SVB Financial Group
Q3 2014 Earnings Call Transcript

Published: 24 Oct 2014

[Operator:]

Good afternoon. My name is Kyle. I'll be your conference operator today. At this time, I'd like to welcome everyone to the SVB Financial Group Third Quarter 2014 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Meghan O'Leary, Director of Investor Relations. Ms. O'Leary, you may begin your conference.

[Meghan O'Leary:]

Thank you, Kyle, and thank you, everyone, for joining us today. Our President and CEO, Greg Becker; and our CFO, Mike Descheneaux, are here to talk about our third quarter 2014 financial results. As usual, they'll 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. We'll limit the call, including Q&A, to an hour. And with that, I will turn the call over to Greg Becker.

[Gregory W. Becker:]

Great. Thanks, Meghan, and thanks, everyone, for joining us today. SVB delivered a good quarter with net income of $63 million and earnings per share of $1.22, reflecting continued robust balance sheet growth, healthy loan and fee activity and solid credit quality. Positive funding exit and business conditions for our clients and our successful efforts at winning and keeping clients enabled us to deliver strong growth for the quarter, including average total client funds growth of 6% to $60.7 billion, average loan growth of 3% to $11.4 billion and core fee income growth of 7% to $53.3 million. We also posted solid credit quality with net charge-offs of just 28 basis points of total gross loans. We continue to perform well as a result of our focus on the innovation ecosystem, where positive business conditions for our clients and expanding market opportunity and our work to cement client relationships are helping to drive our strong performance. Exits of VC-backed companies remain strong. There were 21 U.S. venture-backed IPOs in the third quarter for a total of 86 so far in 2014. 64% of these were SVB clients. Year-to-date, the number of IPOs has already surpassed 2013, and at this pace, 2014 is on track to be the best year for IPOs since 2007. Merger and acquisition activity remains healthy. Year-to-date, the number of M&A transactions is up 15% year-over-year at 341, and the values of disclosed deals are up 86% at $8.8 billion. Strong capital investment continues. Venture capital, corporate venture and angel investment are all up year-over-year and at their current combined run rate, are on track to make 2014 the best year for early-stage investment since 2000. Thanks in part to this ready funding for good companies and expanding market and our unique place in innovation ecosystem, we've continued to win clients at a rapid pace, adding more than 1,300 new clients in the third quarter, primarily startups and early-stage companies. 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. New types of businesses are disrupting and creating entirely new industries, and many of the companies generating the most interest are performing strongly against revenue and growth expectations. As always, our primary goal with clients is to help increase their probability of success, which we do in a number of ways. One is through improving and expanding our product offerings in infrastructure. For instance, we recently began offering our clients 24-hour foreign-exchange trading, placing FX traders in our different time zones around the globe to provide seamless coverage. This move has helped improve our responsiveness to clients and has helped to drive a 13% increase in FX fees year-to-date. In the same vein, we've recently expanded coverage for wire processing in Asia in order to be able to process same-day transactions for our clients there. On the payments front, we launched a new transmission platform that offers clients a secure direct connection to our payment systems. And in the fourth quarter, we plan to launch our new global cards platform, offering credit cards to our U.K. and European Union clients. Our commitment to developing a robust payment platform has helped to boost card payment volumes by 35% and transaction volumes by 46% year-to-date. We're also very focused on supporting our clients' success by providing unique opportunities to enhance their business. For instance, working with MasterCard, we established Commerce.Innovated, an accelerator dedicated to helping payment startups get to market faster. We have already graduated one class of companies from this program, and our second class is underway. We are also a lead sponsor of the new Fintech Sandbox program designed to help early-stage financial technology companies put in place the infrastructure necessary to support and offer their services. And we're a lead investor in the Startup Institute, which runs education programs for individuals 2 to 10 years out of college, who want to transition from larger companies to startups. Think of it as a finishing school to give those individuals the soft skills they'll need to be successful