SVB Financial Group (SIVB) 2016 Q2 法說會逐字稿

Welcome to the SVB Financial Group second quarter 2016 earnings call. My name is Anna and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Meghan O'Leary. Please go ahead.

Thank you, Anna, and thank you everyone for joining us today. Our President & CEO Greg Becker; and our CFO Mike Deschenaux are here to talk about our second 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 www.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 all of you for joining us today.

We delivered another solid quarter despite global market volatility and quiet exit markets, with earnings per share of $1.78 and net income of $93 million. Our results were marked by continued strong loan growth, improved PE VC gains relative to Q1 and credit quality within our expectations. We believe uncertainty will continue to weigh on the markets overall but as you can see from our outlook we currently expect solid performance in the business for the remainder of 2016.

Overall we are positive about our opportunities as we move into the second half of 2016 and beyond, assuming the continued stability in the broader market. Mike will cover the numbers in detail while I will address what we're seeing in the macro environment, the implications for us and our strategy to capitalize on the environment now and in the long-term.

Let's start with the macro environment. Obviously, the big event during the quarter was Brexit, which created fears of a dampened global economy leading to a flattening of the yield curve and vanishing prospects for a rate increase. This weighed on the markets overall, creating uncertainty and restraining investments and exits.

Closer to the innovation space, the venture capital and technology markets remain mixed in Q2, although there were some bright spots. VC fundraising was lower in Q2 but still strong, with limited partners committing [nearly] $9 billion primarily to larger funds and high performing firms with established general partners. We view this as good news for the quarters to come.

VC investment was also healthy overall. With a solid dollar figures were dominated by a small number of very large rounds to late-stage private companies. At the same time, funding to early-stage startups declined as investors opted to put their money where they perceive momentum and staying power. VC backed exits were only marginally better in the second quarter.

Concern over late-stage evaluations and uncertainty in the markets continued to weigh on IPO prospects. There were 12 venture-backed IPOs in the US in Q2. Only three of them tech, although all performed well. This was an improvement over zero tech IPOs in the prior quarter. The number of VC backed M&A transactions was down notably in the second quarter although the average dollar amount per deal increased significantly. Despite this trend of fewer transactions there is a broad expectation that market volatility and a lack of incentive for private companies to go public could lead to higher levels of M&A in the coming quarters.

Let me talk about the impact on SVB. Although our results during the quarter were positive, these market dynamics continue to affect SVB primarily in three areas. Slower total client funds close, some stress with early-stage loans, and lower warrant gains. Total client funds, which includes on-balance sheet deposits and off-balance sheet client fund investments have decreased. Deposits decreased primarily due to more challenging fundraising environment.

In addition, our ongoing efforts to direct clients toward appropriate off-balance sheet products resulted in nearly $2 billion of funds flowing from deposits to off-balance sheet products in Q2. On the client investment fund side, M&A among our clients has been the primary factor behind slower growth, accounting for $2.3 billion of total client fund outflows year to date, although that activity has been good for loan balances and credit quality.

Charge-offs remained elevated due to continued softness in early-stage venture funding, although our overall credit performance was within our expectations and outlook range. And market factors have also contributed to lower gains on PE and VC-related investment securities and warrants, despite some improvement in the second quarter.

Why we are optimistic -- so we have some near-term challenges that could persist for a few more quarters but we believe they are manageable. We are seeing many positive signs and opportunities despite these challenges. So I'm going to tell you why we are optimistic about the rest of 2016. First, our clients are doing well overall. Second, we're winning new clients at a very healthy pace. Third, we are building strategic partnerships to support expansion of our payments and digital efforts, and fourth, we continue to build a platform that will support our long-term growth within the innovation economy.

Starting with clients -- they have always been resilient. Our client base as a whole is performing well even while adapting to the more challenging fundraising and exit markets. Secondly, we are seeing signs of a potential pickup in M&A activity with growing confidence among our private equity clients who are actively looking for good companies and have capital to deploy.

Likewise, a growing number of our corporate clients have told us they plan to focus actively on acquisition opportunities and we have seen evidence of this in greater openness among these clients to conversations about debt financing. And third, while the IPO market is barely moving we have seen a marked increase in the pipeline for secondary public offerings among our clients. The number of active filings nearly doubled in the second quarter compared to the first, which bodes well for future growth and liquidity.

The second area I'm feeling positive about is our ability to win new clients and build relationships in promising markets. Our pace of new client acquisition remains strong. We onboarded more than 1,100 new corporate clients in second quarter including 85 new clients through our partnership with Stripe, which we announced just last quarter. We are investing in people to take advantage of incremental growth and opportunities in promising markets here in the US, which in the second quarter included hiring in Silicon Valley, Los Angeles, Austin, and New York.

