SVB Financial Group (SIVB) 2016 Q1 法說會逐字稿

Welcome to the SVB Financial Group Q1 2016 earnings call. My name is Adrian, and I will be your operator for today's call.

(Operator Instructions)

Please note this conference is being recorded. I will now turn the call over to Director of Investor Relations, Meghan O'Leary. Miss O'Leary, you may begin.

Thank you, Adrian, and thanks everyone for joining us today. Our President and CEO, Greg Becker, and CFO, Mike Descheneaux, are here to talk about our first-quarter 2016 financial results, and will 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, 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 will 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 thank you all for joining us today. We delivered a solid quarter in terms of our core business, with earnings per share of $1.52 and net income of $79.2 million. These results were marked by robust loan growth and healthy fee income. At the same time, downward pressure on valuations and investments resulted in lower securities and warrant gains, which impacted EPS for the quarter. Mike will get into details of the quarter shortly.

I'd like to talk primarily about the environment we're in and how we're thinking about it. In the simplest terms, we believe the VC markets are experiencing a healthy shift, one that comes with near-term challenges for some companies but is positive overall. We have been talking about valuations [and froths] for several quarters, and we're not really surprised about what we are seeing. We believe there is still much to be optimistic about, and we remain positive about our clients and our outlook. Let's start with the state of the markets.

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

The IPO market was all but closed in the first quarter for tech companies, which had zero IPOs compared to only six life science companies, making this the slowest quarter for IPOs since the third quarter of 2011. VC investment overall remained relatively robust, although the number and dollars of investments in seed and early-stage companies spell approximately 20%. So the VC and IP markets are somewhat challenging, but there are bright spots as well. First, entrepreneurs and investors are beginning to replace the growth at any cost mentality that led to high valuations of recent years, with a focus on profitability and slower burn rates.

This shift in focus, as well as more reasonable valuations, should make the private market healthier overall. Second, we are seeing our clients in general deliver on solid revenue growth, helped by strong demand for their innovative products and solutions. Third, after a long period of robust fundraising, VCs have substantial amounts of capital to invest, alongside many new sources of non-venture capital. This is the opposite of the situation VCs and entrepreneurs faced in 2008. This ample capital should ensure good companies will still be able to get funding.

And fourth, while the IPO markets may remain weak for some time, lower valuations could drive an increase in M&A by corporates and private equity firms. This is a dynamic we saw emerge during the 2008 recession. In short, we see a healthy re-calibration and not the beginning of a material downturn. While the markets may slow for a few quarters as investors and entrepreneurs evaluate their next steps, we believe this is likely to be a beneficial period of adjustment.

Nevertheless, we believe continued slow early-stage VC investment and a dormant IPO market could effect us in three potential ways. More investor dependent companies may fail, and we could see more early-stage charge-offs as a result, although these are not unusual in any environment. If that happens, we believe these charge-offs would be manageable, because our early-stage loans tend to be small and make up only 6% of our loan portfolio.

As you know, we have been mindful of overheating in the credit markets for several years now, and have chosen to walk away from deals that do not fit our risk appetite. Slower VC and IPO markets could result in a slowdown or pullback in deposits. However, slower burn rates, increased focus on profitability at our client companies, and a healthy new client growth may help to offset this risk. VC and warrant gains would probably be pressured as we saw in the first quarter, especially if the IPO market remains weak. These are potential challenges, but we believe our business environment remains healthy and we continue to see strength and momentum in key areas.

For instance, we had excellent client growth during the quarter, adding roughly 1,000 new company clients, which is just below our average of 1,100 per quarter in 2015. Demand for loans remains healthy, driven primarily by our highest credit quality segments, private equity and private bank, and any tightenings of equity capital could lead to increased utilization on credit facilities of our other clients. Our fee business continues to grow due to our focus on expanding our client base, growing globally and cross-selling. These efforts have helped drive compound annual growth rates of more than 25% in both foreign-exchange and card revenue over the last three years.

As we'll see in our forecast, we expect strong growth to continue. We continued to make progress in our payments platform. We marked a major milestone in the first quarter, partnering with Stripe to provide banking service for its new Stripe Atlas platform, which allows entrepreneurs to start a global Internet business from anywhere in the world. This new program has gotten a tremendous global reception, and we expect the Stripe Atlas relationship to be a fantastic new banking origination channel for SVB. We're very excited to be a strategic partner with Stripe.

Globally, we announced plans to expand our fast-growing branch in London. SVB has become a vital partner to companies in that thriving ecosystem in a very short time, and the branch just crossed $1 billion of funded loans. All of these things make us optimistic about 2016. We are thinking much bigger and longer-term about our future, and we are making significant changes to our business so that we can take advantage of the opportunities we see.

To that end, as you know, we made a number of changes to our organization structure last year, specifically appointing Bruce Wallace as Chief Digital Officer, hiring Mike Dreyer as Chief Operations Officer, and Roger Leone as Chief Information Officer. These changes are designed to support expansion of our payments and digital efforts, and growth as a globally scalable business. And they are part of a conscious, long-standing commitment to investing in people and enhancing our processes and systems so that today, we are more sophisticated, adept and resilient organization than we ever have been.

For now, we're keeping a close eye on our clients and the shifting conditions of early-stage companies, while maintaining our focus on effective execution regardless of the market environment. While the environment is more challenging as investors and companies adjust to new realities, our view is that this is a moderation rather than a material correction. We continue to believe whatever shifts the innovation space makes in the near-term, it offers tremendous opportunities in the long-term and is the best possible place for us to be.

