SVB Financial Group (SIVB) 2015 Q2 法說會逐字稿

Welcome to the SVB second quarter 2015 earnings call. My name is Yolanda, and I'll be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. It's now my pleasure to turn the call over to the SVB Director of Investor Relations, Meghan O'Leary. You may begin.

Thank you, Yolanda, 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 second quarter 2015 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'll 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, which 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.

Thank you, Meghan, and thanks, everyone, for joining us today.

We had a solid second quarter, reflecting healthy conditions for our innovation clients, our success at adding new clients, and our unique ability to add value to those clients. We delivered quarterly earnings per share of $1.66 and net income of $86.1 million -- again, exceeding Street expectations.

Our core engine remains strong. Our market share in all segments is the highest it's ever been. We're seeing healthy activity across all client stages.

Highlights of the second quarter included average client funds growth of 7.9%, or $5.3 billion, most of it in our off-balance-sheet funds; core fee income growth of 13.6%, primarily from foreign exchange and credit cards; net gains of $39.5 million on warrants and investment securities, net of noncontrolling interest; solid credit quality despite an increase in our provision in nonperforming loans; an ROE of 11.4% for the quarter, which places us near the top of our peer group.

And while you see the average loan growth during the second quarter was tempered, by our standards, at 7.8% annualized, due to repayments on private equity capital call lines, we saw healthy growth across virtually all other segments of our portfolio.

We remain on track to meet our full year 2015 guidance of loan growth in the mid-20% range, and we're also reaffirming our expectations going forward of annual average loan growth in the range of $1.5 billion to $2 billion.

Our results are the product of our continued focus on the vibrant innovation markets, our support of the entrepreneurial ecosystem, and our ability to execute on our long-term strategic plan.

I'm going to cover five areas in my comments today -- the health of the innovation market; client acquisition; our growth initiatives; SVB's unique value add; and challenges.

The innovation markets remain strong and the second quarter saw continued robust investment and exit activity. Venture capitalists 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.

Venture-backed IPO activity increased significantly from the first to the second quarter with 27 offerings worth $3.4 billion. SVB's market share of US venture-backed innovation companies going public was 55% in the second quarter. While the number of venture-backed M&A deals declined 20% during the quarter, the disclosed value of those deals increased by 86% to $4.1 billion.

We maintained a strong pace of new client acquisition in the second quarter, adding more than 800 new clients, nearly a 20% annualized growth rate. These new client wins were dominated by early-stage companies, as is usually the case, and we also saw healthy gains in our global markets and the private bank.

We continue to see strong activity among our innovation clients at all stages, and that activity has driven healthy balance sheet and fee income growth for us.

We also have a number of growth initiatives which we've talked about over the years, including global expansion, payments, and the private bank, and I want to highlight some recent accomplishments in those areas.

As we announced last week, our joint venture bank in China has been granted approval by the China Bank Regulatory Commission to operate in RMB. This license will allow the joint venture bank to provide banking products and services to clients in the local Chinese currency, and is a significant milestone in our global initiative and our long-term growth strategy.

Our global momentum is building. Global loans now represent 8% of average loans, and global deposits represent 18% of average deposits. Our global strategy is also contributing to fee income, helped by a 128% increase in global FX trading revenues year to date, and a 55% growth in global payments and cash management revenues.

Likewise, our payments business is gaining momentum, driven by our diverse and growing client base, and by our role as the payment processing engine for several of our fintech clients. These two drivers contributed to a year-over-year increase of 38% in card revenue and 65% in ACH revenues. We believe our payments business will be a growing portion of our revenue over the next several years.

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%, 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.

Our ability to add value is fueled by these initiatives I've just talked about, and that value add contributes to our continued market leadership in the innovation space. In addition, as we surround our clients with the products and services they need, both businesses -- both business and personal, our unique ability to make meaningful connections for clients is a significant advantage.

For instance, last quarter we brought together 85 virtual reality companies, corporates and investors in our WeWork space in San Francisco. The event was a chance for these leaders to meet each other and discuss potential opportunities. It generated positive feedback and demand for similar events in other markets.