We continue to build relationships and expand our ability to serve entrepreneurs globally. We have grown our global client count at double-digit rates over the past two years and grew average global loan balances by nearly 20% in the second quarter, mostly in the UK. We still see plenty of opportunity in the UK and Europe despite the uncertainty created by Brexit, and we also established a presence in Dublin, Ireland earlier this year.

The third area I am excited about is our focus on leveraging strategic partnerships to offer scalable and sustainable payment solutions to our clients at every stage of their life cycle. In June, we announced an expansion of our card processing relationship with First Data to leverage their industry-leading borderless commerce solutions. This puts us on the path to being able to support the largest e-commerce companies by offering our clients the ability to accept and make payments globally across borders and platforms and to scale this capability as they grow. Our pipeline of e-commerce opportunities has grown substantially since this announcement.

We continue to work with a variety of partners including MasterCard to create flexible scalable payment solutions that not only make it easier for all our clients to run their business but allow us to provide complex payment backbone solutions to our fintech clients as part of our banking infrastructure-as-a-service-offering.

And although we are always building for the future, we are seeing significant benefits from our investments today. Benefits that we expect will grow over time. For example, despite a slight decrease during the quarter, year to date we have seen healthy increases in our card business relative to 2015 with a 20% increase in the number of active cards and an 18% increase in card revenue. We saw similar healthy growth of 27% in foreign exchange revenue during the same period, due to our efforts to strengthen our client relations and the client experience as well as market volatility.

Fourth and finally, we continue to expand our platform reach and capabilities to support our long-term growth within the innovation economy. We continue to focus on providing the best experience possible to our private bank clients. This includes offering enhanced products and advice, customized to the needs of innovators, executives, entrepreneurs, and influencers in innovation economy and providing a differentiated client experience in keeping with our high aspirations for that business.

Secondly, we're expanding our capabilities in life science practice, providing advisory services to help large corporates work with our clients to help identify appropriate partnerships domestically and internationally. And also in life sciences, we continue to see growth at the early-stage through partnerships with leading accelerators that support young and developing companies.

We're also creating growth opportunities across the spectrum of mid to later-stage companies with financing structures that help bridge to important milestones and large syndicated credits for leading private and public life science healthcare and digital health companies. We see these milestones, improvements and initiatives as reasons to be positive about 2016 and beyond. Our fundamental business remains strong and although we may continue to see the effects of the VC market recalibration and global market angst for a few more quarters, we believe these impacts will be manageable and temporary.

In the meantime, we remain focused on expanding our platform and capabilities to support our growth, retaining the best employees, working with the best clients in our industries and leveraging our unique platform to deliver value to those clients. This focus has helped us maintain our growth momentum over the long term and we expect to help drive future growth as we move forward. We will continue to monitor our clients and market conditions but we remain firm in our belief that innovation space offers tremendous opportunities in the long-term and remains the best possible place for us to be.

Thank you and now I will turn the call over to our CFO Mike Deschenaux.

Thank you Greg, and good afternoon everyone.

Our solid results in the second quarter were driven by outstanding loan growth, better PE and VC-related gains and stable credit quality. It is important to note that our results also reflect a $12.4 million pre-tax gain on the sale of investment securities to support our loan growth.

Today I would like to highlight the following items. First, significant loan growth driven by private equity capital call lines. Second, a decline in on-balance sheet deposits, primarily as a result of tempered VC investment levels and exits. Third, slightly higher net interest income and a higher net interest margin. Fourth, stable overall credit quality within our expectations given the environment.

Fifth, somewhat better PE VC related investment securities and warrant gains, albeit down from 2015 levels. Sixth, core fee income comparable to Q1. Seventh, lower expenses as a result of lower compensation costs, and finally, increased capital leverage ratios due to lower assets driven by the decline in deposits. We will also be making a few adjustments to our outlook.

Let us start with loans. Average loans grew by $1.2 billion or 7% to $18.2 billion, driven primarily by continued growth in private equity capital call lines, although approximately $300 million of second quarter loan growth came from other loan categories. As a result of our continued strong loan growth, we are increasing our full-year percentage loan growth outlook from the low 20% to the mid-20%.

Now let us move to total client funds consisting of on-balance sheet deposits and off-balance sheet client investment funds. Average total client funds decreased by $700 million or less than 1% to $81 billion reflecting a decline of $1.1 billion or 2.8% in average on-balance sheet deposits, partially offset by a $400 million increase in average balance sheet client investment funds.