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

Thank you, Greg, and good afternoon everyone. As Greg pointed out, we had a solid quarter despite a slower pace of early-stage funding, lower public market valuations and fewer exits. Specifically, we saw a significant decline in net gains from warrants and investments in private equity and venture capital, which impacted EPS in the quarter. The items I will cover in detail include the following.

First, loans, which grew significantly. Second, a modest decline in total client fund balances. Third, higher net interest income and net interest margin.

Fourth, healthy overall credit quality despite some stress in the early-stage portfolio. Fifth, lower warrant gains and modest investment securities losses. Sixth, higher core fee income. Seventh, lower expenses, and finally, increased capital levels.

Let us start with loans. Average loans grew by $1.3 billion or 8%, to a record high of $17 billion, driven by growth in private equity capital call lines during the first quarter and the impact of strong loan growth in the fourth quarter of 2015. [Period end] loans grew by $993 million, to $17.7 billion, as we saw those fourth-quarter loan balances hold, although we could see some runoff of capital call lines in the second quarter.

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 decreased by $600 million or less than 1%, reflecting average deposit growth of $400 million or 1% and a decrease in off-balance-sheet client investment funds of $1 billion or 2.2%. Period end total client funds decreased by $2.1 billion or 2.6%, reflecting a decrease in period end deposits of $383 million or 1% and a decrease in off-balance-sheet investment funds of $1.7 billion or 3.9%. These decreases were the first we have seen since 2009, and reflect three primary drivers during the quarter.

First, M&A activity by and of our growth and corporate finance stage clients were the primary drivers of the decreases in off-balance-sheet client investment funds. Second, inflows from our early-stage clients from equity funding rounds drove the increase in average deposit balances, although that impact was offset somewhat by a modest runoff in private equity balances, following a strong fourth-quarter due to distributions by our clients. And third, efforts by our corporate finance clients to take advantage of higher-yielding off-balance-sheet investments were the primary driver of lower period end deposits balances.

While we could see tempering in client fund flows if early-stage investment continues to slow and the IPO markets remain dormant, as Greg pointed out, slowing burn rates and strong new company acquisition could offset these impacts. In any case, it is too soon to declare a trend.

Turning to net interest income and our net interest margin, net interest income on a tax equivalent basis increased by $12.3 million or 4.6%, to $282 million in the first quarter, due to strong loan growth and the impact of the increase in the Fed funds rate in December. Interest income from loans increased by $12.5 million, due to higher average loan balances.

Loan yields increased by one basis point, reflecting an increase of 8 basis points in gross loan yields due to the full-quarter impact of the Fed funds rate increase, which was offset by a decline in fees from early loan payoffs. Average fixed income securities decreased modestly, $184 million, to $23.4 billion, due to the sale of $1.9 billion of treasury securities to support our loan growth and cash balances. As a result, interest income from investment securities was essentially flat in the first quarter compared to the fourth quarter. Our net interest margin increased by 13 basis points to 2.67%, primarily due to growth in loans and the full-quarter impact of the Fed funds rate increase in December.

Now let us move to credit quality, which remains healthy overall. Given the slower pace of early-stage funding, it was not surprising that we saw some stress in our early-stage portfolio. We also saw higher criticized loan balances from a handful of larger loans. However, these were not driven by any overarching trend. Overall, credit quality is performing as we expected.

Total loan loss provision was $33.3 million in the first quarter, compared to $31.3 million in the prior quarter. This amount reflected approximately $9.5 million due to loan growth, $20.7 million related to net charge-offs, and a $3.9 million increase in reserves. Net charge-offs were $20.7 million or 49 basis points, compared to $11.2 million or 28 basis points in the fourth quarter. This reflects $26.2 million in gross charge-offs, of which 60% came from early-stage loans, with most of the remainder from one loan to a later-stage e-commerce company.

Net charge-offs also reflect $5.5 million of recoveries, primarily related to the repayment of a loan that became impaired in the fourth quarter of 2014. Nonperforming loans decreased by $9.4 million, to $114 million or 64 basis points, compared to 73 basis points in the fourth quarter. This improvement was primarily driven by the resolution of two loans, the loan recovery I just mentioned, and a sponsored buyout loan that became impaired in the third quarter of 2015. The sponsored buyout loan was repaid in full with no charge-offs and resulted in a reserve release of $7.2 million.

These resolutions were offset by the addition of 10 nonperforming loans that were mostly in the early-stage portfolio. These loans tend to be quite granular, and this level of new early-stage nonperforming loans is consistent with prior quarters. The two other sponsored buyout loans that became nonperforming in 2015 appear to be on a path to improved performance.

[Criticized] loan balances increased to 6.1% of total gross loans, compared to 5.5% in the fourth quarter. This increase was driven by a handful of larger loans, each of which became criticized for reasons specific to the borrower. We do not expect significant migration of these loans to nonperforming or charge-offs.

Our allowance for loan losses held steady at 1.29% of total gross loans. Our allowance for loan losses for performing loans increased 2 basis points, to 1.01%. And finally, the allowance for loan losses for nonperforming loans decreased by $1.4 million, to $50.4 million, reflecting $11 million of reserves for new nonperforming loans, offset by the reserve release from repayment of the sponsored buyout loan noted earlier and $5.2 million of other reserve releases related to charge-offs and loan repayment.