in the startup. Startup Institute is one approach to providing qualified people to fill the large numbers of job openings our clients have available. Activities like these are showing how our differentiated value, which is supporting continued growth and a healthy pipeline. We are pleased with our ongoing strong performance and encouraged by the opportunities we see in our domestic and international target markets. Despite our good results, we face a number of ongoing challenges, including decreasing interest rates, which we didn't think was possible; increasing regulatory oversight and related costs; and an incredibly competitive market. Low interest rates have been a persistent challenge, of course. More recently, uncertainty in the markets caused long-term rates to decline even further, which impacts our new investment and reinvestment in our fixed income portfolio, and the timing of rate increases has been pushed out. Regulatory requirements also remain a challenge. We continue to build infrastructure and add people to support the increasingly intense -- intensive regulatory requirements related to BSA, stress testing, the Volcker Rule compliance and our global activities. All of these regulatory requirements add to our complexity and cost base. And competition remains intense. It's affecting our pricing and pace of loan growth. As we indicated last quarter, we're not willing to compromise the quality of loan growth for growth's sake. As a result, we're walking away from deals where we believe the risk and reward are out of balance. The good news, the robust market and our competitive differentiation are still allowing us to expand, win and retain the majority of relationships we pursue. Now I'd like to share our initial outlook for our 2015 growth versus 2014. Our outlook is based on the assumptions that our market will remain strong. Rates will remain a challenge. We will continue to invest in the business for long-term growth, and competition will remain intense. This outlook is based on our estimates to-date, and it is preliminary. We expect average loan growth in the low double digits. Now in the last few years we have had better-than-expected growth in some categories, among them private equity services in the private bank. We think we could see some upside potential in these areas in 2015 as well albeit at lower margins than other parts of the portfolio. The market is there, but as we've discussed, the pace of growth will depend on the terms and pricing and the balance of risk and reward. We expect average deposit growth in the high 20% range. Our clients' liquidity has grown well beyond our expectations, and our acquisition of new clients has been strong. Our 2015 outlook assumes continuous strong liquidity growth but with a higher portion of on or off balance sheet funds growth relative to deposit growth as a result of our continued efforts to offer better and more compelling investment solutions to our clients. We expect net interest income growth in the low double digits as a result of higher investment and loan balances offset somewhat by lower yields. This forecast is based, in part, on the market outlook for rates, but as you know, the market outlook changes day to day, so it could be volatile. We expect continued strength in credit quality with net loan charge-offs between 30 and 50 basis points of total gross loans, which is comparable to 2014. This assumes the economy remains stable. We expect core fee income growth in the mid-teens, driven primarily by foreign exchange, credit cards and client investment fees as a result of new products, solutions and a growing client base. And finally, we expect expense growth in the mid-single digits. Our outlook assumes we will continue to invest in our online delivery channels, infrastructure, new products and services and people, to support our growth. We also assume ongoing increases in compliance and regulatory costs. We're feeling positive about the year ahead. Despite the challenges we face, we'll continue to take advantage of the opportunities in our market, while maintaining our commitment to disciplined, reasonable growth. Our ongoing investment in our business and our long-term relationships with clients are helping us further solidify our unique position as the leading bank for the innovation economy. We believe the investments we've made in supporting growth today, combined with the considerable talents of our SVB team, will help us deliver growth 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. It was a good quarter even considering the impact of FireEye, which we estimate reduced earnings per share by $0.11 per share. Our results were driven by continued strong execution of our strategy and a positive operating environment for our clients. Nevertheless, we continue to see pressure from low rates, and competition remains intense. I would like to highlight a few items, which I will cover in more detail shortly