As Greg mentioned, the funding environment in a slow IPO market were the key drivers of lower on-balance sheet deposits during the quarter. An increase in M&A by and of our growth and corporate finance stage clients slow growth and our off-balance-sheet client investment funds. This was offset by strong new client acquisition and inflows from early-stage and private equity clients related to our successful efforts to encourage clients to use the appropriate off-balance sheet products.

Despite the impact of current market trends on deposit flows, our client funds franchise remains healthy and we have ample access to liquidity. In light of the decline in deposits over the past two quarters, we believe our full-year 2016 deposit growth will be slower than we originally expected and as a result we are reducing our deposit percentage growth outlook from the low double digits to the mid-single digits.

Turning to net interest income and our net interest margin. Net interest income increased by $1.9 million to $283.6 million in the second quarter, due to loan growth, although the impact was largely offset by the sale of investment securities to fund loan growth. Nevertheless, the impact of strong loan growth means we are maintaining our full-year 2016 outlook for net interest income growth. Interest income from loans increased by $7.3 million due to higher average loan balances.

Overall loan yields decreased by 14 basis points primarily due to growth in lower yielding capital call lines, which accounted for 8 basis points, and a $1.2 million decline in loan fees driven by lower fees from early loan payoffs in the second quarter. Interest income from investment securities declined by $4.5 million, primarily due to lower average balances from the sale of securities. At the same time, overall investment security yields increased by 3 basis points to 1.62%.

Average fixed income securities balances decreased by approximately $1.6 billion to $21.8 billion due to the sale of $1 billion of US Treasury Securities to fund our loan growth and $600 million related to paydowns and maturities. I would also like to call your attention to an increase in our short-term borrowings of $500 million from the Federal Home Loan Bank which we used at the tail end of the quarter to support our loan growth. As a result of our strong loan growth, our net interest margin increased by 6 basis points to 2.73%. Because of this, we are raising our full-year 2016 net interest margin outlook range by 10 basis points to between 2.6% and 2.8 %.

Now let us move to credit quality, which remains stable overall and within our expectations, given the environment. As we expected, the slower pace of early-stage funding relative to 2015 and broader market conditions continue to weigh on early-stage credit quality in the second quarter. However, it is important to note that our early-stage portfolio is only about 6% of our total loans. The rest of our portfolio performed well overall.

Our allowance for loan losses was $244.7 million at the end of the second quarter, an increase of $14.5 million, but remained stable overall at 1.29% of total gross loans. Our allowance for loan losses for performing loans as a percentage of total gross performing loans decreased 3 basis points to 0.98% at June 30. The overall increase in the allowance was primarily reflective of the $1.1 billion growth in period end loan balances as well as increases in specific reserves for nonaccrual loans. These increases were offset by a decrease in the reserves for our performing loans which reflects the continuing shift in the mix of the loan portfolio to our private equity venture capital loan portfolio.

Our loan loss provision was $36.3 million in the second quarter, compared to $33.3 million in the prior quarter. This amount reflects approximately $15.4 million in reserves for new nonaccrual loans, $13 million for charge-offs that did not previously have a specific reserve and $10.7 million for loan growth, offset by a decrease in the reserves for performing loans.

We indicated in April that we expected quarterly provision levels for 2016 to remain at or near Q1 levels on average, due to current credit conditions. The provision as it relates to credit quality was higher than expected due to strong loan growth during the quarter which contributed to a somewhat higher dollar amount overall. The allowance for loan losses for nonperforming loans increased by $9.5 million to $59.9 million, reflecting the $15.4 million in reserves for new nonperforming loans, which I've mentioned earlier, and which was partially offset by charge-offs of previously reserved nonaccrual loans.

Net charge-offs were $19.4 million or 43 basis points compared to $20.7 million or 50 basis points in the first quarter. This reflects $20.7 million of gross charge-offs compared to $26.2 million in the first quarter. 65% of charge-offs came from 11 early-stage software Internet loans. Additionally, we had one charge-off of $5.2 million from a later-stage digital media company.

Nonperforming loans increased by $10.8 million to $124.7 million or 66 basis points, compared to 64 basis points in the prior quarter. The increase was driven by $33.5 million of new nonaccrual loans, primarily from the addition of one new sponsor buyout loan in the second quarter in the healthcare services space. The increase was partially offset by repayments of $16.8 million and charge-offs of $5.5 million. Subsequent to quarter end, and as a result not reflected in the nonperforming loan amount as of June 30, we also received repayment of a $9.6 million nonperforming software loan in the mobile and telecom infrastructure space. With respect to our outlook, we are maintaining our credit quality outlook for the full-year 2016.

