duration of the portfolio remains stable at 2.7 years at the end of the third quarter. As a result of our better-than-expected net interest income, we are raising our 2013 growth outlook from the high single digits to the low double digits. Turning to net interest margin. Our net interest margin decreased by 8 basis points to 3.32% in the third quarter. The decrease is primarily due to higher levels of cash held at the Federal Reserve. Both average and period-end cash balances increased significantly during the quarter due to large deposit inflows early in the quarter and the timing of our deployment of those balances. Premium amortization expense related to our investment securities portfolio remained flat at $6.2 million. We believe that is a reasonable run rate for future quarters based on our current investment portfolio composition. We are on track to meet our 2013 net interest margin outlook, although NIM will continue to be significantly influenced by deposit and loan growth as well as premium amortization. Now let us look at total client funds. Average total client funds, that is, the sum of our on-balance sheet deposits and our off-balance sheet client investment funds, increased by $2.7 billion or 6.5% to $44.5 billion. This increase reflects strong growth in deposits and off-balance sheet funds as our clients saw increases in liquidity due to healthy VC-related investing and exits, and we continue to add new clients at a steady pace. Average deposits grew by $946 million or 5.1% to $19.6 billion primarily due to strong acquisition of early-stage and venture capital and private equity clients. Average off-balance sheet client investment funds increased by $1.8 billion or 7.6% to $25 billion as a result of active VC investment in IPO markets, as well as increased use of our off-balance sheet suite product. This is the first time average total client investment funds have reached $25 billion. Now let us move to noninterest income. Noninterest income, net of noncontrolling interest, was $105.8 million compared to $67.4 million in the second quarter. That is a non-GAAP number. The increase was driven by significant gains on investment securities and equity warrants related to the FireEye IPO. Gains on investment securities net of noncontrolling interest were $36.5 million compared to $9.5 million in the second quarter. The majority of these gains, approximately $29 million, were related to valuation increases and carried interest from our managed direct funds and debt funds that held investment in FireEye. Gains on equity warrants were $18.8 million compared to $7.2 million in the second quarter. $15 million of the gain was due to unrealized valuation gains on the portfolio, including $8 million from FireEye. The remaining $4 million was attributable to warrant exercises. These gains were driven primarily by strong M&A and IPO activity among our clients. While VCP-related [ph] investments and warrants are very much a part of our core business model, there was a unique alignment of conditions that made this FireEye impact much larger than normal. First, the majority of our investments was through our investment and debt funds. Second, we held a larger investment in FireEye than we typically make. Third, we received significant carried interest on our investment. And finally, we had warrants. On top of this, FireEye was the largest IPO of the quarter. It is important to note that there is a 180-day lockup period on our FireEye investments and warrants, and that their value will fluctuate during their lockup period and until, if and when, any sales and investments are made. Now let us turn to core fee income, that is, fees from foreign exchange, deposit service charges, credit cards, client investments and letters of credit. Core fee income increased slightly by $688,000 to 37 -- excuse me, $37.2 million driven primarily by higher revenue from credit cards. Credit card revenue increased by $579,000 or 7.6% to $8.1 million due to higher transaction volumes and transaction values as well as steadily increasing client adoption. Client investments fees declined $131,000 or 3.7% to $3.4 million despite significant growth in balances, due to continued margin pressure which as a result of the current low rate environment. We saw strong volumes and healthy new client acquisition in foreign exchange, although that was offset by increasing and continuing margin pressure. Foreign exchange revenue increased slightly by $109,000 to $12.9 million. Due to continued margin pressure in client investment fees and foreign exchange fees, we are decreasing our 2013 outlook for core fee income growth from the low double digits to the high single digits. Nevertheless, our client acquisition and overall client activity are strong, and we remain optimistic about the long-term growth prospects for core fee income. Now I'll move on to expenses. Noninterest expense was $160.5 million, an increase of $17.2 million or 12% from the prior quarter. This increase was driven primarily by an increase of $12.1 million in incentive compensation due to our strong performance in the third quarter and the year so far. As we have said before, incentive compensation is a significant variable in our expenses since it is determined by our performance relative to that of our peer group and our internal goals. But in short, when we outperform, it goes up. As a result of higher incentive compensation from higher net interest income, as well as strong warrants and investment gains in the third quarter, we are increasing our 2013 expense outlook from a percentage increase in the mid single digits to the low double digits. Now I'll move on to capital. Our capital position remained strong and is supported by continued solid earnings growth and credit performance. The holding company total risk-based capital ratio increased by 13 basis points to 14.16%, primarily because of sizable gains on VC and PE-related investment securities. The bank level total risk-based capital ratio decreased by 11 basis points to 12.31% due primarily to strong loan growth and a $10 million dividend paid by the bank to the holding company. And the bank level Tier 1 leverage ratio decreased by 20 basis points to 7.46% primarily due to significant deposit growth and the dividend paid by the bank to the holding company. To wrap up, we are extremely pleased with our performance in the third quarter and the year so far. Our clients are doing very well, and our markets are thriving. We are consistently delivering strong results despite the low interest rate environment and increasing competition. Regardless of the environment, we will continue to execute on our strategy and focus on achieving things within our control. These include