[Operator:]

[Operator Instructions] Your first question comes from the line of Joe Morford from RBC Capital Markets.

[Joe Morford:]

I guess first question was, looking at the $3.5 billion of inflows of average client funds, can you give any color? And is that coming more from the record VC funding activity or the increased number of IPOs? And what kind of impact, if any, do you see the recent market volatility having on that?

[Gregory W. Becker:]

Yes. So I guess, the first question, Joe, is about where did it come from and then kind of what's the outlook. 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. 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. So it's not one area. It is truly across the board. And we also saw growth in our Asia clients as well, putting in more deposits again as they raise capital. IPOs have some impact, but it is mainly the private companies that are really driving that total client funds growth. Now the outlook is, as we said and I referred to the 2015 view for deposits, we still expect to see very strong growth in the -- in overall liquidity for our clients. We believe it's going to taper a little bit from where the growth was this year, which makes sense, and part of it is this year was so strong. The growth rate just can't, from my standpoint, keep at this level. But we're still looking for strong liquidity in 2015.

[Joe Morford:]

And you said in '15, you're expecting more growth in the off-balance sheet accounts. How exactly do you see that playing out? Is it new products? Is it change in pricing? More concerted sales effort with incentives or what have you?

[Gregory W. Becker:]

So the short answer is yes to all of the above. When you think about it with our clients, you got to start with what's the right thing for the clients. That's the most important thing. And you can look at our balance sheet right now and how much of those deposits are sitting in non-interest-bearing accounts. And while the yields that they're getting off balance sheet aren't substantial by any means, it is -- it's the right place for a lot of these funds to go. And right now there really hasn't been an incentive for them because if you can only get 4, 5 basis points off balance sheet, is it really worth the hassle? So what we're trying to do is make it as easy as possible for them to move the money to these off-balance sheet solutions, right? And so it's tempering that a little bit, moving it more towards the off balance sheet. Is it going to be a dramatic change? We don't think so. But it really doesn't need to be a dramatic change to make sure that we're coming in within the Tier 1 capital levels that we want to be at.

[Operator:]

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

[Steven A. Alexopoulos:]

Maybe I'll start -- just a follow-up on that. It looks like you had less success in the third quarter than the second quarter in directing clients into the off-balance sheet product. Is that because you just have more capital so you didn't push as hard? Or has demand for that product just trailed off here?

[Gregory W. Becker:]

I -- Steve, this is Greg. I wouldn't read anything, quite honestly, into the third quarter because you can see in any quarter some pretty big swings, so I don't think it's a less emphasis on it. I don't think the -- it was less compelling to move off balance sheet. I would look at the trend and kind of the guidance that we're giving. So I think, as I said to Joe, it's the product set that we have. It's making sure we're making it as easy for our clients to move it off balance sheet and also really targeting some of the really large depositors that have hundreds of millions of dollars sitting in an account, where it truly is the best for them to move it off balance sheet. So we obviously expect to make progress on that over the coming quarters.

[Steven A. Alexopoulos:]

Okay. What was the balance of the sponsor-led buyout loans at the end of the quarter? And can you talk about what paydowns were? And are paydowns in that bucket basically the key driver of your 2015 outlook, which is a bit more modest than it was at this stage last year?

[Marc C. Cadieux:]

This is Marc Cadieux. The sponsor-led buyout portfolio was actually up a bit in the third quarter. It's about 16% of our loan portfolio, recognizing that to be a pretty good outcome in as much as we did see some significant loan payoffs at the same time. So encouraged that has been a slower part of the growth in the first half of the year as leverage had kind of moved away from us and caused us to compete less frequently. But we saw some more strength there in the third quarter.

[Gregory W. Becker:]

Steven, let me give a perspective on next year. So we still expect to see payoffs to occur in the buyout portfolio in 2015. And although we expect to see growth in that area, the market's a strong market, and so you're starting to see exits happen with the private equity firms as they try to sell these assets. So we're replacing and growing that portfolio. The rest of the growth is really going to come from, I'd say, mainly a couple of different areas, but then it's broad based below that. The main areas are private equity services, the private bank. Again, we'll see some of the buyout, and to a lesser extent, we're going to see global and the general technology market. So across the board, but predominantly private equity services, the private bank is what we expect to see that. And again, the tempered growth, first of all, still feel good about the growth in the low double digits, but it is -- from a competitive standpoint, we expect the market to be very competitive. We're going to be very selective on where we want to play. And as I said in my comments, there's upside there, and if we do see upside, I would expect that to be in the private equity services and the private bank.

[Steven A. Alexopoulos:]

Maybe just one final one. The loan-to-deposit ratio pushed down below 40% again. Now looking at the preliminary guidance, it's going to push down even further next year. Are you guys considering any other lending areas within your niche or even options such as loan purchases or anything like that?

[Gregory W. Becker:]

Yes. Steve, this is Greg. We've -- when I go back and look over the last 10 or 15 years, I would say, where we have strayed from our focus, we probably have stumbled more than we've done a good job. And I think that really tight focus on our market, the markets that we serve, is really the right place for us to stick to. When I think of expansion, I think of global. Global was a little bit flat this quarter but mainly because of paydowns. And as I've said in prior earnings calls, I look at global, and that's an area that should be growing 30%, 40%, 50% on an annual basis. I'd rather again stick to our target market and in global and in sponsor-led buyout, private banking, in those areas because if we can still grow in the low double digits and maybe have some upside there, that feels right. Your loan-to-deposit ratio question really is a function of not of loan growth, which is strong. It's actually more of a function of we have such a strong deposit franchise, but that tends to swamp the growth we have in loans. I'll take that any day because it really is a sign that we're really targeting a very robust market.