Now let us move to non-interest income, which is primarily composed of core fee income and net gains 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 $112.8 million, compared to $86.1 million in the first quarter. Non-GAAP non-interest income net of non-controlling interest was $111.2 million compared to $88.8 million in the first quarter. The increase compared to the first quarter was driven primarily by non-GAAP net gains on investment securities, net of noncontrolling interests of $20.6 million compared to net losses of $2 million in the prior quarter. This reflects gains of approximately $12.4 million for the sale of $1 billion in US Treasury Securities, which I mentioned earlier, and $9.6 million of gains from our PE and VC-related investments, primarily due to fund distributions and some improvement in certain public valuations during the quarter.

Gains on warrants were $5.1 million, compared to $6.6 million in the prior quarter. This primarily reflects valuation increases of $7.4 million. The increase was offset somewhat by $2.3 million of losses, mainly related to warrant exercises at prices below our estimated fair value.

We expect that the recalibration of the VC market and lack of visibility to potential exits may continue to drive lower and fewer funding rounds and temper gains on warrants and PE and VC related investments. Core fee income was $74.5 million, a slight decrease from $76.5 million in the first quarter. This change was driven primarily by a decrease in foreign exchange fees. As a reminder, core fee income includes foreign exchange, credit cards, letter of credits, deposit service charges, lending related fees and client investment fees.

Foreign exchange income was $24.1 million, down $2.9 million due to a one-time reclassification in the first quarter of fees that were previously reflected in gains and losses on derivative instruments. Year to date foreign exchange income is up 27% over the same period in 2015.

Credit card and payment fees were flat at $15.4 million in the second quarter primarily due to reduced interchange volume related to lower spending on our business credit cards by some clients as a result of the slower pace of early-stage investment and clients adjusting spend rates. Nevertheless, year to date credit card and payment fees are up 18% over 2015. Our fee income lines are performing solidly and we expect strong growth in foreign exchange and cards and payment fees over the long-term.

Although we are decreasing our 2016 outlook for core fee income growth from mid-20% to low 20%, the nominal after-tax differences relatively small at approximately $5 million. I would like to note that we still expect growth in card and payment fees in the second half of the year. The decrease in our outlook was driven by the near-term impact of lower average spend by our business credit card users, lower foreign exchange transaction sizes and lower off-balance sheet client investment balances all somewhat impacted by the over arching affects of the current VC funding and exit markets. If the investment environments, exit markets, and the broader economy improve faster than expected, we could see upside.

Moving on to expenses. Non-interest expense decreased by $3.6 million to $200.4 million. The primary driver of the decrease was a $6.7 million decrease in overall compensation expense which consists primarily of the following components. A $4.3 million decrease incentive compensation expense related to our current expectations for our full-year performance relative to our internal targets. A decrease of $3.3 million and other compensation expenses attributable primarily to the seasonal increase in the first-quarter from additional 401(k) matching expense and employer payroll taxes, related to our 2015 incentive compensation plan payments, as well as lower share-based compensation. And, a $1 million increase in salaries due to an increase in employees in Q2.

Professional services fees were $6.5 million higher, primarily related to ongoing IT projects as well as regulatory compliance initiatives. Finally we also saw a $2 million decrease in business development and travel expense, due to a seasonally higher Q1 expense.

Turning to capital. Our bank level tier 1 leverage ratio increased by 37 basis points to 7.56% and our holding company level tier 1 leverage ratio increased by 39 basis points to 8.08%, due to earnings and lower average assets as a result of the decline in deposits in the second quarter. Our risk-based capital ratios were effectively unchanged at the bank level and increased modestly at the holding company level.

In closing, we delivered a solid quarter and our businesses are performing well overall with healthy activity among our clients and stable credit quality. We view the ongoing recalibration, evaluations, and VC investment levels as a healthy development for the long-term. We expect continued growth in the second half of 2016, and could see upside of if the broader environment improves faster than expected.

In the meantime, we remain focused on delivering high quality growth, driving fee income, maintaining stable credit quality, and continuing to position ourselves for long-term growth. Thank you and now I will ask the operator to open the lines for Q&A.

(Operator Instructions)

Jared Shaw, Wells Fargo.

Good afternoon. First with the -- on that expenses you have the $3.6 million increase in consulting for regulatory compliance initiatives? Can you give a little detail into what that is working on?

And will that -- what's the timeline on that in terms of implementation? And would we expect to see that being offset down the road with additional hires? Or is this more of a software and systems program?

So it's a little mix of everything, Jared. You've obviously got infrastructure builds and we've obviously experienced quite a lot of growth over the last couple years. Certainly, as we move toward that c-card level of $50 billion in assets and some of the preparations around there. And even in other areas and risk are BSAA amounts, just all across the board.

Okay, and once those are implemented though, is that going to be offset by additional hires? Or is it more implementing these systems through the professional services line?