At a similar event in Boston, we brought together more than 100 investors, corporates and disruptors in the big data space for a day and a half of keynotes, panels and one-on-one meetings. We've heard from many of the participants that this event has already led to revenue-generating connections for them, and others made valuable contacts that will help them move their business forward.

We make these kind of connections in hundreds of more of our clients every day. Our clients are focused on turning these ideas into reality, on building their business, and doing it fast. They come to us for the value we bring to that process. Our ability to make a difference for them is part of our DNA and a significant advantage for them and for us.

As vibrant as the innovation markets are, we still face challenges. Despite our strong performance, persistent low interest rates limit net interest income upside. However, as you know, we will benefit significantly from a rising rate environment.

The competitive environment remains heated. Strong funding and exit markets have increased the amount of liquidity in the markets, and borrowers have many options. As a result, some lenders appear willing to go to any length to win business, regardless of whether the risk justifies that return.

Finally, the regulatory burden for banks of our size is significant. While we have and will continue to invest in a regulatory and compliance infrastructure, we expect the regulatory bar will continue to rise.

Despite these challenges, we remain optimistic about our opportunities and our markets. We see ample opportunities to lend, although we remain focused on delivering high-quality smart growth. Our experience, networks and talented people, and our ability to add value, differentiate us, and we'll continue to leverage that differentiation to [remain] our market leadership.

And we have a long-term strategy for diversified growth that has proven to be, and continues to be, the right strategy. We will continue to execute consistently on that strategy, as we have.

We are pleased with our second quarter results and remain positive about our growth prospects. There is no shortage of opportunity. The key, in our view, is -- lies in delivering the right kind of growth. Through focus and discipline, and the efforts of our talented and dedicated employees, we believe we can make the most of our near-term opportunities while positioning ourselves to take advantage of the significant long-term opportunities that lie ahead.

Thank you, and now turn the call over to our CFO, Mike Descheneaux.

Thank you, Greg, and good afternoon, everyone. We had a solid quarter marked by continued strength in income from PE, VC related investment securities, warrants and core fees. I would like to highlight a few items in my comments today, which I will cover in more detail shortly.

First, relatively tempered average loan growth and lower period-end loan balances.

Second, substantial growth in total client funds, particularly in off-balance-sheet client investment funds.

Third, higher net interest income despite a lower net interest margin due to loan mix, loan rates, and a competitive environment.

Fourth, solid credit quality despite a higher provision and higher levels of nonperforming loans.

Fifth, higher noninterest income due to strong gains from warrants and private equity and venture capital-related investments, and a record quarter for foreign exchange as well as credit card and payment fees.

Sixth, solid capital ratios.

And finally, seventh, higher expenses due primarily to increased incentive compensation driven by our strong performance.

Let us start with loans. Average loans grew by $273 million to $14.3 billion, driven primarily by loans from our private bank. In general, we had good growth in all areas except private equity and venture capital.

We saw significant levels of repayments on PE capital call lines of credit in the second quarter -- repayments that we had expected but did not see in the first quarter. I do want to note that average loan balances for PE, VC capital call lines were flat in Q2.

Repayments of private equity capital call lines were also the primary driver of lower period-end loan balances, which decreased slightly by $186 million to $14.3 billion. These decreases were offset somewhat by healthy period-end growth in buyouts and private bank loans.

As Greg indicated, we remain on track to meet our full year 2015 loan growth outlook. While Q2 was relatively slower in terms of loan growth, we are seeing strong momentum across most of the portfolio, and we have a solid pipeline. That momentum should also help us meet our expected growth rate going forward of $1.5 billion to $2 billion annually, which we noted in Q1 would be an optimal level of growth.

Now let us move to total client funds; that is, combined on-balance-sheet deposits and off-balance-sheet client investment funds. Average total client funds grew by $5.3 billion, or 7.9%, to $72.8 billion. This growth was due to continued healthy funding and exit markets for our clients, and strong client acquisition. Period-end total client funds grew by $6.7 billion, or 9.7%, to $75.7 billion.