Now let us move to no-interest income, which is largely composed of core fee income and net gains and losses from warrants and investment securities. I will discuss certain non-GAAP measures in my comments, and we encourage you to refer to the non-GAAP reconciliations in our press release for further details. GAAP non-interest income was $86.1 million, compared to $114.5 million in the fourth quarter. Non-GAAP non-interest income, net of non-controlling interest, was $88.8 million compared to $111.8 million in the fourth quarter.

The decrease in non-interest income in the first quarter compared to the fourth quarter was driven by a modest net loss on investment securities and lower gains on warrants, primarily related to valuation pull-backs for public companies and a lack of VC-backed exits. This was the lowest level of combined net warrant and securities gains, excluding the volatility we saw in 2014 from one company, since the first quarter of 2012. Losses on investment securities, net of non-controlling interest, were $2 million compared to net gains of $9.6 million in the fourth quarter. This reflects $3.9 million of losses related to unrealized valuation decreases tied to a decrease in market prices of public positions held by certain of our funds of funds.

This was partially offset by $2.4 million of realized gains in our strategic funds driven by distributions. Other components included $2.2 million of losses on sales of exercised warrant securities that were subject to lockup agreements during the first quarter's public market decline, offset somewhat by a $1.4 million gain from the sale of treasury securities, which I noted earlier. We had warrant gains of $6.6 million, compared to $16.4 million in the fourth quarter. These were primarily realized gains from warrant exercises due to M&A among our clients. We had only $400,000 in valuation gains compared to $12 million in the fourth quarter, due to the pullback in valuations overall.

Core fee income was $76.5 million, an increase of $3.8 million or 5.2% over Q4. As a reminder, core fee income includes foreign exchange, credit cards, letters of credit, deposit service charges, lending related fees, and client investment fees. This increase was driven primarily by foreign exchange and client investment fees. FX income was solid at $27 million. While the increase compared to Q4 was primarily driven by a reclassification of fees on forward contracts previously reflected in gains and losses on derivative instruments, we were coming off a record quarter in Q4 in terms of volume and revenues.

FX income is up 50% compared to the same quarter in 2015. We saw a 29% increase in client investment fees, to $8 million, due primarily to money fund rate increases in our client investment funds, which were supported by an increase in short-term rates. This represents a 78% increase over the same quarter in 2015. Credit card and payment income was $15.5 million in the first quarter, modestly below our fourth-quarter income, which was a record high. Nevertheless, first-quarter 2016 credit card and payment income increased 28% over the same quarter in 2015, attesting to our continued momentum in implementing our credit card and payment strategy.

Moving on to expenses. Non-interest expense decreased by $4.6 million or 2.1%, to $204.1 million. This decrease primarily relates to a decline in incentive compensation levels and seasonality in Q1 expenses. Incentive compensation was $10 million lower in comparison to higher than normal fourth-quarter levels, driven by our strong 2015 performance. Professional service fees decreased by $5 million, reflective of changes due to timing of certain projects.

These decreases were offset by an increase of $3.5 million in salaries and wages reflecting higher average FTE, and $5.7 million of seasonal expense related to 401(k) matching and employer payroll taxes. Turning to capital. Our capital position remains healthy due to solid earnings, and we saw increases in all key capital ratios. Our bank level tier 1 leverage ratio increased by 10 basis points, to 7.19%, due to earnings and tempered average deposit growth in the first quarter.

Our risk-based capital ratios, that is total risk-based capital and tier 1 risk-based capital, increased at the bank and the holding company levels by approximately 6 basis points. We continue to closely monitor the trend in our capital ratios, and in particular our bank level tier 1 leverage ratio, for which our target range is between 7% and 8%. If deposit levels continue to temper, assuming no material changes in the economic environment or business conditions, we do not believe we would have to raise capital in 2016.

If we were to see a return to deposit growth trends of past quarters or other changes in our capital position, we believe we have some options that we could pursue before raising capital. However, if we did raise capital to support our growth at some point, they we consider preferred equity as an option. Moving on to our outlook. We're making one improvement to our full-year 2016 outlook, and that is the narrowing of our expectations for loan growth from our original range of the high teens to low 20s, to just the low 20s.

Additionally, I would like to provide color on two of our outlook items, to give you a better idea of how we think they may trend during 2016. First, we believe deposit growth is likely to be near the bottom of our outlook range of the low double digits, due to a slower pace of early-stage funding and fewer exits. Second, continue pressure on valuations and a tough exit environment could mean more early-stage loan charge-offs and reserves, similar to what we saw in the first quarter.

While these levels are not exceptional, they could mean that we could see full-year 2016 net charge-offs closer to the top of our outlook range of 50 basis points of average total gross loans. Furthermore, we could also expect to see loan loss provision levels for the rest of the year, on average, in line with the first quarter, although I am not suggesting that they would be identical from quarter to quarter.

Finally, while we do not provide an outlook for net gains or losses from warrants and investment securities, I want to remind you that we expect lower early-stage investment levels, downward pressure on valuations, and a slower pace of exits to put considerable pressure on gains from warrants and investment securities in 2016.

In closing, we delivered a solid quarter in terms of our core business. We believe the slower pace of early-stage investment in Q1 and the ongoing re-calibration evaluations are healthy developments. While our early-stage clients may feel the impact of this shift more than others, our clients overall appear to be doing well.

Nevertheless, we are paying close attention to the market shifts we saw in the first quarter and monitoring their potential impact. We expect our experience in the innovation industry, our multiple touch points with clients and investors, as well as our insight into our clients' businesses, will serve us well.