Jared, this is Greg. I'll add to what Mike said. It's hard to look at a one quarter basis. You really have to look at it over multiple quarters. This past quarter was a higher level of consulting we had coming in, helping out in a couple areas, and when that happens it tends to be a little more of a blip so we believe it will stabilize over the coming quarters.

Okay, thank you. And then on the credit side, with the addition of that new sponsor-led buyout loan and two MPAs -- can you give an update on what the status is of the other sponsor-led loans that had migrated into MPA status in earlier quarters? And what you think the timeline on resolution could be on this new one that's in there?

This is Marc Cadieux. The two that are in there from prior periods, they have -- I guess I will say they are between stable to modestly improving. But as we said before, these turnarounds do take time and so while cautiously optimistic that they will turn out okay in the end we still think it's a little too early to call those.

For the new edition, candidly it is still a bit of a fluid situation and so unable to say at this point. As was the case with the prior two, just how that one is going to turn out.

Okay. Thanks. And finally, with the news out of the UK with the Brexit, does that change your thoughts in terms of potentially having an additional full-service branch and operation more euro-based? Or do you still feel that with the London branch you will still be able to continue to service most of the European customers?

Yes, Jared, this is Greg. There's two ways to think about Brexit. One is on a direct basis and then there's the indirect.

On a direct basis, from our standpoint, there really isn't much of an impact. The UK market, the UK office services -- the UK at this point, we don't have other offices in Europe. Although over time, given what's happened, it would be easier for us to go directly -- branch directly from the US. Again, don't expect a lot of impact on a direct basis. If we were to go into Europe again what we've talked about in the past is that may be looking at branching into Germany, maybe branching into the Nordics but again we don't believe Brexit has any impact on that.

On a macro basis, obviously a disappointing part was the impact of the both longer-term rates and the likelihood, or not likely scenario, of rate increases later this year. That's the macro impact, but on a micro direct basis we don't expect any real impact.

Thank you.

Brett Rabatin, Piper Jaffray.

Hello, good afternoon. Wanted to first ask on the deposit side -- the decline wasn't a big surprise but you are essentially saying mid-single digit on an average basis for this year. What's sort of changing the dynamic going forward that you experienced in 2Q? How do you see that changing over the back half of the year?

Yes, this is Greg. I'll start and Mike may want to add something. When you look at the second half of the year right now, as we look at it, the addition of client growth that we've had, which is great, combined with, we believe, a market that will continue to be unsettled or a little bit soft in fundraising, is going to cause deposits to be mostly flat for the second half of the year. That's how we look at it. There is obviously a risk that it could be lower, much like the second quarter was. If you see a lot of M&A activity, if you see our clients being acquired, if you see clients acquiring, and if fundraising, or actually investment declines even more than it was in the second quarter -- obviously we don't expect that to happen but it could happen. So that's kind of the color for the second half of the year.

Okay. And I guess the other thing I was curious about is -- Greg, you mentioned the near-term challenge? You were facing some near-term challenges, but obviously credits -- I think the fear was a little too robust relative to your results.

In terms of the challenges you are seeing, is it VC fundraising that lower -- sort of concerns you more than early-stage software? What would be your bigger concern about the near term?

This is how I would describe it and I think you are accurate. When we give guidance in the second quarter, we really try to look at the provision for the balance of the year and the outlook, but we added a lot of caveats. We said it could be worse than this depending on how the market plays out.

How I look at what happened in the second quarter is that there was a lot more clarity. That's why we are more confident in the second half of the year. It may be volatile on a quarter to quarter basis but the outlook we gave we feel good about. What drives that is what would have happened in the second quarter and the first quarter, which is, you have companies again that failed to raise that next round of financing that put themselves up for sale and can't find a buyer. We had roughly 15 early-stage companies that weren't able to accomplish that in the first quarter. We had 11 in the second quarter and again, if you look at the average for 2015 it was around 10. Again, feel pretty good about where we are from an outlook perspective and it's more clarity, which is where we are right now.

Great. Thank you. Good point. Thanks for the color.

John Pancari, Evercore ISI.

Back on the credit topic. I just want to understand a little bit more around the drivers of the deterioration you are seeing in the mid and later stage as well as the sponsored buyout portfolios? I mean I get the early-stage deterioration, given the pullback and inflows from VCs and private equity. I get how it can impact that part of the book. Is there any commonality between the deterioration you are seeing in the sponsored buyout credit? And then maybe even the mid- and later stage, just to understand that better?

So John, this is Greg. I'll start and then Marc will add some color. There are the three buckets, right?

One is the early-stage which we talked a lot about, I don't think there needs to be a lot more discussion around that. The second one is mid-stage and buyouts. That mid- and later stage we don't expect to see a pattern.