Consistent with last quarter, a significant amount of this growth occurred in our off-balance-sheet client investment funds and is the result of our efforts to place our clients in these products when appropriate.

Average client investment fund balances grew by $4.2 billion, or 12.6%, to $37.9 billion. This growth was driven primarily by early-stage corporate-financed and private equity clients, and most of it occurred in SVB Asset Management, which is approaching $20 billion in average balances, and in our off-balance-sheet product, which crossed the $10 billion threshold during the quarter.

Period-end client investment funds grew by $4.9 billion, or 14%, to $40.1 billion, driven by our early-stage growth and corporate finance clients.

Average deposits grew by $1.1 billion, or 3.2%, to $35 billion. This growth was due primarily to our private equity and early-stage clients. Period-end deposits grew by $1.7 billion, or 5%, to $35.6 billion, driven by early-stage and private equity clients as well.

Our efforts to ensure our clients are using the right off-balance-sheet products, are having a positive impact across many client groups. As a result, we are lowering our full-year 2015 deposit growth outlook from the low 30s to the high 20s; although, as we know from past experience, things can change quickly.

Moving to net interest income and the net interest margin, net interest income increased by $4.8 million, or 2%, to $244.2 million in the second quarter. The primary drivers were an increase of $1.8 million in loan interest income, related to average loan growth and one additional day in the quarter. Loan interest income was impacted by a 10-basis-point decline in loan yields due to loan mix and the competitive environment.

Investment interest income increased by $3.3 million, primarily driven by a decrease in premium amortization expense on mortgage-backed securities due to the impact of higher market interest rates on prepayment estimates.

Average balances of fixed-income securities increased by $296 million, or 1.4%, to $21.4 billion. The yield on the total fixed income portfolio increased slightly to 1.6% compared to 1.58% in the first quarter.

New purchases of $1.5 billion during the quarter consisted of US Treasury and Ginnie Mae securities, with average yields of 1.39% and 2.07% respectively. Portfolio duration remained stable at 2.8 years. Our net interest margin declined by 6 basis points to 2.58%, primarily due to lower loan yields.

Now turning to credit quality, overall, our credit quality remained solid despite an increase in our loan loss provision and levels of non-performing loans. Our provision for loan losses was $26.5 million compared to $6.5 million in the first quarter. This increase primarily reflected an increase in specific reserves of $21.1 million, related to two impaired loans in the software and Internet portfolio, one a buyout loan and one an asset-based loan.

Net charge-offs were extremely low at $1.7 million compared to $3.9 million in the first quarter. This reflects lower gross charge-offs of $4.7 million, compared to $5.5 million in the first quarter.

The two impaired loans mentioned previously were the primary contributors to an increase of $58.4 million in nonperforming loans to $100.8 million. Despite this increase, nonperforming loans at 70 basis points of total gross loans are well within our acceptable operating range.

We would expect nonperforming balances to remain at these levels for several quarters, despite the fact that we are optimistic about resolving these newly impaired loans. With that in mind, we are assigning a range of 60 basis points to 100 basis points for 2015 nonperforming loan balances, which is higher than our original outlook; but again, still within our acceptable operating range.

Outside of these items, our loan portfolio performed as expected during the quarter. We are reaffirming our 2015 full-year outlook for net loan charge-offs of between 30 basis points and 50 basis points, and we expect to come in at the lower end of that range.

Likewise, we are reaffirming our outlook of an allowance for loan losses for performing loans comparable to 2014 levels.

Now, let us move to noninterest incomes. GAAP noninterest income increased by $2.8 million in the second quarter to $126.3 million, compared to $123.5 million in the first quarter. Non-GAAP noninterest income, which is net of noncontrolling interest, was $117.7 million compared to $109.4 million in the first quarter. We encourage you to refer to the non-GAAP reconciliations in our press release for further details.

We adopted a new accounting standard in the second quarter that allows us to deconsolidate certain noncontrolling interest and report only amounts related to SVB's ownership in certain private equity and venture capital-related fund investments. It affects most, but not all, of our private equity and venture capital-related fund investments.