[Operator:]

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

[Julianna Balicka:]

I just wanted to follow up on a couple of different areas. One, in terms of the competition that you highlighted as being more intense in your remarks, the -- what about the competition changed linked quarter and/or about the outlook of competition changed that you have highlighted it so differently in this call? I mean, is it new entrants? Or are -- is it preexisting entrants becoming more competitive on pricing? Is it underwriting terms? I mean, what happened -- what was the catalyst behind the change in tone?

[Gregory W. Becker:]

Yes. So Julianna, this is Greg. I'll start and Marc may want to add to it. 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. And pricing is one thing, and we've seen that maybe start to really be impacted a couple of years ago. Pricing is getting even more competitive. And the areas that we're being more sensitive about is really on the structure, and when structure starts to give, that's when we're starting to back away. So it's really the aggressiveness and structure that we're seeing that we're really making sure we're sharpening our pencil and being with the right companies. 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. That being said, as I mentioned in my comments, we're still winning the majority of companies we want to pursue either by winning new business or retaining existing clients, and that's really because we offer a very differentiated both product solution and value add to our clients compared to our competitors. So I wouldn't say it's new competition. I wouldn't say it's something that's changed dramatically. It's just the continuation of that intensity.

[Julianna Balicka:]

Okay. That makes sense. And then another area in your remarks that struck my attention was how you had highlighted the regulatory and compliance costs, which, of course, many banks are encountering. However, in your outlook for 2015, your increase in expenses doesn't seem out of line with your previous outlooks in -- beginning of the year outlooks in previous times. So is it that you are investing less in certain growth areas and replacing that with compliance costs? Or I mean, how should we think about kind of what's going on in the mix of the expense growth?

[Michael R. Descheneaux:]

Sure, Julianna. This is my Mike here. So you are right, so we are forecasting a decline -- sorry, in the growth rate of expenses for 2015. But just backing up a step, I mean, as you know, one of the main reasons why 2014 expenses have increased from the initial guidance is because of outperformance, right, the incentive compensation that goes along with the outperformance. So as a result, the primary reason why we've gone from that initial forecast of mid-single digits to our new outlook for the rest of the year for 2014 is almost entirely related to incentive compensation. Having said that, we have continued to invest in systems delivery channels, and as well as there's been some compliance and regulatory costs as well, too. But again, we have the outlook there for 2015 because, again, you go into the year, and you start anew with new targets. And again, if we overperform those initial targets, you'll see it go up, but again, it's that pay for performance.

[Julianna Balicka:]

So it sounds like the regulatory aspect of it is kind of as a outgrowth of your strategic investment initiatives as opposed to an input, like for banks are, say, crossing $50 billion. You know what I mean?

[Michael R. Descheneaux:]

That's right. I mean, we've been investing and dealing with regulatory challenges like a lot of banks have for quite some time, so it's nothing new for us. It's just a continued added expense.

[Julianna Balicka:]

Okay. And then finally, I find your comments about financial technology interesting, and I had a side question about that kind of seeking of competition. Do you think about nonbank lenders as direct threat such as lending club? Or I mean, how do they even interact in your space? And what's your view of nonbank lenders as you go on to support financial technology?

[Gregory W. Becker:]

Sure, Julianna. This is Greg again. And actually, we view them as being great opportunities for us to partner with them. Most of the non-bank lenders that are out there are going after consumer finance in some form or fashion, which, as you know, we don't do or just through our private bank. So we look at partnering with them and really figuring out how to leverage them -- having them leverage us in our infrastructure for payments and solutions. So we view it more as an opportunity as opposed to a challenge or a competitive threat. And we have a whole payments team. We're dedicated to not just these type of companies but really, payment companies or FinTech companies in general, again, so we view it as an opportunity.

[Marc C. Cadieux:]

This is Marc. The only thing I would add to that is I think Greg's remarks are about FinTech and payment companies, and I'll call it that category of non-bank lender. We do have competition from another category of non-bank lender, both at the early stage and for sponsor-led buyout.

[Gregory W. Becker:]

These are venture debt funds, BDCs, those sort of things, so we're kind of bifurcating those 2 things.

[Operator:]

Your next question comes from the line of Aaron Deer from Sandler O'Neill & Partners.

[Aaron James Deer:]

I just want to, I guess, rehash a couple of points here that have been topics. One is on the expense line. Can you give any color beside -- behind the suddenness of this increase that you've had in the professional services? Was there something in particular this past quarter that drove that higher?