We're going to see one or two deals on a quarterly basis that have the same issues or similar issues to early-stage so there's no pattern, no surprises there. The same thing holds true with the sponsor-led buyout. We have to remember, we go back -- we have been in this business for seven or eight years and when you look at that you are going to have one or two credits over time, in a given year, that actually do end up becoming nonperforming.

What Marc has said repeatedly is that although they may go nonperforming, because these are more substantial companies with stronger revenue, their cash flow may be just a little bit off. Once that happens it takes a little longer for them to recover and get back on the right track. As we said with the two credits already mentioned, they are tracking, they are performing in a solid way, but they are just not there far enough for us to take them back in becoming performing loans. No real pattern that we can see.

It's Marc again. The only thing I would add to that is that there's -- to part of your question, there's no correlation between what's caused stress in the early-stage portfolio segment versus what's happened in the sponsor-led buyout segment.

And particular to the couple of NPLs that we have sponsor-led buyout, those have really been Company specific issues -- not indicative of any broader trend, not indicative of any stress more broadly in that part of the portfolio or elsewhere. And then the only other thing I would reiterate is that we are reiterating our guidance on that charge off for the balance of the year.

Okay. And then related to that, of that -- this will help of some of the clarity around that. The year over year increase in MPAs, the 23% year over year increase we're looking at right now -- I know you've had a payoff you've flagged, but obviously there can be movements in a quarter.

Of that 23% year-over-year increase in MPAs how much of that was early-stage?

It's the minority for sure. If you just look at our sponsor-led buyouts today, right, those three represent the vast majority of the nonperforming loans. I think it's $82 million in the aggregate. And that really was and remains the driver. Was the driver for why it increased year over year, or period over period and why NPLs remain elevated relative to 2015.

The only thing I would add to that is those three that Marc is mentioning on the sponsored buyout, roughly $80 million or so. We have roughly, not quite but roughly, around half of that has been set aside for reserves.

Okay. Got it, Mike. And one last thing if I could ask you mentioned, Mike, in your comments, the ample access to liquidity. Could you just talk about that a little more? Would it primarily coming from additional security portfolios sales or how do you view that? Thank you.

Yes, John. Just on a quarterly basis we expect to see maturity of our existing investment securities portfolio somewhere between $700 million and $900 million. Going back to Q2, and even in Q1, we had such extraordinary loan growth in there, so we had to accelerate some -- sell some of these securities in order to fund the loan growth.

Right now, again, if we are more or less averaging below that $700 million to $900 million and I don't anticipate having to sell any securities. But again, if we have to be pleasantly surprised by stronger than expected loan growth, then one option would be to sell. We also do have [mooring] capabilities as well too, to pledge our investment securities as well. We look at whether or not the funding shortfall is more permanent or more temporary before we make that call in order to sell securities.

Got it. All right. Thank you, Mike.

Chris McGratty, KBW.

Thank you for taking my question. If I could ask the credit question a little differently? The charge off guidance of 30 to 50 sounds like it's unchanged and I think in June, Greg, you said it was high end of that and that's kind of what we are tracking.

If loan growth remains a little stronger than we saw it relative to last quarter should we be thinking about a provision? Maybe not like the first quarter, but maybe more like the second quarter or if not a little higher?

I'll start. This is Greg and then Marc may want to add. If you look at the provision in the second quarter, roughly $10 million of that is related to loan growth.

And that's because again we had such a strong, both average and period and loan growth. If that continued at that pace, more than likely the provision would be on the higher side because you are supporting that higher loan growth. Probably would look more like that.

We don't expect growth to be that strong for the second half of the year. But if it is, yes you would see a higher provision.

Okay, and then the charge off still upper end based on what you see today?

Yes. It would be -- it is a little bit a function of if you see substantial loan growth, and again the loan growth is coming from very high quality low risk PE VC portfolio. So that maybe ticked down a little bit on a percentage basis because of the quality of the overall portfolio and the growth, but generally speaking you would be correct.

But as we mentioned, in the first quarter our guidance on the net charge offs is 30 to 50 basis points for the full-year. But as we indicated in Q1, we're probably going to come closer to the higher end of that range. So essentially, we're still saying the same thing here which is more closely to the 50 basis points of that range.

Got it. Thanks a lot.

Steven Alexopoulos, JPMorgan

Hi, everybody. I wanted to drill down a little bit on the deposits. What percent of the deposits are from the corporate and the growth in corporate finance clients? And how did that change quarter over quarter?

Steve, it really hasn't changed a whole lot. By and large, what we have seen historically is more the early-stage emerging techs account for 50% of our deposit base plus or minus. When you look at the PE VC funds account for roughly 25%, and then you have the remaining is growth in corporate finance. It really has been fairly consistent.