On the balance sheet you will see the impact of the revision primarily in reductions to nonmarketable securities balances and noncontrolling interest for an overall balance sheet reduction of approximately $1.1 billion. On the income statement, the largest impact was a reduction to investment securities gains and losses, and noncontrolling interest.

It is important to note that there was no impact to Q1 or Q2 net income or SVB stockholders' equity. You can refer to the press release for details.

Per the requirements of early adoption, we have applied the new accounting standard to the first and second quarters of 2015, but we will not be revising periods prior to January 1, 2015.

The major components of non-GAAP noninterest income in the second quarter were warrant gains, PE/VC-related investment securities gains, and core fee income. We had warrant gains of $23.6 million compared to $20.3 million in the first quarter, driven primarily by strong IPO activity, which included a realized gain of $13.9 million related to our warrants in Fitbit. Valuation increases accounted for $9.1 million of the warrant gains.

Warrants continue to provide healthy upside to our earnings, although we do not view these elevated levels of gains as sustainable. We have private equity and venture capital-related investment gains, net of noncontrolling interest, of $15.9 million compared to $19.1 million in the first quarter. This included $9.5 million of gains from distributions in our strategic and other investments, and $5.4 million of gains from our managed funds of funds, primarily related to unrealized valuation adjustments.

Turning to core fee income, core fee income was strong in the second quarter, increasing 13.6%, or $7.9 million, to $66.1 million. Core fee income includes foreign exchange, credit cards, letters of credit, deposit service charges, lending-related fees, and client investment fees, and is a non-GAAP measure. Please refer to the non-GAAP disclosures in our press release for more information.

The increase in the second quarter was due primarily to record high foreign exchange revenues of $22.4 million, driven by higher volumes from our private equity and life sciences clients, and by a 15% increase in credit card volumes, which drove credit card fees of $14.2 million.

As a result of continued strong performance in core fee income, we are increasing our full year 2015 outlook for core fee income growth from the mid-teens to the low 20s.

Moving on to capital, our capital levels remain strong overall. Our bank level Tier 1 leverage ratio ticked down slightly by 4 basis points to 7.39% due to continued growth in average assets from client deposits.

Risk-based ratios at the bank and holding company increased across the board by approximately 50 basis points, due primarily to capital generation from strong earnings and lower risk-weighted assets, primarily loans, compared to the first quarter.

Now turning to expenses, noninterest expense rose by $3.6 million to $194.1 million compared to $190.5 million in the first quarter. The increase in expenses was due primarily to a $9.1 million increase in compensation and benefits expense related to incentive compensation due to our strong performance year to date.

All other expense lines, in aggregate, decreased by $5.5 million, driven in particular by a lower provision for unfunded commitments due to portfolio mix. Our non-GAAP efficiency ratio, which excludes costs related to noncontrolling interest, fell by 99 basis points to 53.6%, and remains below our target range of 60%.

As a result of our strong performance year to date, we are increasing our full year 2015 expense growth outlook from the high single digits to the low double digits, to reflect higher levels of incentive compensation.

Before I close, I would like to summarize the changes to our 2015 outlook. One, we have decreased our outlook for average deposit growth from a percentage rate in the low 30s to the high 20s.

Two, we have increased our outlook for levels of nonperforming loans from a range comparable to 2014, to a range between 60 basis points and 100 basis points of total gross loans.

Three, we have increased our core fee income growth outlook from a percentage rate in the mid-teens to the low 20s.

And finally, fourth, we have increased our expense growth outlook from a percentage rate in the high single digits to the low double digits. Our 2015 outlook for other items remains on track.

In closing, we are pleased with our solid performance. Our leadership in the innovation economy continues to drive strong flows of client funds, and despite a relatively tempered quarter for loan growth our pipeline and prospects remain healthy.

Our expansion to larger and global clients continues to drive balance sheet growth, while making fee income a more meaningful portion of our overall revenues. We see good opportunities in the market despite the challenges of significant levels of low-cost liquidity and intense competition in our markets. However, we will continue to be judicious in delivering the right kind of growth that will position us for long-term success.

Thank you, and now I would like to ask the operator to open the line for Q&A.