[Michael R. Descheneaux:]

No, nothing in particular, Aaron. And again, you start initiatives. There are some timing challenges as well, too, right, so you begin the year thinking you're going to start some projects at the beginning of year, where you'd have more smoothing or so of expenses but again, just some of the projects that did start in Q3.

[Aaron James Deer:]

And so this is truly a run rate going forward off of this base level?

[Michael R. Descheneaux:]

Well, I think the -- probably the best thing for you to do is refer to our 2015 outlook, right, so kind of going back to that mid-single digits, and obviously, we gave you the rest of the outlook for 2014. So I think you can kind of back into what would be kind of a normal average. Again, as you know, we look at more the full year as versus by quarter number.

[Aaron James Deer:]

Fair enough. And then in dealing with the deposit challenges, I mean, you guys have had these extraordinary deposit inflows for quite some time, so it's not a new phenomenon. I got to think you guys have been trying to work and then develop these alternative products to get some of this off balance sheet for a while. So where does that stand in process? When might you expect to see something coming online that has a real incentive to bring some of this off the balance sheet?

[Gregory W. Becker:]

Sure, Aaron. This is Greg. Let me take a step back first, and when I look at the growth in total client funds, we expected growth. We didn't expect growth anywhere to the degree that we have seen, so I think it would be hard for anyone to have predicted that. And it's a function of 2 things, right, the market, number one, and our success of winning new clients. It's those 2 areas combined that have driven this growth. And when we think about the answer to your question, which is how successful have we been, I would argue we've been very successful when you look at the amount of liquidity that has moved off balance sheet. The challenge has been the entire growth has been massive, so we've done a really good job, but the growth has been even faster than that. So when we talk about what else are we doing, those are the products and services and making it simple for our clients to move that money off balance sheet. So we're working more on that simplification to make it easy and compelling for our clients to move off balance sheet and just a renewed focus. I would tell you that I expected 2 things to happen. One is the deposit growth to temper a little bit more from a volume perspective just based on lower funding, really hasn't happened, number one. And number two, my hope as well was that interest rates were going to be heading up, growing in the second quarter of next year. And as that happens, it's easier to direct that money off balance sheet as there's better opportunities for them. And as I said in my comments, we didn't think rates could go lower, I guess. We didn't think rates could continue to be extended, and that changed a couple of weeks ago. And so those 2 things are really causing us to have a renewed focus on making sure that simplicity of moving deposits off balance sheet is the right thing for us and the right thing for our clients.

[Operator:]

Your next question comes from the line of Jared Shaw from Wells Fargo Securities.

[Jared David Wesley Shaw:]

I guess could you just let us know what the total prepayment penalty was for the quarter and what your expectations are on that sort of specifically going forward?

[Michael R. Descheneaux:]

So roughly the prepayment fees that we're referring to were roughly around $4.5 million, is what we had talked about. Again, it varies quarter-to-quarter. I mean, I think that was a pretty good quarter on that one. I wouldn't necessarily say that, that's the run rate. But again, you can look to the last couple of quarters in our disclosures and our press release if you want to kind of map it out and graph it out.

[Jared David Wesley Shaw:]

Okay. And then, Greg, you had mentioned a little bit about some frothiness in the valuation on -- in the IPO markets. What -- any particular industry that's giving you concern? And is that more you think that we're at a plateau there or that things just start pulling back from those valuations?

[Gregory W. Becker:]

Yes, Jared. Your maintenance thing [ph] 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. Then, you really see a big distinction where the companies that start to hit performance levels. Once they start to see good trends, that's when you start to see valuations pick up dramatically, and also, the dollars that people are willing to invest in these companies pick up dramatically. Again, the size of these rounds are massive. It's a largest sort of financings I've seen for private companies, where you're seeing consistently $50 million, $75 million, in some cases, even $100 million rounds being closed. And that's -- those are the areas where you're really seeing what I'll call price for perfection occurring with these high-performing companies.

[Operator:]

Your next question comes from the line of Brett Rabatin from Sterne Agee.

[Brett D. Rabatin:]

Wanted to just talk about the -- with this deposits, obviously, continuing to be faster growth and that's the expectation as well in '15. Can you talk maybe a little bit about obvious disappointment with what's happened with rates? But any thought on a barbell strategy in the securities portfolio going forward? i.e., can the net yield improve in the taxable AFS portfolio? Or do you continue to be super conservative with what you're doing there very short term, and so maybe it continues to be under pressure? Any thoughts around that?