[Operator:]

[Operator Instructions] [Technical Difficulty]

[Operator:]

Okay, our first question comes from the line of Brett Rabatin from Sterne Agee. [Technical Difficulty]

[Brett D. Rabatin:]

I wanted to first ask if you could just give a little more color around the guidance for deposit growth for the full year essentially implies that it slows down quite a bit in 4Q. Can you -- I guess, first talk about that? And then secondly, the follow-up was just on the guidance for '14 implicitly assumes the margin would come down given the growth of loans with slower spread revenue growth. Can you talk maybe about those 2 things?

[Michael R. Descheneaux:]

Yes, I'll talk to the first part of the question which is with respect to deposits. I mean, you saw for the fist time this year that deposits came back and it came back significantly strong. But you will recall that the first half of the year was essentially flat. So we still have our growth outlook for 2013 as we just mentioned. But again, we've continued to believe we'll still see some deposit growth, but again, with such a massive run up here in the third quarter. But nonetheless, we still expect some continued growth in the fourth quarter.

[Brett D. Rabatin:]

Okay, and any thoughts around the conservatism with forward margin expectations?

[Michael R. Descheneaux:]

Sorry, maybe just repeat because you had such a long question, Brett. I apologize [indiscernible] on your first part.

[Brett D. Rabatin:]

Essentially, I'm just asking around the early 2014 guidance. Just thinking about the spread revenue growth being in the single digits with the loan growth being, obviously, in a dollar amount about the same as this year, would imply that the margin goes down a little lower from present levels. Any thoughts about just why you're thinking about that? Would it be in loan pricing or some other variable?

[Michael R. Descheneaux:]

If you're talking about the core fee income growth was your first part of your question or not?

[Brett D. Rabatin:]

No, it's actually...

[Gregory W. Becker:]

No, no, no, spread, spread. So Brett, this is Greg. So the spread -- the single digits -- high single digits for next year is really driven from the loan growth. It's by mix -- loan mix is one thing. And the second part is definitely from a pricing compression. So you can look at the mix, and we've seen this for this past year, and we've seen it last past couple of years. So as you head to do more capital call lending, as you tend to do more corporate finance lending, that tends to be a lower margin than the average loan yield, so that tends to bring down your loan margin a little bit. So although loan growth is in the midteens, the net interest income was on the lower side. So that's -- and we don't give guidance for deposits so you kind of -- that's the combination that creates the high single digits.

[Operator:]

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

[Joe Morford:]

Just a follow-up on the growth in client funds. I guess, for the piece coming from new client acquisition, how much would you say is coming from new companies being started and how much is more market share gains? And then for the piece that's more the client liquidity events of this quarter, how sticky are these deposits typically and how rate-sensitive?

[Gregory W. Becker:]

Joe, it's -- let me -- this is Greg. I'll start and then Mike may want to add to it. So there, it's kind of across the board. When you look at new client acquisition, clearly, that's part of it, but it's not the main part of it. Because when you -- even if you add 300 or 400 new clients to the thousands of clients, it still isn't that big from a numbers perspective. It really is that our clients, overall, had very nice fundraising, and that's both from new rounds of private equity financing, as you saw in the venture capital numbers, they were very strong in the quarter, as well as liquidity events. When you look at total client funds, clearly, because of the number of IPOs there were, and we funded a fair share of them, that adds a fair amount of liquidity to, especially, the off-balance sheet numbers. So it's really not one thing, it's really all of them. As far as interest rate sensitivity, I guess we're looking for the day where we can actually have a conversation about interest rate sensitivity because right now, there's no margin. So it's kind of hard to determine what behavior is. We are, obviously, planning for rates to pick up at some point and then, we want to make sure we have a broad enough product set, product offering, that we can make sure we try to find the right balance between on and off-balance sheet of deposits. So right now, I would say there really isn't a lot of sensitivity because there really isn't a lot of yield to find those right now.

