What happened

Shares of SVB Financial Group (NASDAQ:SIVB) are down by about 12% as of 4 p.m. EDT after the company reported its third-quarter earnings. Though the bank holding company beat the consensus Wall Street forecast on the bottom line -- it earned $5.10 per share vs. a consensus estimate of $4.49 -- some of the moving pieces and forward guidance may have left investors wanting more.

So what

SVB Financial's "secret sauce" is its deep relationships with Silicon Valley start-ups, venture capital firms, and private equity investors, which help it attract low-cost deposits it can lend out at healthy margins. This quarter, though, deposit growth seems to have hit a wall, as SVB Financial's clients seemingly are looking for higher yields elsewhere.

Notably, average client deposits grew only 2.3% compared to the sequential quarter, rising to $49 billion. In contrast, client funds held off balance sheet grew 11.6% quarter over quarter, rising to $79.6 billion.

Golden Gate Bridge

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As interest rates rise, SVB Financial's clients are keeping their excess liquidity in short-term bond funds and money market products, which offer a higher yield than Silicon Valley Bank's deposit accounts. This is leading investors to worry that the bank may not be able to capture high deposit growth in a rising-rate environment unless it starts paying higher rates to its depositors.

The bank's net interest margin, or the difference between what it earns on its assets and pays on its liabilities, grew only modestly, to 3.62%, up from 3.59% last quarter and 3.38% in the first quarter of 2018. That suggests that SVB Financial Group may not capitalize on future rate increases to the extent it has in prior periods.

Now what

On almost any measure, SVB Financial is growing like a weed. The question for investors is whether that growth will play through in its earnings power. On the conference call, management was peppered with questions about the company's outlook for the rest of 2018 and its preliminary outlook for 2019.

One sore spot for analysts was the company's expectation that expenses would continue to grow at a percentage rate in the "mid-teens," consistent with 2018, despite the fact that the bank expects major revenue drivers to grow at a slightly slower rate in 2019 than in 2018.

Management suggested that now is a good time to invest in growth by hiring new people and adding new teams, pointing out that competition for talent is pushing up compensation costs as the bank tries to hire new workers and retain its best employees. With the bank's value based on the expectation of outsized earnings growth, Wall Street wasn't completely sold on the idea that expense investments would be a short-term pain for long-term gain.

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