In the meantime, we remain focused on delivering high quality growth and maintaining stable credit quality. While we are mindful of the challenges presented by the environment in which we operate, the economy and the regulatory landscape, and we believe we are well positioned.

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

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

I wanted to start on the capital calls, looking at the very strong growth in capital calls above $20 million, which I would assume were mostly private equity. Could you give more color on what drove that magnitude of growth this quarter? And was it funds investing outside of tech?

So Steve, it's Greg. I will start, and then Mark is going to add some additional color. It was pretty broad based. It was private equity, I guess first and foremost, that was the main driver. It was both new clients. It was also utilization rates increased. And as you know, what we have been doing over the last three or four years is, it's been broadly going after private equity in technology but also in non-technology. And we just saw deal activity in the first quarter actually be stronger than even we expected.

Yes, I think that covers it, Greg I have nothing to add.

Okay. And then -- that's helpful. In terms of customers' adjusting cash burn, which came up a couple of times, how widespread is that currently within your customer base?

So Steve, it's Greg again. I guess there's two ways to look at it. One is what we are hearing when we talk to the venture capitalists. And as you know, we spend -- we probably had more interactions with venture capitalists than anybody else. And obviously, in the first quarter, we talked to them a lot about, what is their outlook and what advice are they giving to their companies? And a lot of that advice came back that we are hearing, it is focused on lowering cash burn, get to profitability, try to raise capital so you really don't have to go to the market, if you have to, for 12 to 18 months.

And so we're hearing that pretty consistently. Now, some companies that are truly -- they're doing so well they really don't have to worry a whole lot about fundraising or valuations. We're not really seeing a major change. But then you look at our operations and our flows of dollars. We are starting to actually see it a little bit. I would expect that to continue to happen in Q2. So it is real, and it is pretty broad based from the standpoint of what people are doing and how they are operating in this environment.

Okay. And Greg, related to that, when we think of inflows into deposits, we think of new clients. Right? And you mentioned 1,000 new company clients this quarter, which is really not that far off. Am I missing something? Or has the new company formation trends really have not declined by that much yet?

They haven't changed a whole lot, Steve. I'd say if you look back over the last three or four quarters, our high water mark, on a quarterly basis, was just under 1,300. So from that high water mark, you've definitely seen a noticeable difference. But it was a little low in the first quarter, then it ramped up in the second quarter, and then it trickled down. But I agree with you. When you look at the new client additions, it's really not that far off. And my crystal ball would say it is going to be in that range for the next several quarters.

And part of that is driven by the fact that you are seeing a decrease in that early-stage funding, number one, and new Company investments. But it's also, on the positive side, driven by the fact that we now have a bigger footprint, right? We have a bigger footprint in the UK. We have a bigger footprint in the US. We have more feet on the street, and that helps us. So it's a -- there's a positive side with our ability to bring in new clients despite the market, but it's also -- has a little bit of a headwind by the fact that there's less funding going into that early stage, as well.

Okay. I appreciate all the color. Thanks.

Jared Shaw, Wells Fargo.

When you look at the early-stage book, have you -- can you tell us what you've done with the reserves on the early-stage book? Has that been increasing over the quarter, as well? And where do they stand now compared to balances?

Sure, so this is Marc. So we have seen, as I think we alluded with the stress in the early stage, we have seen an increase in criticized early-stage loans. And with the increase in criticized comes higher levels of formula loan-loss reserves.

And when you look at the increase in the criticized, is that just -- are you saying that since there's stress in the whole lifecycle, we are going to make more of a methodological change to the evaluation of these loans? Or is this, on a loan-by-loan basis, we are actually seeing more of a migration into criticized?

So we have seen a migration into criticized, is the first thing. As far as the methodology change, no. We continue to have the same AAA-loan methodology for early-stage as we've always had. But with, again, the migration into criticized comes a higher level of formula reserve.

Jared, what I would add onto that is, what Mike tried to do in his opening comments is -- there is a couple -- or in his comments, a couple things. One is, we reiterated our expectations for net charge-offs in that 30 to 50 basis point range, but said it will (inaudible) probably more towards the higher end of that, and that would be driven by early stage. That's part of the helping to give you guys more context.

And the second part is, he also commented the fact that if you look at the first quarter from a provision perspective, and you then look at that number at $33 million, you could say that the next three quarters, our view would be in that range. Although he was very clear to point out that obviously, it wouldn't be that streamlined, so each quarter, it ends up being that. But I think on average, that's really what we expect to see. And then the preponderance of that higher level of provision, from what we've seen over the 2015, relates to early stage.

Okay. And then as you look at your markets, and especially the international markets maybe outside of London, are you seeing any greater weakness in those secondary tech markets? Or is it pretty similar throughout the footprint?

This is Greg again. It is pretty similar. We have had very strong growth, strong numbers in the UK, as I mentioned in my comments. We have seen good new-client acquisition in Asia. So it's pretty consistent across all the markets.

Okay. Great. Thank you very much.

Ken Zerbe, Morgan Stanley.

I guess probably a question for Mike. In terms of the NCO guidance that you gave, the 30 to 50, right, and you're going to be at the high end of that range. But this quarter, you were 49. I guess I'm just wondering, what's the thought process? Because if you are already at the very high end of the range, it implies that your losses on average around here, maybe a little bit lower. But I guess the concern that the market has is that losses continue to tick higher. Could you just help us understand, why not raise the range? Or what are you seeing that may keep it within that range? Thanks.