Okay. Thank you. And then Mike, if we look specifically at that piece from startups, could you talk about one, the reduction and inflows you're seeing from new startups? Maybe just talk about cash burn rates from existing startups? When you put those together and you look at the total pool of funds from startups, how does that change in the quarter?

So as Greg mentioned, we did see quite strong growth or acquisition of new clients and we had over a thousand new clients coming on. They are still bringing in a healthy amount of flow in there. Admittedly, it's probably a little smaller size than what we have seen in the past, given the VC funding environment.

There's certainly a little bit of slowdown in that area and I think the rest of the year would probably be more coming from the growth in corporate finance stage that's affecting some of the deposit levels.

Just to add onto that, Steve. Again, what we are seeing is maybe a Series B round was going to get $20 million to $25 million of round. That's down 15 to 20 and it doesn't take many of those across a large portfolio to have an impact on the overall deposits, given that these companies are still burning cash.

Okay. That's helpful. And then the comments around the slowdown in fundraising -- when you look at the capital call growth, you guys had really solid growth, particularly capital (inaudible) below $20 million, which are typically VC?

But you are saying fundraising is down but investing is up? So you're saying VCs deploy existing capital that's already been raised by having tough time raising new capital?

Fundraising was basically down a little bit but not much, and it depends upon again, what numbers you look at. We are using MVCA numbers and it's roughly $12 billion in the first-quarter and roughly $9 billion in the second quarter. Net-net, a very strong fundraising cycle.

I guess that's one way to look at it. The pitchbook had even higher numbers -- like $13 billion in the second quarter. My view is it doesn't have much of an impact. I still think it bodes well for the second half of the year and into 2017, about the capital that will be deployed.

Thank you. Just one final one for Marc. Give a little color on the reserve decline on performing loans which you cite in the release.

So that decline was driven by the source of the loan growth with the vast majority of it, I think, 70% plus or minus having come from the high-quality capital [color] borrowings where our credit quality experience has been very good. That change in portfolio mix is the driver of the 3 basis point decline.

You know Steven, as we have talked about before when you look at the composition of our loan portfolio, today the private equity venture capital, the [wine] in the private bank, represent more than 50% of our total loan portfolio. And as we have seen historically, those have performed exceptionally well in terms of credit quality. I think that's something to remind ourselves about the risk profile has been improving over the years.

That's very helpful. Thank you guys.

Joe Morford, RBC Capital Markets

Good afternoon. Just a couple follow-ups. I guess first, I'd be curious about the increases in the off-balance sheet sweep money market funds? Was that just kind of a greater focus internally or is this perhaps the beginning of any kind of broader trend on the client behavior?

Yes Joe, this is Greg. It's mainly just a product that we had in place and it's set up mainly for early-stage companies and so this is one of those things we set up over the last 18 months, as we've had this big onslaught of deposits over the last couple of years. We were looking for ways to kind of balance that on and off balance sheet number and the off-balance sheet sweep is one way to do that.

We did that very successfully, as you see in the numbers and it's grown dramatically. So I'd say it's more of a product guidance that we have as opposed to any shift in behavior of clients.

Would you then think that we will probably see more regular growth on a quarterly basis going forward in this product then?

You are going to see -- I think you're going to see growth in that product. The question will be, and I think it's a question we are asking ourselves, which is how do we want to look at that balance of early-stage companies and how much is appropriate to be on the balance sheet and how much is appropriate to be off the balance sheet.

I think you will see, again, more of it come on. But it may take a quarter or two to see that behavior change.

Okay. And then the other -- just a follow up on the UK. I was just curious, and I recognize it's probably early, but just what impact did Brexit have on business activity in general among startups and loan demand and things like that?

Joe this is Greg. I'll start. One way to look at it is with the FX exchange and what was happening.

You had a little of a slowdown in April, May actually had a pretty big drop off and then toward the end of June once the announcement was made, we had a lot of activity in the end of the quarter. How does that play out? I think given the volatility, again, our outlook is we are seeing decent numbers in the second half of the year. But it was interesting to watch the actual transaction volume.

There was definitely a -- as it got closer, a hesitation in deal activity that we saw and now that it's over it's amazing how fast markets recovered with the exception of the 10 year treasury along with interest rates; just the activity in the UK. We spent a lot of time talking to our team there and our clients, and what's great about our client base is they are very resilient. They looked at this, they saw it happen, they digested it very quickly and now they are executing on how does this impact them. But in the end we don't think it will be a dramatic impact.

Okay. That's helpful. Thank you, Greg.

