SVB Financial's (SIVB) CEO Greg Becker on Q2 2016 Results - Earnings Call Transcript

| About: SVB Financial (SIVB)

SVB Financial Group (NASDAQ:SIVB)

Q2 2016 Earnings Conference Call

July 21, 2016 17:00 ET

Executives

Meghan O'Leary - Director, IR

Greg Becker - President & CEO

Michael Descheneaux - CFO

Marc Cadieux - Chief Credit Officer

Analysts

Jared Shaw - Wells Fargo

Brett Rabatin - Piper Jaffray

John Pancari - Evercore

Chris McGratty - KBW

Steven Alexopoulos - JPMorgan

Joe Morford - RBC Capital

Ken Zerbe - Morgan Stanley

Ebrahim Poonawalla - Bank of America Merrill Lynch

Aaron Deer - Sandler O'Neill & Partners

Operator

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. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn now the call over to Meghan O'Leary, please go ahead.

Meghan O'Leary

Thank you Anna, and thanks everyone for joining us today. Our President and CEO, Greg Becker; and CFO, Mike Descheneaux are here to talk about our second quarter 2016 financial results, and they 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'll be making forward-looking statements during this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information which applies equally to statements made in this call. In addition, some of our discussion may include references to non-GAAP financial measures, information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release. We'll limit the call, including Q&A, to an hour.

And with that, I will turn the call over to Greg Becker.

Greg Becker

Thank you, Meghan and thanks all of you for joining us today. We delivered another solid quarter despite global market volatility in quite exit markets with earnings per share of $1.78 and net income of $93 million. Our results were marked by continued strong long growth, improved PEVC related 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 in vanishing prospects for a rate increase. This weighs on the markets overall creating uncertainty and restraining investment and exits. Closer to the innovation space, the venture capital and technology markets remain mixed in Q2 although there were some bright spots. VC fund raising was lower in Q2 but still strong with limited partners committing near $9 billion to larger funds, and high performing firms with established general partners. We view this as good news for the quarters to come.

VC investment will also help the overall. But the 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 valuations and uncertainty in the markets continue to weigh on IPO prospects. There were 12 venture-backed IPO in the U.S. 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 of 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 flows, some stress with early-stage loans, and lower warrant gains. Total client funds which include on-balance sheet deposits and off-balance sheet client fund investments have decreased. Deposits decreased primarily due more challenging fund raising 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 flows – outflows year-to-date although that activity has been good for loan balances and credit quality. Trade-offs [ph] 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're optimistic? So we have some near-term challenges that could persist for a few more quarters but we believe they are manageable. We were seeing many positive signs and opportunities despite these challenges. So I want to tell you why we're 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're 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 fund raising an exit markets. Secondly, we're seeing signs of potential pick up in M&A activity with growth -- 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've seen evidence of this in greater openness among these clients to conversations about debt financing. And third, although the IPO market is barely moving we've seen a marked increase in the pipeline for secondary public offerings among our clients. The number of active fillings 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 remained strong, we on-boarded more than 1,100 new corporate clients in the second quarter including 85 new clients to our partnership which we announced just last quarter. We're investing in people to take advantage of incremental growth and opportunities and promising markets here in the U.S. which in the second quarter included hiring in Silicon Valley, Los Angelis, Boston 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. We also established our presence in Dublin, Ireland earlier this year.

The third area I'm 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, cross borders and platforms in the scale this capability as they grow. Our pipeline E-commerce opportunities has grown substantially since this announcement. We continue to work with a variety of partners including Master Card, to create flexible scalable payment solutions that not only make it easy for all our clients to run their business, but allows us to provide complex Payment backbone solutions to our Fintech client as part of our banking infrastructure, as a service offering.

And although we're always building for the future, we've seen significant benefits from our investment today but it's that we expect will grow overtime. For example, despite a slight decrease in the quarter, year-to-date we've 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 relationships and the client experience, as well as market volatility. Fourth and finally, we continue to expand our platform reaching capabilities to support our long-term growth within the innovation economy.

We continue to focus on pride -- providing the best experience possible to our private bank clients. This includes offering enhanced products and advice, customized to the needs of innovators, executive, entrepreneurs and influencers in an 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 identify appropriate partnerships domestically and internationally. 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 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, be 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'll turn the call over to our CFO, Mike Descheneaux.

Michael Descheneaux

Thanks, 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 20s to the mid-20s.