(Operator Instructions). Ebrahim Poonawala.

I think if you can first just start upon, possibility of the two nonaccruals this quarter, and if you can provide any color in terms of what transpired for them to go into nonaccrual, and if we should think of something more systemic going on, partly also driven by the fact that you have increased your guidance for nonperforming loans going forward.

So -- and I'm just wondering, Greg, Mike, if you're seeing anything out there that concerns you, where you expect recurring small credit issues going forward.

Hi, Ebrahim. It's Marc Cadieux. So, first, I'm just going to reiterate something Mike said in his opening remarks, which -- 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 in 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. I think the way to characterize the sponsor-led buyout one is, this is a portfolio that has grown over the last several years. And as that portfolio matures, like any portfolio we are going to see the occasional problem loan in that portfolio.

Having said that, this particular loan -- we are cautiously optimistic that, with time, will improve. It's backed by high-quality sponsors consistent with the balance of our sponsor-led buyout portfolio, and there is support for the Company. And, again, we're cautiously optimistic that with time that will turn out okay.

The second one is an asset-based loan that -- a long-time client of ours, where their first problems arose in connection with a merger, and then was followed up by a bad quarter. And so, that one-two punch is what caused the impairment of that loan. But, again, cautiously optimistic that, with time, that will turn around.

With regard to the rest of your question about, do we see anything systemic here, and I think you mentioned taking our guidance up -- as that buyout portfolio matures, and consistent with having been making larger loans, what we recognize is that, when these loans become impaired, they're going to stay in the impaired portfolio for longer. And it only takes one or two to move the needle. And so, it's in connection with that, that we're taking up our range for 2015.

That's helpful. Thanks, Marc. And on a separate subject, obviously core fee income showed very good growth this quarter.

I'm just wondering, in terms of when we look at the forex fees and credit card fees, was 2Q elevated, and we should fear a reset lower, despite, sort of, the raised guidance? Or, because of the sort of global operations and increased capacity, we are sort of resetting at a higher level from where these things should grow from here?

So, Ebrahim, this is Greg. I'll take that question. And second quarter was an incredibly strong quarter, both in cards and in FX. You see a little bit of volatility with the FX because it -- you do see some big trades on a quarter-to-quarter basis that can have an impact.

So, that number may move around a little bit. But on the credit card side, that is more consistent, more recurring, and so that should continue to go up and to the right at that kind of constant pace.

That being said, both comments -- as I said when I had given my comments, feel very good about both those as being key drivers of our growth. The global initiatives that we're doing both in the UK and in Asia are allowing us to capture a lot more of the funds flow and do FX transactions with them. And credit cards are a combination of both penetration in our client base as well as being more of that infrastructure component to the fintech companies.

And as you know, that's something we're continuing to put more effort behind. And so, in both cases we expect it to be a very nice growth business for a while to come.

Understood. And if I may sneak in one more last question, is -- regarding sort of the China banking license, any sense in terms of how we should think about its impact to the balance sheet, income statement, over the next 12 to 18 months?

Yes. The next -- so, this is Greg again. The next 12 to 18 months, it's going to have little impact. And there's really two reasons for that. One is the growth of it -- number one. And number two is the method of accounting, by how we account for that investment. It's more of an investment method, or equity method, as opposed to consolidating it onto our balance sheet. So, that's kind of one aspect.

But on the growth side, again, we have the RMB license. We're starting to open up accounts in RMB right now. We'll have a greater launch towards the end of this year. But we are going to have a very measured approach.

The one thing we don't want to do is, number one, misstep; number two, disappoint our clients as we grow that business. And so, you're going to see a slow growth over the next 12 to 18 months.

Now obviously, the reason we are excited about the license is that, longer-term, three to five years, we expect to be growing at a very nice clip and contributing. Again, remember, it's using the equity method. So, really, we plan to come out with more details next year with expectations as far as growth when we look out three to five years.

Thanks a lot for taking my questions.

Joe Morford.

I guess, first question's just on the off-balance-sheet funding. This is the second consecutive quarter where we've seen accelerated growth there. Is it really just greater focus internally with your relationship officers, or are clients actually being more receptive to this.