So it's Marc. I'll take this one (inaudible). While at the 49 basis points for the first quarter, important to point out two things that were true about the first-quarter experience. The first is that we had one larger loan, which unlike the fourth quarter, which was entirely early stage, this one large loan was almost one-third of the charge-offs for the quarter. So that would be the first thing. And then the second thing is there was one larger early-stage loan in the population of early-stage charge-offs in the first quarter. Those two things together, I think, skew the first quarter, relatively speaking, from what normal or normal for 2016 might look like.

Okay. And then just the other question was, in terms of -- I think one of things that you guys mentioned about deposit outflows was corporate -- I think it was corporate finance clients taking advantage of higher rates elsewhere. Did that happen throughout the quarter? Was there any big lumpiness? Because I guess I'm trying to figure out A, how meaningful was that particular piece? And we done with that batch of outflows, so to speak?

This is Greg. I will start, and then Mike may want to add. So if you look at the mix of total-client funds, we actually continued to see strong numbers at that kind of early mid-stage. When you got to the gross stage and later to include corporate finance and private equity services, that's actually where you saw the outflow of deposits. And it's for different reasons.

The one reason you'd see in the later stage companies was that we had companies that were acquired that actually happened to have fairly sizable balances on the balance sheet, number one. Number two, you had some of the corporate finance clients that we had that actually made acquisitions and took excess cash to actually make the acquisitions, and so it declined from that. The third one is, you had distributions, which means you had a lot of gains by some of the private equity firms and venture capital firms that then they paid out to limited partners as distribution.

So it was the combination of those things that really drove the change in total-client funds. Now, your second question is, what do we think is going to happen? Again, there's two parts to that. On the early stage, if the early stage slows down more, you could see some pressure or some slowness in that area again, but we didn't see that in the first quarter.

And we don't know yet, on the corporate finance side, if, what the behavior (inaudible) described, either acquisitions going on and companies using up excess cash or companies getting acquired is going to make a meaningful dent. What I made the comment is, is that there are some potential areas of headwinds, but there's also positive signs in the sense of burn rates are coming down. Companies are focused more on profitability. And again, we have done a good job of new client acquisition. So that's kind of the whole context, the whole picture, when we think about the outlook for deposits in total-client funds.

All right. Thanks a lot, Greg.

Ebrahim Poonawala, Bank of America.

So I guess first question, just in terms of if you can talk about the competitive landscape, both from a lending and deposit side? I guess, given what's happened in the last six, nine months, how has that impacted in terms of maybe increased opportunities on the lending side? And likewise, from a customer-acquisition standpoint, have you seen some of the fringe players pull back, which has created more opportunities?

Yes, Ebrahim, this is Greg. I'll start. When I think of the competitive landscape, we have been saying for, as you know, the last several quarters that the higher valuations and just activity levels, we are paying more attention to where we want to lend, where we don't want to lend, and what risk profile we want to take. We have seen, over the last quarter or two, that we have looked at certain business models, some in the consumer area and a few other ones, that we're just a little more cautious on, because of the environment for fundraising and what's happening.

What we have been surprised by, I would say that I have been surprised by, that the competitive landscape, I guess, hasn't gotten the memo that things have changed a little bit. And from that standpoint, we are still seeing very aggressive terms. And it's interesting, not only aggressive terms in structure, but also aggressive terms on pricing. So we are still winning a strong amount of new clients, but we're also, I would say, probably losing more. And it's not that there aren't opportunities; it's more because we have chosen not to step up to the terms that others are willing to provide in the market.

I think the only thing I would add there, Ebrahim, is that the demand is clearly there, but the demand falls into maybe three broad buckets. It's refinancing debt taken on over the last couple years that we would look at and say, that's just too much debt in any environment, let alone this one. Or it would be companies seeking debt in order to postpone their day of reckoning, perhaps, where it's a company that's over-valued and knows it might be facing a down round if it were to raise again.

And then there's the last grouping of what I'll call quality opportunities. And it's the quality opportunities that, I think as Greg noted, I too have been surprised at just how remarkably competitive it's been for that subset.

Got it. And I guess on the second question -- and I appreciate your not wanting to give a guidance on the warrant or securities gains. But is the action in the public market, when we see the recovery in the stock markets and IPOs coming back recently, is that a good cross-feed into how the behavior of your warrant and securities gain might be? Or is it too detached from what's happening in the private markets, and we shouldn't read into that as a signal of potential improvement for you all?

Ebrahim, this is Mike. Obviously, I think any improving public markets are actually very good for our clients, our warrant portfolios, our investment portfolio. Certainly in terms of valuations and certainly in terms of M&A exits or if the IPO markets return. So yes, if you start to see a thawing of that or some improvement on that, then yes, we could potentially see some improvements in the warrant gains and investment gains. And as you clearly have seen, Q1 was just a dire quarter.

There just was very limited M&A and certainly just no IPOs, really, to recognize. But again, things can change quickly. We all know that. And we do have a lot of warrants. We have warrants in some 1,600 companies. So all it takes is a handful of M&A activities, and then you're right back onto having some interesting gains, and similarly on the investment side, as well.

The only thing I would add onto it is it could have an added upside, is that in the investment portfolio, we have a certain amount of investments that are held at cost from an accounting perspective. And obviously, the market value is still, even if it pulls back a little bit, it is still much higher, roughly $100 million of valuation difference. And so as those companies sell, as those companies or those funds become liquid, even in a more depressed market, there's still more upside. So -- but when are those going to happen and what's the timing? As you know, that's why we don't give guidance on a quarterly basis, because it's really too difficult to predict.