[Joe Morford:]

Okay, and I guess following up on that point, again, despite all this growth in client funds, deposit service charges have been relatively flat and client SMPs, as you say, down both quarter-to-quarter and year-over-year. Has there been that much margin pressure over the past 12 months or some of these revenues, some of these clients are being captured elsewhere like through compensating balances or something like that?

[Gregory W. Becker:]

Joe, it's Greg again. Let me start with the first one, and that's -- it is compensating balances. And when you see the level of deposit growth, even though the earnings credit rate is so low, you basically -- it covers a lot more of the fees. So it was a slight decline. It was a slight decline last quarter and so it really is, to your point, compensating balances related and the growth in deposits. So that's one thing. The second part, when you look at the spread that we're getting on the off-balance sheet funds, there has been margin compression. It doesn't take much. If you're going down to -- you're looking at getting 5 basis points basically and it drops from 8 basis points of fees for us to 5 basis points, that's still a lot of depression or decline even with the growth in off balance sheet. So from that standpoint, we're, again, waiting for rates to pick back up so we can go back to a more normal or appropriate fee-sharing relationship on the off-balance sheet funds.

[Operator:]

Your next question comes from Steven Alexopoulos from JPMorgan.

[Steven A. Alexopoulos:]

I wanted to start and follow up on the comments on guidance. I know it really is preliminary for 2014. But when we look at the midteens loan growth, it's still very strong, but it is a bit of a step down from the 20% range we've been seeing this year. Are you just being conservative with the guidance or are there specific segments of the loan book where you're expecting a slowdown?

[Gregory W. Becker:]

Yes, Steve, it's Greg. I'll start then Michael probably want to add. Part of it is just when you look at the base of -- the size of the loan base right now, it's significant -- we've seen significant growth. So when you just look at average growth, even the midteens is a substantial number. And as I said in my comments, it's generally aligned with the absolute growth we've seen over the last couple of years. So it's less about being able to keep that pace on a percentage basis. It's more -- we're looking more at the absolute growth numbers. And as we said, it's preliminary. But right now, that's our best view forward for 2014.

[Steven A. Alexopoulos:]

Okay. And maybe to follow up, I know you addressed this before but in terms of the disparity between that outlook and the growth for mid or single-digit net interest income growth, are you expecting an outflow of deposits next year? Is that embedded in this assumption?

[Michael R. Descheneaux:]

Steve, this is Mike. We haven't given the guidance on the deposits outflow for next year. But again, our -- right now, we believe we're going to continue to grow the deposit base. I mean, you've seen how the deposit franchise is. I mean, client investment funds off the balance sheets continue to be strong. But again, we are expecting some positive growth next year.

[Operator:]

Your next question is from Ebrahim Poonawala from Bank of America Merrill Lynch.

[Ebrahim H. Poonawala:]

So just a quick question in terms of looking at the leverage ratio. I mean, I guess you have a fair degree of a buffer at this point, both at the bank and the holding company level. Do you see as internal capital generation to be enough based on sort of the preliminary guidance that you gave to sustain that without having to sort of come to the market for any sort of growth capital?

[Michael R. Descheneaux:]

Yes, that's right. I mean, we expect to be self-funding our growth. When you look at basically the run rate of our earnings in the given quarter at the bank levels and you target a certain total risk-based capital ratio and it's essentially adequate enough to cover what we're forecasting for loan growth. So the short answer is, no, at this point, we don't anticipate going to the market.

[Ebrahim H. Poonawala:]

Got it. And then I guess my second question in terms of, Greg, you mentioned that the FireEye was not the typical investment that you guys make. I'm just wondering, given the strength and the sort of the tech IPO activity, what's the -- what are the chances of similar gains over the next 12 to 18 months or was it that unique that it's unlikely to be repeated anytime soon?

[Gregory W. Becker:]

Ebrahim, this is Greg, and I think there's a couple of factors there. The one part is we had so many touch points into FireEye, whether it was warrants, it was gains and funds that we had invested into fund-to-funds. It was in our direct funds. So it was so broadly based. That's what made it unique, number one, and what it made unique, number two, is that it was such a substantial IPO, right? It was the largest IPO in the quarter. I would -- we would love to see more FireEyes in the next 12 to 18 months, but the probability of that happening is very low.