[Michael R. Descheneaux:]

Yes. No doubt there are pressures on investment securities portfolio for sure. I would say we have to be sensible because when you start to look at the size of an investment portfolio in terms of proportion to your balance sheet, you've got to be really sensible, right? So we're now up to $20 billion of our -- 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. So I would say you would probably continue to see us buy U.S. treasuries, continue to see us kind of in that 3-year duration. Yes, we might be able to go up a little bit as well, but again, you just got to be conscious of that and again, just not go and chase yield.

[Brett D. Rabatin:]

Okay. And then, I guess, the other thing I was hoping to maybe get a little more color on was the prior commentary around competition and that having an impact on loan yields. I mean, they're still very robust. I guess I'm just curious if you guys have any thoughts on the magnitude of declines in the portfolio yield. Saw it, obviously, from the noise with loan fees, but does that pick up going forward? Or do you kind of feel like that is a manageable grind despite the environment?

[Michael R. Descheneaux:]

So this is Mike again, and I'll start, and some of my colleagues can jump in. But yes, I think the bottom line answer is you will continue to see pressure on loan yields, and it's for a variety of reasons, right? Part of it is actually the loan mix, so as we go into adding more private equity, capital call lines of credit, those tend to be in a lower rate albeit very high credit quality. So if you go back and look at kind of that declining glide path or declining loan yields over the last 2 years or so, you're probably going to see continued declines of that nature in the loan yields. It's just the nature of the mix, coupled with the fact that what we've talked about was the competitive environment is really, really fierce, right? And so when a loan actually goes up for renewal or rolls up on an annual basis, again, given the competition and tighter spreads and just overall lower rate -- lower rates in the market, you're going to see those kind of compressed. So yes, it definitely continues to be under pressure, but again, it is just reflective of the market.

[Brett D. Rabatin:]

But it sounds like, Mike, you're basically saying that with the environment getting somewhat more competitive, you don't necessarily expect that pressure would increase on yields on a relative basis to past quarters necessarily.

[Gregory W. Becker:]

Brett, this is Greg. I'd probably say that, again, as you have a portfolio of loans and as those loans come up for renewal, it's, in some cases, a very competitive process. And so you would see some yield deterioration just based on the churn in the portfolio as new deals are added. That, combined with, Mike said, the mix, then you should continue to see some pressure downward on loan yields. What is important to note though and you'd mentioned this at the beginning of your comments about where our loan yields are, which are still actually good relative to, I'd say, the market, and it's mainly because we've spent so much time talking about the value add that we bring to the table, and companies want to work with us because, again, and it may sound somewhat trite that we can help our clients be more successful. We really believe that. We hear it from our clients. And so that does give us a pricing premium in the market. And we don't take that lightly. We have to deliver on that. But it still is a very competitive market, and that trend downward in loan yields is what we'd expect to see.

[Operator:]

Your next question comes from the line of Ebrahim Poonawala from Bank of America.

[Ebrahim H. Poonawala:]

All my questions have been asked.

[Operator:]

Your next question comes from the line of David Long from Raymond James.

[David J. Long:]

History has shown that you guys have been able to keep funding costs low even in a rising rate environment. I wanted to get your view here, and it's maybe a different -- times are different this time around. Looking out over the next couple of years, if we do get that rate increase in the short term, how do you see that playing out with your deposits? And will you be able to keep your funding costs low like you have in the past?

[Michael R. Descheneaux:]

So very good observation, right. Our deposit franchise has been very strong, have been known for very low-cost deposit base, primarily because we keep a significant amount of our clients' operating cash on the balance sheet. And for those clients who do want yield, we tend to get them in the off balance sheet. Going forward, it's anybody's guess. But I guess when I step back and look about it, if rates go up, then clearly, there could be a need that we might have to pay more for deposits to keep them on the balance sheet, which is okay. It's not necessarily a bad thing because what that means is if rates are likely up because then on the asset side and the loan side, you'll actually be making more interest income as well, too, which allow you to pay up for the deposits if you actually need them, right? So we've been very, very fortunate, very, very liquid and had significant amount of deposits to fund our loan growth. So I think we're in a really good position, but time will tell whether or not we will actually have to pay up. But again, if you look at history, history shows that we have a large amount of demand deposits, and we don't really have to pay up for them.