Understood. Thanks for taking the questions.

Joe Morford, RBC Capital.

I guess my first question was just a follow-up to that last one. Marc, did you say you are seeing more companies turn to the bank for financing their growth, as opposed to, say, doing a down round? And if so, did you suggest that, that's business that you are leery of taking on at this point?

So I've got to break that question into two pieces, Joe. I think there is potentially demand for assistance with financing growth, right, so working capital financing. But that would probably be in the bucket that has been more in the hyper-competitive. And then there's the second category where I'd say it's debt not necessarily to finance growth, it's debt to avoid equity. And it's that second category where, again, they are looking for a large slug of debt to, I'll say, replace the equity financing that probably is the right answer for the company, but they don't want to go there because of valuation or other reasons, that we are particularly leery of.

Right. Okay. That makes sense. And then I guess Mike, you had mentioned that the payments and credit card fees were up 26% year over year. What's been the biggest driver to that activity? And how do you see that growth rate, going forward?

So I'll go ahead and start, and Greg will probably add onto it. Certainly, the credit card aspect of it has been a key driver. And as we've talked before, there's other areas, in terms of developing a broader payment strategy, taking advantage of payments from point A to point B. So again, we continue to implement that strategy. And in terms of growth, we do provide the guidance on that core fee income outlook, and so you do have our outlook for that, as well, too. And those are primarily driven by FX and credit card fees, as well.

So Joe, this is Greg. I would just add onto it. It starts with just additional penetration of the product on the credit cards. That's one area that's driving growth. But as you know, we've talked about this a lot, is the missed-payments business, we're really trying to connect more with our clients and be a value-added partner on the payment side.

So we're using virtual cards, B2B payments where more companies can use virtual cards to pay not just travel and entertainment, but actually they make their payments on their vendor payments. And when you are running that through, the volumes are obviously much, much bigger than travel and entertainment. So those things can drive very nice growth. And we expect that to be a key driver of our growth, on a go-forward basis, which is why our outlook remains where it is, in the mid-20%s.

Great. And then lastly, Mike, do you anticipate doing additional sales of securities to help support the loan growth and liquidity?

Joe, obviously, if we need to we certainly will, right? It's all about matching your maturities from your investment securities portfolio. For example, each quarter, we have maturities of about $800 million per quarter, in terms of the investment securities portfolio. And you saw, obviously, this past quarter, we grew loans over $1 billion, around $1 billion, at least in the period-end numbers. So it just really depends on the inflows of deposits and the loan growth. And so that just dictates whether or not we need to sell. But again, healthy liquidity, healthy amount of maturities, which generally, hopefully we wouldn't have to sell.

Right. Okay. Thanks so much.

Aaron Deer, Sandler O'Neill.

Following up on Joe's question with the credit card business. Given the growth that you're seeing and projecting in the payments and the API, would it make sense to break that out in an individual line item? Because it would be nice for us to get a better sense of just how that's performing independently.

Yes, so this is Greg. I'll start. So right now, as you know, we lump it in together. That is something that we may want to do in the future. It's not big enough yet to really justify it, because you're going to see, potentially, some fluctuations on a quarterly basis. So you really want to get it so it becomes more meaningful. Do I think that will happen in the next 12 months, 18 months? Yes, I could see it happening, maybe as we consider it, looking at the volumes and what numbers it would be and what the forecast is, possibly in 2017 or 2018.

Okay. And then going back to the reserves and credit. I'm curious, on new loan fundings, what kind of reserves do you establish on the various loan types? For example, what's the reserves on a new loan for early-stage companies versus those for capital-call lines?

Sure, so it's Marc, and I'll start there. Generally, the reserves that's assigned in our model will be a function of the category. So as you mentioned, private equity services versus early-stage and the credit-risk ratings. And so considering that our loans are originated at a risk rating of Pass, meaning the expectation that everything is going to be great, you would have reserves that would be, plus or minus 1% of the funded balance might be lower for private-equity services. Where the probability of migrating to criticized or non-performing or charge-off is far, far less. Might be higher for the early stage.

But generally, they are plus or minus 1% at the Pass rating. And then depending on the category moving up as they migrate, or if they migrate into criticized or worse-risk rating.

Okay, great. Thanks for taking my questions.

Matthew Keating, Barclays.

I was hoping you could review. Obviously, venture capital fundraising activity was pretty healthy in the first quarter. I think around $13 billion was raised, relative to about $28 billion in all of last year. Could you comment on maybe the historical relationship between VC fundraising activity and then venture capital actual financing activity? And then maybe related exits? Is there any relationship there? Or is that more of a lagging indicator on the fundraising side? Thanks.

Matt, this is Greg. I'll start. There is a correlation between the two. But as far as what it takes to deploy that capital is very different. The kind of venture capital it is, is it (inaudible), what their investment horizon is, and it's [over] what they see from an opportunities perspective. So you could see venture funds that deploy their funds in 24 months, but you can also see funds that really, they are raising large funds, and the whole point is to create time diversification for that fund. And then maybe over three, four, or even five years.

And then they keep a certain level of reserve, so as those companies needs funds over even a six-, seven-, eight-year period, they have capacity to support those companies. So it's a great indication of how limited partners look at the venture capital market, that $13 billion was raised in the first quarter. But you can't extrapolate that and say then, if you raised that in the first quarter, that means second, third, fourth quarter are going to be very, very strong. In addition to that, you have to look at what's changed of the last two, three, four, five years, which is that it's venture capital, as important as it is, and it's very important, there are other sources of capital in the market.