[Operator:]

Your next question comes from Aaron Deer of Sandler O'Neill.

[Aaron James Deer:]

And the -- I guess, I just wanted to follow up on something that you said earlier, Greg, about the intensity of competition out there right now. In the past, you've talked about the kind of capriciousness of competition or competitors come in when the market is hot, but then kind of run and hide when things take a turn. With the economy moving to a large degree towards kind of more innovation kind of sectors, is the nature of the competition that you're seeing changing? Is it more sophisticated and more dedicated to the space for the longer term?

[Gregory W. Becker:]

Aaron, I think, from our standpoint, there's a couple of things happening. You pointed up to one, which is the innovation economy is growing at the fastest pace of really any of the parts of the market or the economy. And if you just take a step back, clearly, we expect that to happen for the foreseeable future, that's why we like the space we're in so much. Does that then entail that we are going to see competition, competitors, be here for a longer period of time? I think that's probably a legitimate conclusion. The reason I spent a fair amount of time in my opening comments talking about the various things that we do to add value to our clients, really, from my standpoint, is that's where the competitive differentiation is. We spend so much time not only just looking at our products and services and making sure they're competitive, but we really say, what are the additional things that we can do by virtue of the market share we have, the reach that we have, the relationships we have, that we can bring to our clients that no one else can. And that's really the differentiation that we spend so much time on, and that's the feedback we hear from our clients. So yes, it's competitive. It will continue to be competitive. Clearly, if the market turns down a little bit, some people will back away, but we do expect this competitive landscape to be here for the foreseeable future. But we just need to continue to raise the bar and differentiate ourselves.

[Aaron James Deer:]

And then beyond the kind of changes in the types of loans that you're doing, I think you've mentioned in response to Joe's question about as you go into some different loan types that the yield is going to be lower. Is there -- are yields still coming down in general just from that competitive pressure that we're seeing out there right now?

[Gregory W. Becker:]

Yes, a little bit, but I'd say the majority of the decline in margin relates to mix. And again, it's -- the biggest growth that we've seen, you look at Capital Call Loans is probably one of the biggest areas. And when you look at lending money to large -- larger money Capital Call Loans to top-quality firms, you're in that prime range, and that's obviously lower than the average loan yield that we have, so just that alone, as we continue to grow that business, you're going to see some pressure on the overall loan margin as an example.

[Operator:]

Next, we have a question from Jennifer Demba from SunTrust Robinson.

[Jennifer H. Demba:]

On the international front, your loan balances have grown quite a bit in the last couple of years. I'm just curious as to, if you could give us some qualitative commentary on sort of were you ahead of expectations or behind, versus maybe what you're budgeting or thinking about a couple of years ago?

[Gregory W. Becker:]

Sure, Jennifer. This is Greg. And yes, it's -- from my standpoint, we are ahead of where -- a couple of years ago, I would have thought we were going to where we had been. And it's really driven by a couple of things. First of all, what's evolved in our business model over the last several years, or the last like 4 or 5 years, is that we're able to do bigger, more well-structured Capital Call Loans, loans to corporate finance companies. And so when you look at that, we're not going into the U.K., as an example, and just doing early-stage loans, we're doing capital call lending. We're doing buyout financing. We're doing loans to corporate finance sized clients. When you do those larger loans, again, very similar structure to what we're doing in the United States, very similar equity sponsors, those loans add up pretty quickly. So you can get to pretty substantial balances in a very short period of time, remaining consistent with our credit quality standards. And I think that's the big difference that allows us to grow that business at a fast pace. And what I've said before in prior calls, there's no reason that I see that we couldn't be growing that 30%, 40%, 50% per year for the next few years. And you add that to the growth that we have in the United States, that's really where we see a lot of upside.

[Jennifer H. Demba:]

And I have one more question. Greg, all the events that you mentioned at the top of the call that were just mentioned on the last question, I mean, has that increased for you in the last year or so? Have you done more of that as competition has increased?