And then, related to that, wanted to confirm that the lower deposit guidance was just because you're having more success off-balance-sheet.

Yes. So, Joe, it's Greg, and I'll answer your second question first, which is, that is exactly the case. When you look at total client funds growth -- and as you know, we think about the business that way, or the health of the business -- the second quarter was incredibly strong, with more than $5 billion worth of growth.

When you think about mix, you can't just look at the $5 billion of total client funds. You have to look at the total pool of client funds being $75 billion. And so, moving a little one direction could cause it to move more off-balance-sheet than on-balance-sheet. And so, that's really what's happening. It's getting the clients in the right product and services, plus a little bit of a mix.

Optimally, again, as I said, I would love to see kind of a new client funds kind of evenly split, kind of a 50/50, 50 on/50 off. For this quarter it would have been at $2.5 billion. It was a little more off, which is okay. Because as you know, that also allows us to strengthen our capital ratios.

So, from that standpoint, we feel good. The reason that guidance got taken down was because more of the mix was off-balance-sheet, and we feel strong about the kind of outlook from a total client funds perspective.

Okay. Perfect. And then the other question, I guess, probably more for Mike -- the -- just looking at the increase in the incentive comp this quarter, how much of that was kind of [do your] catch-up, or moving to a new accrual rate given your expectations on performance, and how much may have been specifically tied to payouts in, say, Fitbit or something like that -- the outsized warrants. I'm just trying to gauge what might be a better run rate for that going forward.

Yes. Joe -- so, yes, there certainly is an element of catch-up, going back from the first quarter. Because basically the way we pay out incentive or compensation or accrue for it is, you look at your full-year forecast performance.

And we certainly had an expectation at the end of Q1; then when we moved into Q2, certainly performed in excess of our expectations. And so, therefore, you do raise it up. But you have to go back and catch up from that accrual from the first quarter.

So, it's probably $2 million -- I mean, it's probably about $2 million or $3 million relates to kind of a catch-up from the first quarter. But certainly at -- based on what we know today, you are going to have kind of a run rate up around that area, plus or minus.

Okay. Thanks so much, Mike.

Steven Alexopoulos.

Maybe I'll start -- looking at the decline in the capital call lines, you guys -- would you call this typical volatility tied to a shorter-duration asset, or is it more a function of the competitive environment causing balances to fall?

So, Steve, this is Greg. I'll start, and Marc may want to add. From my standpoint, it's almost exclusively tied to just the borrowing on the existing credit facility. So, kind of short-term in nature.

And when you look at the press release and go in the detail, and you look at the loans greater than $20 million in outstandings for private equity services, that was a pretty big decline. And really, that is just tied to just temporary -- the timing of when they borrow and when they repay.

So, from the standpoint we continue to grow those commitments, and feel very good about the outlook for that business for growth, and so I wouldn't read anything into that from a competitive landscape. We're doing exceptionally well in that area.

And Greg, can you talk about the sponsor-led buyout trends? Looks like those were down in the quarter too.

Yes. I'll start, and then I will have Marc add a little bit to it. So, the sponsor-led buyout is -- as you know, has been a key part of our growth for the last few years. And it continues to be a 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 the last couple of years, mainly for one reason, which is the competitive landscape. And unlike the other business, with sponsor-led buyout you have competition from banks, but more -- or, increasingly, you see competition from non-banks which don't have the same, both regulatory requirements; and have, quite honestly, lower yield hurdles and are -- can be even more flexible.

So, from that standpoint, it's very competitive; but because of the consistency that we've demonstrated over time in that market, and the players -- PE funds that we work with, we continue to view that as a growth opportunity.

It's Marc Cadieux. The only thing I would add to that is our discipline and what we've talked about in the past as being smart growth. Again, we think we can growth because of our reputation and the sponsors that we work with.

But the growth would be slower than it had been in past years, in part because leverage levels have gone up, the market has become more competitive, and with greater frequency we have elected not to compete to win business that we thought was too highly leveraged or too loosely structured.