And so watching how that behaves is going to be where we're paying attention. And just a separate note to that. We have spent some time with some of the larger mutual funds out there that have gotten into the market, and gotten their perspective. And wondering if they're going to pull back and how far they will pull back, if they are. And what we have heard directly from them is that yes, they don't like to have written down some of the investments they have made over the last couple years. But they believe, because if these companies stay private longer, they have to play in the late-stage private market.

And so we believe they are going to continue to invest in this market over the coming years, and that is a good sign for us and it's a good sign for our clients.

Great. I guess more on the later stage aspect of the market. What percentage of your business is related to these unicorns, these $1 billion private-market valuation companies? Is that a major factor in your business? Or not so much, in your opinion?

This is Greg, and it's not a major part of our business. Clearly, we have some unicorns in the portfolio, but we don't actually lend that much to them. In fact, I would argue, very little. Part of it is because, as we have said in prior calls, a lot of times we've competed over the last few years with equity. So when you've raised hundreds and hundreds of millions of dollars, does it really make sense, even if it's an attractive rate, to basically borrow money? And the answer has been, for the most part, no. We do have some deposits and some total-client funds, but I would argue, from my standpoint, it's not a material number.

Okay. Thanks. And then, so ex the capital call lending this quarter, the rest of the portfolio's loan growth was a little bit more moderate. What can be done? Is there anything that can be done to accelerate that growth? Do you have any strategic initiatives at play, to drive more early-stage lending growth? Or is that really just a function of the market right now not being as vibrant as it has been over the last couple of years?

This is Greg. And yes, as you look at the loan growth, excluding private-equity services, which was exceptionally strong, and the private bank, which was also very strong, there was some growth in the other parts of the portfolio. Life sciences, for an example, had, had some growth. What we saw in the first quarter, again, is you're seeing some companies that are coming to the realization that their business models don't work. And some of those loans are actually getting repaid when they say, we've got excess cash, doesn't make sense. It's going to hard for us to raise that next round of financing. Let's pay down that loan.

When you have other companies that could raise money, they really -- a lot of people try to get those funds replenished as quickly as possible, and they still have 12 to 18 months worth of capital. That being said, where we see there is an opportunity in still in that mid and later stage. As competitive as it is, we clearly believe we have a competitive differentiation and we believe that we're going to be able to grow that bucket of the business over the course of the year. Although again, it's very competitive.

Great. Thanks very much.

David Long, Raymond James.

The remaining question I have is regarding the net interest margin. Maybe Mike, you can answer this. You talked about the loan yield and it had an 8 basis point benefit from the Fed-rate hike in December. But then there was an offset from a decline in loan fees of 7 basis points. My question is, what is the absolute impact of the loan fees? And then how does the first quarter compare to what you think may happen for the rest of 2016?

So the loan fees that affect the loan yields from the prepayments does vary quarter to quarter. So it just depends on if certain loans are prepaying early, and then we can accelerate the recognition of the fee. So again, admittedly, it is up and down every single quarter, by anywhere from $2 million to $4 million, on average, in a given quarter. So there's no really way to necessarily predict that. It's just behavior in terms of growth of loans and when somebody decides to repay a loan early. So, but again, like I said, generally it moves up and down around between $2 million and $4 million a quarter.

And did you disclose what the absolute dollar amount was here in the first quarter?

No, but you can keep an eye on us. If you actually go to the press release, there is a disclosure about, in the footnotes back there on the income statement, that talk about the loan fees that we are recognizing each quarter. So you can actually pull that out from there.

Great. Thanks for the color.

Tyler Stafford, Stephens Inc.

Just one more from me. I believe the question was asked earlier, but I think I missed the answer if you gave it. Can you tell us what the current reserve on the early-stage portfolio is at this point?

Yes, we didn't in the earlier question, and won't now, break out the portion of the loan loss reserve that's allocated to early stage. But would repeat the answer to the earlier question that it has trended up as the level of criticized early-stage loans have trended up.

Got it. Okay. All right. Thanks, guys.

Brett Rabatin, Piper Jaffray.

Just wanted to ask, you gave range guidance for towards higher, low-end for some of the line items, but not on the margin. And was just curious, given where the margin is and what's going on with the balance sheet, any thoughts on why you wouldn't talk about the margin guidance being at the higher end of the range? Or maybe changing that this quarter?

No, obviously, we feel comfortable with the margin, in that, certainly, the rate increase that we had in December is very helpful. I think the things you've got to think about is, what could change that, going forward? And certainly loan mix, or as we continue to grow loans, that's going to have a positive impact on that, right? Because by and large, the loans we're issuing are larger than our net interest margin. So that's why we feel comfortable with our range that we've [outlook]. Now, with respect to deposits, whether those are coming in lower or at a faster pace certainly does affect it, but again, not a significant amount, at least at this stage.

Okay, it just seems like you might at the high end, or maybe higher, potentially, at some point this year.

Let's hope so. We're always hopeful for an increase in net interest margin.

Okay. Thanks.

Julianna Balicka, KBW.

I wanted to ask a little more about your investment-fund gains. You've been in some of these funds for coming up on a decade now. So shouldn't some of these fund be in harvesting stage? For example, your managed (inaudible) of funds which are still holding onto public securities.