[Gregory W. Becker:]

We've -- I'd say, we've done it for 2 reasons and the answer is, yes, we've increased it. One is it's really positive feedback from our clients. And the one thing that's changed is that, is you see these larger corporations; Fortune 50, Fortune 500 companies, and they're really struggling with trying to figure out how they can tap into the innovative -- innovation economy more quickly, they're nervous in a lot of ways. We're one of the only places where they can come and really broadly connect with these next-generation emerging technology companies. So the number of phone calls we're getting and relationships we're building with larger companies where we can introduce them to our client base is substantial. And it's a win-win, right? So the big companies come to us, and that's great, and the smaller companies and medium-sized companies, look at us and say, "You're the only one that can do that". So it's both driven by clients, but it's also driven, to your point, we want to continue to distance ourselves from competition. And from that standpoint, the best way to do it is to add value in a way that we don't think other companies can.

[Operator:]

We have a question from the line of Julianna Balicka from KBW.

[Julianna Balicka:]

I had a couple of questions, please. One, you talked about this during your remarks. On the cash redeployment, just to clarify, the balance was up on an average basis and also up at the end of the quarter. So have you redeployed that cash already in October or that's still pending throughout the fourth quarter?

[Michael R. Descheneaux:]

So, we're certainly looking at it to deploy here in the beginning of the quarter as well, but what do we -- what we wanted to make sure is when you have these deposits coming on this excess cash is to make sure it's going to be sticky and make sure it's going to be around. So that's why it's a little bit of a timing issue. But again, we certainly are looking to, in general, all things being equal to try to bring down those cash balances that we had during the quarter, so that is likely to happen this quarter.

[Julianna Balicka:]

And do you think you'll go back to your previous run rate within a quarter or it will take more like a couple of quarters?

[Michael R. Descheneaux:]

I think we'll catch up fairly fast. Again, there's always a certain kind of level of the targeted cash that you want to hold, given the size of your balance sheet. But again, we will continue to invest the excess.

[Julianna Balicka:]

And what are you investing -- what yields, I mean, are you investing to excess in right now?

[Michael R. Descheneaux:]

So it can range from a few places. I mean, you could on U.S. agency debentures, that's probably around 1.5%, 1.6%. If you start getting into some of the agency passers, you may be looking at 240, 250. So kind of overall blended yield, somewhere around that 200 to 215 basis points, somewhere in that range.

[Julianna Balicka:]

Got it. And to finalize, a follow-up on this topic. On the -- you discussed the impact on your off-balance sheet funding from the liquidity events of clients. So 2 questions on that. One, are those going to be fairly sticky or they -- you expect them to kind of run off within a couple of quarters as those funds get reinvested elsewhere? And also two, within the deposit growth, you call that deposit growth from various client sources, but has that also come from these liquidity events on the on-balance sheet and therefore, we should think about the redeployment on the client side?

[Michael R. Descheneaux:]

Maybe I'll start with the off-balance sheet. I mean, we actually expect them to be fairly sticky. I mean, our clients continue to do well. They continue to generate a lot of cash. And obviously, when they come in with a lot of the surplus cash, they actually are looking to kind of a little bit longer term investment, obviously, preserving capital and liquidity is a top of mind. But again, we do expect the off-balance sheet to be more or less sticky.

[Julianna Balicka:]

And then was any of that also in the on-balance sheet?

[Michael R. Descheneaux:]

So as Greg was talking about earlier, I mean, we had -- a fair amount is some of the early-stage clients that are generating a lot of cash. And some of those will continue into something of a burn scenario as well as they continue to invest and develop products as well. But again, I wouldn't say, we'd have any differing attributes than what we've seen in the past.

[Operator:]

Next, we have a question from the line of John Pancari from Evercore.

[Stephen M. Moss:]

It's actually Steve Moss on behalf of John. Most of my questions really have been answered. Really, congratulations on this quarter here. I'm just wondering a little bit in terms of the larger loans. What's the average size of loans greater than $20 million that you're putting on the balance sheet these days?

[Gregory W. Becker:]

So this is Greg. I'll start and Marc Cadieux, our Chief Credit Officer, will add some commentary. When you look at the average loan size above $20 million, yes, that number has increased, but the average truly isn't that much greater than the $20 million. So it's, again, just north of the $20 million, but I'm going to let Marc give you a little more detail.

[Marc Cadieux:]

I think Greg answered it well -- it's Marc Cadieux that -- and it depends on the type of lending we're doing, but the average really isn't that much above $20 million, probably in that plus or minus $25 million range.

[Stephen M. Moss:]

Okay, and then I guess just one more thing, you guys, sound a little more optimistic to me in terms of what definitely Marc called an early stage development. Just wondering where that is as a percentage of the overall loan portfolio these days?