Okay. And maybe just one follow-on question on your comments around moving funds off-balance-sheet. I think you tweaked the incentives for the off-balance-sheet funds last year. Was there any further tweaking of incentives, and is that part of the increase in the expense guidance? Thanks.

So, this is Mike, Steve. Generally, no. I mean, really, what's part of the success has been on how we position our products at the outset of a client relationship, which went back to kind of November, where we started, and it's just really taking hold and taking effect, and so you're seeing some nice results as a result of that.

Okay. Thanks for taking my questions.

John Pancari.

Can you just give us what your criticized loans were for the quarter, and how they may have changed on a linked quarter basis?

Sure. This is Marc Cadieux again. So, criticized loans were up in the quarter but still at -- we consider well within the normal operating range at around 6% in total.

Okay. So, they're 6% in total now, and then what where they last quarter?

Last quarter was 5.2%, I believe.

Okay. And then, also on the credit front, Marc, the -- what was the other $16 million in inflows into [MPLs] outside of the two credits?

Sure. Would characterize that as our normal early-stage activity. And so, by way of background, historically, where we have tended to have nonperforming loans and loan losses has been in our early-stage segment of our portfolio. And I'd characterize the balance as that typical in-and-out. And, unlike the larger loans we've mentioned, those tend to move in and out of nonperforming more quickly than the larger loans do.

Okay. And then lastly, also on the credit front, the mark on these two loans -- what you put into reserve -- that appears somewhat steep. And I guess what I'm trying to triangulate here is, how does that go with your feeling of cautiously optimistic? It just seems like a pretty steep mark.

So, the way I think about that is, the situation now versus the situation over the next, however long it takes for the company to turn around. We generally will look at situations like this -- take a probability-based approach. And in essence that can lead to, day one, based on the current set of facts, a higher reserve because you can't yet give them credit for the turnaround they have not yet delivered.

Having said that, the factors, and particularly on the larger one, the buyout loan, of having a supportive sponsor willing to commit additional funding to the business, new management, et cetera, are the things that give us confidence that, over time, notwithstanding what appears to be a higher reserve that would signal more pessimism, is what leads to my cautious optimism. Again, they need to deliver that turnaround. And until we see that, we think the reserve is appropriate.

Okay. And then just one more related to that. Were either of these Shared National Credits? I would assume not.

No. Neither.

Okay. All right. Thank you.

Aaron Deer.

Greg, I wanted to follow up on a statement you made about the payments business, and I'm guessing that this is tucked in the credit card and FX line items.

But you mentioned that some of this growth is coming from your work with third party fintech companies, and I'm just -- was hoping you could give a little color behind that -- how big that opportunity might be, and if there's any challenges or risks associated with know your customer or AML rules.

So -- this is Greg. How I'd describe it is, when you think of the fintech companies, these are companies that are, as an example, processing payments for small companies, taking the -- what would normally be paper-based approach to vendor payments, and moving it to a digital structure.

And when I think about that as an example, they're using credit cards or other versions of our payment systems to be part of their infrastructure, to actually facilitate the payments. So, what happens is, we're looking at facilitating payments in large volumes as they support their clients. So, that's -- that is an example of what can drive substantial credit card fee income.

From a BSA/AML perspective, we obviously have expertise in dealing with that, so we have a knowledge of how that operates, number one. We also work very closely with them to make sure that they're building out their BSA/AML program to ensure it's compliant with what is going to be required from a regulatory perspective.

So, we feel very comfortable. We spend more time walking through these payment businesses to ensure they're compliant, than any other part of our business. And so, that level of rigor, we believe, gives us comfort that we're taking the right approach.

That's great. How much would you say is the -- in terms of the revenues and those line items, is coming from some of these third party relationships versus the -- your core customers?

I'd probably describe it -- it's probably 20% to 25% of the overall revenue, again; but it's growing at a faster pace than just the normal kind of card penetration.

So, as I said in my comments, we're excited about this being an increasingly critical part of our business, and have a team structured around that. And again, why this makes so much sense is, these fintech disruptors are our clients. And so, if we can help them and be part of their business, be part of their infrastructure -- that, from our standpoint, is -- it's a great win for us and it's a great win for our clients.