Is there any kind of a curve to when they're going to sell these securities and therefore get you out of your loss positions? Because your strategic and other investments contributed positively to gains, as did your warrants contributed positively. So is there any way to think about a curve of when these will start to exit?

Obviously, I think over time, they will begin to exit, but they'll look to markets that are more calm. So as we all know, in Q1, it was a very anxious market. So if the markets do calm, then perhaps you would start to see them beginning to exit out of some of these positions. Now, you also have to think about some of these public companies that they're holding positions in are subject to lock-ups, right? So that also can delay.

But at the end of the day, as you know, the partners of those funds will decide when it's the opportune time to actually exit out of those markets. But yes, over time, over the next couple of years, since some of these funds have been around for a long time, we should start to be seeing exits as long as there's M&A activity and the economy holds. And as Greg pointed out, a fair amount of these investments we have are held at the cost basis, and so we certainly look to the -- when they do exit, because that would certainly potentially generate some nice gains for us.

Okay. And then maybe switching to the early-stage credit cycle, as you talked about that being within expectations. In terms of thinking about how long a credit cycle might last for early-stage loans, it's usually that these companies are going to fail, they're going to fail very quickly. So whereas with, say, more established industries like oil, where this can drag on for seemingly forever, it would seem that credit deterioration, to the extent you're going to have it, should come fairly quickly. And by like, say, I don't know, mid 2017, you'd almost be resetting? Or how can we think about the duration of potential credit stresses?

Julianna, this is Greg, and then Marc may want to add some color. You are right, it actually is -- it happens in the nearer term. The only caveat, I would say here, is that companies have longer funding. They've got maybe 12 months, 18 months worth of cash, as opposed to the companies who are running on nine months of cash collected with an average. And all of a sudden, then you've got to make a decision very quickly or you'll find out very quickly where the stress actually is.

So we see that over the course of 2016, a lot of this is going to play out, and it could actually be even earlier than that. So as Mike described in his comments that we expect the first-quarter provision to repeat itself. Q2, Q3, Q4, again, on an average, but it may be volatile from quarter to quarter. That's our best view of what we'd expect to play out from an early stage, and then decrease and start to improve once the market settles down. And as you said, some of these companies will have played out already.

Okay. Thank you very much.

John Pancari, Evercore.

I just want to ask about the loan-yield impact from the Fed hike. You indicated that you saw about an 8 basis point benefit to loan yields, from the 25 basis point Fed hike in December. That feels light, especially given your 88% variable rate loan composition. So could you give me a little bit more color on, is there anything that impacted that 8 basis points where possibly it could be greater in future hikes?

John, roughly about 80% of our loans are tied to variable rates. I think there's a few things to consider when you think about the number, whether it is light or not. First off is, part of the increase of the loan yields actually happened, the full effect in December, right? So there was a little bit of that. But perhaps one of the larger things to consider would be the fact that we have LIBOR-based loans, as well, too, right? And so if you look at, certain of the LIBOR rates, one-month LIBOR is around 43, 44 basis points, so not quite up to the 50 basis points.

So there's a little bit of a not quite the full impact of that. And plus, you also saw in December that LIBOR rates were starting to increase, even before the Fed started to increase. So there was some of that pick-up, as well, too. And then perhaps the final point is, look, it still takes some time for some of these loans to reset, whether it's on a 30-day LIBOR or a 90-day LIBOR, as well, too. So that would, I think, account for the differences. But by and large, when you see a 25 basis point rise, assuming LIBOR is going to move in conjunction, you are going to see approximately 75% to 80% of us, that falling to the loan yields.

Okay. So you think that 8 basis points is relatively representative of the move you'll get if you get another 25 basis point hike later on this year?

No, I think what I am saying is just in the quarter, the 8 basis points is reflective of, again, some of the yield increases we saw in December, some of the pre-run-up in respect to LIBOR, some of the things related to LIBOR and some our clients are still resetting over the time here. And the fact that, right now, there still is a difference. LIBOR, again, is -- one-month LIBOR is only at 43 basis points, so not quite the full 50.

Right. Okay. And then separately, on the lower loan fees, I guess you answered earlier that they can tend to be volatile. Do you have any visibility into the next quarter about how that's trending?

No. But again, when you look at the loan-fee income we had in Q1, it was $25 million. If you compare that to Q4, it was $27 million. So there was a decline of $2 million. By and large, that's primarily driven by the prepayment fees from early loan repayments. And again, if you go back and map it out and do some of that benchmarking looking at it, you're going to see movement anywhere, $2 million, $3 million, $4 million in a given quarter, one way. But again, it's very difficult to predict, because I just can't predict when somebody is going to repay a loan.

Okay. All right. Thanks, Mike.

This concludes the Q&A session. I'll now turn the call back over to CEO Greg Becker for closing remarks.

Great, thank you. Want to thank everyone for joining us today. When we look at the first quarter, we delivered a solid quarter, in terms of the core numbers. Clearly, as you heard on the call, we spent a lot of time talking about where we saw some stress, and expect to see a little pressure in the early-stage loan portfolio, and some headwinds in our investment-security portfolio and warrants.

That being said, we did spend a lot of time, and I hope that came through, that we are comfortable with the outlook, comfortable with our ability to manage it. And maybe as important or more important, we're still looking at the long term and what we can do to invest for the long term to grow our business and support our clients. So with that, I want to thank our clients for their support of us, or our ability to support them, and all our employees and our investors and analysts for joining us today. Thanks, and have a great day.

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