Ken Zerbe, Morgan Stanley

Question on fees -- the reduction in your guidance -- I know it's generally small but the core fee income growth has kind of been a really big positive for the story. Is the reduction in your outlook for core fee income solely a reflection of what happened this quarter? Or is there something more fundamentally changed going forward?

So Ken, this is Greg. I'll start. Mike may want to add something.

When you look at the quarter, part of that was driven by what happened in Q2. We did see a slowdown in spend of cards because people are more focused on lowering their burn, right -- number one. So that's part of it and that will trickle through a little bit of Q3 and Q4.

That being said, on a positive side you can look at card revenue, you can look at the penetration of cards that is still happening. If you can look at the deals we are winning in either virtual cards or card solutions, you can look at what we've just announced with First Data and that will bode well for the second half of the year but really into 2017. We still expect growth in the second half of the year from card revenue.

The only thing I would add is also bear in mind the off-balance sheet funds that we have, given the tempering and the fundraising and investing levels, that's also bringing down kind of our outlook or estimate for those off-balance sheet funds. Which, as you know, we capture a fee on that as well. Some of that core fee income adjusting downward relates to that.

And last question -- on page 18, you obviously break out the private equity/ venture capital between above $20 million and below $20 million? Can you break out private equity capital call versus VC capital calls?

Just overall, on the basis we're probably about 80/20 mix, somewhere around there. About 80% being PE and 20% VC. On an overall total loan portfolio related to the private equity/venture capital portfolio.

Did VC capital calls actually decline in the quarter?

It's Marc. I'd have to go look at that to be sure. I don't believe they declined.

I think they were, relatively speaking, stable with Q1. But if we were to compare it to 2015 utilization on the venture capital side, reflective of the slower pace of venture deployment would have been down.

Certainly the dominance of the growth in that category would certainly come from the private equity this quarter and even the last couple quarters.

Okay. Perfect. Thank you.

Ebrahim Poonawala, Bank of America Merrill Lynch

Just a quick question I think for Marc, in terms of the sponsor-led buyout book. If I caught you correctly I think you said you had about 50% in reserve set aside those three nonaccrual loans. I'm just trying to -- if you could remind us in terms of -- is this portfolio generally a higher loss content portfolio?

Or you got to look at it on one loan now basis -- sort of give a sense of, how should we think about the loss content on this book if you have this one off nonaccruals?

Right. It's a good question and to back up a little bit, we have had in the entire history we have been doing this, a total of four nonperforming loans and zero loss experience thus far. And so it remains to be seen and in the absence of that, we rely to some degree on broader industry data to get a sense for loss content.

But then we look candidly, much more specifically at the individual loans and individual situations. And we set reserves appropriate to what we think the probability of various outcomes would be. And then, as I've said before, these turnarounds do take a while. And thus, the reserves associated with them, if they are going to turn out good, take a while to get to a place where you feel confident enough about the outcome to consider a release.

Got it. That's all I had. Thank you.

Aaron Deer, Sandler O'Neill & Partners

Most of my questions have been addressed. One on the guidance for loan growth. I'm just curious, historically you guys have had a fair level of paydowns, particularly in the capital call lines early in the year.

Last year seemed to drag into more toward the middle of the year. How does -- is that seasonal factor not really evident this year, or how does that play into the guidance that you've laid out?

So, it's Marc again. I think what we saw this year is reflective of the evolution of that portfolio. Where we historically would have seen, to your point, more paydowns in the first quarter as the portfolio has become more heavily weighted towards private equity funds, the private equity funds tend to borrow larger and borrow longer.

And it's the combination of those two things, that again that becoming the dominant part of the portfolio, that I think is changing the historical pattern to one where we may not see that same first quarter decline that we would have seen in prior years.

Okay. That's helpful. And then on the tax rate, it looks like there were a couple of items that were referenced in the text of the press release.

But no values that I saw anyway. Were those kind of offsetting? Is that why we saw what appeared to be a fairly normal effective tax rate or are just too small they didn't show up?

They are just too small, Aaron.

Okay. Very good. Thank you for taking my questions.

We have no further questions at this time. I would like to turn the call back over to CEO Greg Becker. Please go ahead.

Great. Thank you. Just want to thank everyone for joining us today. As you can hear from our remarks, although our innovation market is still a little bit soft, the good news is there's more clarity; we feel there's more clarity than there was in the first quarter. That gives us more confidence in what our outlook is. That being said, again, as we tried to reference and I think it's really important -- we are making investments not just for the short-term but for the long-term and we believe that's really going to create the long-term growth for us and develop kind of a broader product set for our clients.

We feel good about where we are, we feel good about the clarity, and just want to thank all of our clients for their trust in us and also thank all of our employees for their incredible work. Thank you and have a great day.

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