[Gregory W. Becker:]

So Dave, this is Greg. Let me just add on to that. The one thing, I think, it's important to keep in mind is looking at the total client funds number and the amount of money that companies would typically keep in an operating account even if rates start to pick up. So let's just do the simple math. You got $60 billion of total client funds. If you were to keep 20%, 25% at -- in operating cash, right, you can look at just in a DDA account or checking account, you can look at $12 billion to $15 billion sitting in that operating account even as rates pick up. And so when you think about that being the main part of your funding costs, keeping that at a very low level, 0, obviously, that is a big impact on what your total cost of funds actually is. So I think going back and looking at that on a historical basis in a higher rate environment, I don't see the mix of the operating cash to total cash being that different.

[Operator:]

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

[John G. Pancari:]

On the competitive topic again, can you give us a little more detail? What loan types are you seeing the greatest amount of competitive pressure right now? And if you can, can you give us an idea of where your new production yields are coming in at?

[Gregory W. Becker:]

So John, this Greg, and then I'll let Marc add even more color to my comments. So we're seeing competition across the board. And you can look at the early stage. You can look at mid-stage and the buyout financing. You're seeing refinances come. So you're seeing it from a variety of different areas. You're also seeing -- it's interesting. 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. I'll have Marc add some color both on the -- where we're seeing it more but also on where the yields are.

[Marc C. Cadieux:]

Yes. Well, as Greg mentioned, the competition is broad based. It's pretty much in every segment of our business. To give you a sense for where yields are in the current environment and maybe focusing on those areas where our growth has been the greatest, capital call lending, the range there tends to be in the high 2s to low 3%. The same for our private bank. It's been in the low 3% of late. Going to some of the higher margin, which maybe we wish were growing a little more, sponsor-led buyout would still be in the low 5% range. Again, we're talking interest-only yields and net of fees. And then finally, our early-stage lending tends to similarly be in that low to mid-5% range.

[John G. Pancari:]

Okay. And the later stage is just similar to traditional C&I, I guess, that the other banks are seeing?

[Marc C. Cadieux:]

Yes. Later stage would be in that high 3% to -- maybe mid-3% to low 4% range.

[John G. Pancari:]

Okay. And then separately, can you give us a little -- just an update on the size of the global loan book and then also the growth rate that you're seeing there?

[Gregory W. Becker:]

Sure, John. This is Greg. And if you look at the total loan portfolio, the global loan portfolio, which is -- includes London global private equity services, so private equity firms, capital call loans that are international, what we're seeing in those kind of 2 areas mainly, you're looking at about $800 million of total loans. This past quarter, we saw some pretty significant paydowns with a couple credits on the more substantive side. That being said, the pipeline and outlook is very strong, and so that's an area, again, as I mentioned in my earlier comments, that you could see substantial year-over-year growth just because we're still coming into the market, especially U.K., and we're delivering our full product set from a lending perspective from early-stage loans to buyouts to private equity services. And it's a small base to grow from, so the percentages actually tend to be higher. So that we feel very good is an opportunity for growth for the next several years.

[John G. Pancari:]

Okay. All right. And then lastly on your comments about spending on risk and compliance as you're over the -- through this year and then your expectations for next year, are you pretty much implying that the spending you're doing now you feel -- or you're starting to factor in the infrastructure you're going to need as you approach and surpass $50 billion?

[Gregory W. Becker:]

So John, this is Greg. And we've been -- it's not as if you hit a switch and all -- one thing and all of a sudden everything changes. It's something you build into. And the regulators are looking at this, and although they don't say you have to comply with the $50 billion today, they are asking for greater, I guess, just increasing the bar on a regular basis. So yes, it's being built in. Is part of it heading towards the $50 billion? Yes, sure part of it's heading towards the $50 billion, but it's kind of a steady increase that we see on a quarterly basis.

[Operator:]

There are no further questions at this time. I'll turn the call back over to Greg Becker for closing comments.

[Gregory W. Becker:]

Great. Well, thanks, everyone, for joining us today. We delivered another real good quarter of growth in deposits and core fee income, so feel very good about that. And it's really because we're in the right market, and we believe we have the right strategy not just for 2014 or 2015, but we have the right strategy for many years to come. And we're so fortunate to have such great clients that support us and great employees that help us support those clients. So feel really good about where we are, really good about where we're going and hope everyone has a great day. Thanks.

[Operator:]

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