[Gregory W. Becker:]

This is Greg. The early-stage loan portfolio as a percentage has -- it's been dropping modestly. And it's not that it's not growing. It actually is growing but the rest of the portfolio is growing at a faster pace. So you're looking at a 7-ish percent of the overall portfolio, 7% to 8%, and that's where it's going to be right now. And again, if you look forward the next 1 to 2 years, that will probably continue to decline modestly.

[Michael R. Descheneaux:]

Just to clarify. I mean, it's an extremely important part of our business model. So just because the numbers are coming down, doesn't lessen the importance. In fact, it becomes even more important as far as a source of future clients. Because remember, a lot of our clients grow up with us, so capturing those clients early on is extremely important to us.

[Gregory W. Becker:]

Yes, to Mike's point, we expect it would continue to grow. It's just the rest of the loan book will grow at a faster pace. Therefore, on a percentage basis, it will have a modest decline.

[Operator:]

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

[Gaston F. Ceron:]

Just quickly here. I just wanted to go back towards the issue of the innovation economy and just ask a more kind of thematic question. I mean, you guys have done very well over there. I'm curious how you see sort of the impact of the -- on the innovation economy of the fiscal uncertainty that we've had for a while now, and most pronouncedly recently with the shutdown and everything, and its spillover effect. I mean, do you think that it's -- do you think the innovation economy in spite of that has been remarkably resilient? I mean, do you think that -- how do you think of the upside might look like and if we can finally dispose of with this fiscal clouds. I mean, how do you think this economy -- this part of economy might kind of rev up if we can get rid of some of this uncertainty once and for all?

[Gregory W. Becker:]

Yes, Gaston, this is Greg. I'll start. The innovation economy hasn't really been impacted much from my standpoint. And part of it is because it's been a short period of time. Now if that had lasted and we'll find out pretty soon in kind of the January, February time period, if it starts to actually have a long-term effect and you start to have bigger issues, then, I think quite honestly, it's going to impact the overall economy and the innovation economy is more immune, but it's not completely immune to what happens in D.C. So that answers the second question which is do I believe there's upside if it's get resolved. There may be modest upside. But again, because it really hasn't negatively impacted, you probably won't see a bounce back because it hasn't dropped down. So where it stands right now, little impact. The one place where you'd see it first, if it was a little bit longer, would be our clients that sell into the government. Now that isn't high concentration, by any means, but we clearly have some companies that sell into the government and they would be impacted first. So let's keep our fingers crossed, the government figures it out and doesn't extend it in January.

[Gaston F. Ceron:]

Okay, and I'm sorry one last thing very quickly. I know you talked a lot about deposit growth and that sort of thing. Any thoughts on -- sorry, if you mentioned this, but any thoughts on how you see the mix evolving within deposits or pretty steady compared to what it's been?

[Michael R. Descheneaux:]

I think at this juncture, we'd more or less assume the same proportions or similar growth that we've seen over the last several quarters.

[Operator:]

[Operator Instructions] We have another question from the line of Herman Chan of Wells Fargo Securities.

[Herman Chan:]

Just wanted to follow-up on the competitive front. Are you seeing competition intensify in some various buckets of your business' early-stage, capital call buyout or is it more of a mix?

[Gregory W. Becker:]

Herman, this is Greg, and it is pretty much a mix domestically. It is that you see it at the early-stage, you see it at the late stage. It varies -- competitors vary in a segment by segment basis. But clearly, we're seeing competition, I would say, across the board. A little bit less on the international side but it's still a competitive market for the reasons I described earlier.

[Operator:]

There are no further questions. I'll now turn the call back to Greg Becker for closing comments.

[Gregory W. Becker:]

Great, thanks. So let me just wrap up. It was a great quarter and, as I said earlier in my comments and Mike did as well, we're clearly optimistic about the various growth opportunities we have over the coming quarters and years, despite the competitive landscape. And as we reflect back on our 3 years of growth, clearly, carving out a unique place in the innovation ecosystem, we're really proud of the company we've built and the more than 30,000 companies we've helped over our history. And I guess it's important from my standpoint to thank all our employees, those with us from the early days as well as those who have recently joined us, because it's really their dedication and commitment to clients that really I think sets us apart. And I also want to thank all the innovation companies who have put their faith and trust in us. And at the end of the day, what gets us out of bed in the morning is that we're just thrilled to be their financial partners because, as we've said in the past, they really are changing the world. So it's great to be here, it's great to be 30 years. And thanks, everyone, for joining us today. Have a great day.

[Operator:]

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