Sure. If I may, just one quick one for Mike. With the new accounting adoption, I wouldn't expect this would have any impact on the Volcker rule accounting, but just wanted to double-check on that. Is that just a straight-up 3% of Tier 1 capital, or does this change in accounting affect that?

No. No effect on the Volcker rule.

Okay. Thank you.

(Operator Instructions). Gary Tenner.

Thanks. Actually, my question was just asked. Thanks.

Julianna Balicka.

I have a couple of questions. One, just to kind of go back and follow up on the buyout and the asset-based nonperforming credits that you expect to stay nonperformers for several quarters -- at the end, when you resolve them, is this going to be a binary outcome of either a large charge-off or a large reverse -- reserve release?

Or, as the turnaround of these companies that you're cautiously optimistic about, happens each quarter, are you going to give them some incremental credit, and we might see incremental reserve releases?

So, this is Marc Cadieux. Yes. The answer is, it's hard to predict how these things play out. Having said that, both of these borrowers are substantial businesses. And so, the likelihood of a total charge-off devolving into liquidation -- that kind of scenario, I think, is a much lower-probability event.

Okay. Very good. And then -- but, I mean, just in terms of the -- if we go with the positive outcome, then you will be releasing these reserves. Is this something you would do incredibly each quarter, or is this something you'll wait until the very end?

It will depend on the nature of how it's getting better. For example, an acquisition of the Company that results in repayment would result in a fairly immediate release of reserve. A gradual turnaround, and one that we become increasingly confident has momentum, would be the more gradual kind.

Okay. I see.

And then maybe if I can switch topics, please, to -- back to the payments revenue that you were just discussing, in terms of -- some of your -- the fintech third party clients that are your clients, and you grew up with them, and you provide payments for them -- are you now also going out there competing and winning business for fintech companies that may not have been processing through you because when they were started in -- two or three years ago, you did not have the product capabilities? And so, now, have you won any new big clients recently?

So, this is Greg again. And the answer is yes. Obviously our capabilities and our ability to support these companies has improved significantly over the last 12 to 24 months. And we're looking at companies that may not have done their processing with us for a variety of different reasons, and going back -- and, yes, we have won some very nice larger companies on the -- kind of, being their payment backbone.

So, it's a combination of both growing with our clients as well as going in the market and selling our value proposition to these companies. And we feel very good about both.

Very good. And if I can ask one more, and I'll step back. In terms of the private bank, where you've seen some nice growth, just kind of top-down view in terms of your portfolio mix, what share of your loan portfolio distribution would you like to see the private bank get to? Or, I mean, what is kind of like the macro vision there?

So, this is Greg. I'll start, and Marc may want to add to it. We look at portfolios in a lot of different ways. We look at concentration limits, and from that standpoint I'd start with the good news. The good news about the mortgage portfolio is, we expect to have very positive credit results when we think about that.

And so, really, from a mix perspective, it's all right being very comfortable from a credit perspective, but you still need mix limitations. You're looking at portfolios -- in the short-term, I actually don't see in the next 12 to 24 months, really, a limiter on our ability to grow that business. Kind of at the current pace that it's at, is going to be fine.

So, you really won't have to deal with what I'll call a concentration question, until you're looking at hitting 20%, 30% or more -- 35% of the portfolio. But that's several years out.

Very good. Thank you very much.

We have no further questions at this time. I will now turn the call over to Greg Becker for final remarks.

Great. Thanks, everyone, for joining us today. We are pleased with our second quarter and excited about the opportunities we have in 2015 and beyond.

And as we talked about both where we are in the cycle, our place in the innovation economy, and the outlook, you know, I feel really good about the strategy and where we're going. We're going to continue to execute in what -- I would describe it a very disciplined way, to strengthen our position and be the partner of choice for these innovation companies.

It's critical to us -- we just want to thank our clients. It's the most important thing, and we appreciate their putting their trust in us; and our employees for making -- allowing this to happen. So, with that, I want to thank everyone for being here, and have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.