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 and 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 slowed growth in our off-balance-sheet 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 slows, our client funds franchise remained 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 that 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 $1.2 million decline in loan fees driven by lower fees from early loan pay-offs 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 security balances decreased by approximately $1.6 billion to $21.8 billion, due to the sale of $1 billion of U.S. Treasury Securities to fund our loan growth and $600 million related to pay-downs 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 remained 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 continued 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 non-accrual 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 non-accrual 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 an 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 non-performing loans increased by $9.5 million to $59.9 million, reflecting the $15.4 million in reserves for new non-performing loans, which I mentioned earlier, and which was partially offset by charge-offs of previously reserved non-accrual 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 in 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. Non-performing allowance 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 non-accrual 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 charged us $5.5 million. Subsequent to quarter end and as a result not reflected in the non-performing loan amount as of June 30, we also received repayment of a $9.6 million non-performing 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 once and from investment securities. I will discuss certain non-GAAP measures in my comments and 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 interests 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 off non-controlling interest of $21.6 million compared to net losses of $2 million in the prior quarter. This reflects gains of approximately $12.4 million from the sale of $1 billion in U.S. 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 improvements in certain public company 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 tempered gains on warrant on 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 decrease in foreign exchange fees. As a reminder core fee income includes foreign exchange, credit cards, better credits, deposit service charges, lending related fees and client investment fees.

Foreign exchange income was $24.1 million, down $2.9 million due to onetime reclassification in the first quarter, 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 interchanged volume related to lower spending on our business credit cards by some clients as a result of the slower pace of our early stage investments 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 the mid-20s to the low-20s, the nominal after-tax dollar difference is 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 our lower average spend by our business credit card users, lower foreign exchange transaction sizes and lower off balance sheet climb investment sizes, all somewhat impacted by the overarching effects of the current VC funding and exit markets. If the investment environments, exit markets, broader economy improve faster than expected, we could see upside moving onto 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 in 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 fees were $6.5 million higher, primarily related to ongoing IT projects as well as regulatory compliance initiatives. Finally, we also saw $2 million decrease in business development and travel expense due to a seasonally higher Q1 expense.

Turning to capital; our bank level tier I leverage ratio increased by 37 basis points to 7.56% and our holding company level tier I 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 increase modestly at the holding company level. In closing, we delivered a solid quarter in our businesses performing well overall with healthy activity among our clients and stable credit quality. We view the ongoing recalibration evaluation in 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 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.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question is from Jared Shaw from Wells Fargo, please go ahead.

Jared Shaw

Hi, good afternoon. Maybe just first on the expenses, you have the $3.6 million increase in consulting for regulatory compliance and issues. Can you give us more detail into what that is working on and what is 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 it more of a software and systems program?

Michael Descheneaux

So it is a little bit of mix of everything Jack, I mean you have obviously got some infrastructure builds to move obviously expand quite a lot of growth the last couple of years. Certainly as we move towards that sea car level of $50 billion in assets and some of the preparations around there. And even these other areas in risk and BSA and just all across the board.

Jared Shaw

Okay. And once those are implemented though that is going to be offset by additional hires or is it more implementing the systems through the professional services line?

Greg Becker

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

Jared Shaw

Okay, great, thanks. On the credit side with the addition of that new sponsor led by our loan into NPAs, could you give us an update on what the status is of the other sponsor-led loans had migrated into our NPA status in earlier quarters and what do you think the timeline and resolution could be on this one that's in there?

Michael Descheneaux

This is Mike here, on 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 addition, candidly it is still a bit of a fluid situation and so unable to really say at this point as was the case with the prior too, just how that was going to turnout.

Jared Shaw

Okay, thanks. And then just finally with the news 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?

Greg Becker

Yes Jared, this is Greg. So I guess there is two ways to think about Brexit; one is on a direct basis and then there is 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 overtime, given what's happened it would be easier for us to go directly, branch directly from the U.S. So again, don't expect a lot of impact on a direct basis. If we were to go into Europe again what we talked about in the past is that it may be looking at branching into Germany maybe branching into the Nordics but again we don't believe Brexit really has any impact on that. On a macro basis obviously disappointing part was with the impact of the you know longer term rates and the likelihood were being not likely scenario of rate increases later this year, so that that the macro impact but on truly on micro direct basis we really don't expect any real impact.

Jared Shaw

Thank you.

Operator

And our next question is from Brett Rabatin from Piper Jaffray. Please go ahead.

Brett Rabatin

Hi, good afternoon. Wanted to -- I guess, first I ask on the on the deposit the decline wasn't a big surprise but you're essentially saying kind of missing all digit on an average basis for this year. What's sort of changing the dynamic going forward that you experience in 2Q or how do you see that changing over the back half the year?

Greg Becker

Yes, this is Greg. Brett, I'll start and Mike may want to add something. When you look at a second half year right there right now again as we look at it the addition of client growth that we've had which is great, combined what we believe a market that's going to continue to be unsettled, little bit soft in fund raising, it's going to really cost deposits to kind of be flat for the second half 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 the M&A activity, if you see our clients being acquired -- if you see clients acquiring and if fund raising 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 a color for the second half the year.

Brett Rabatin

Okay. And then I guess the other thing I was curious about was 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 that you're saying is that VC fund raising that lower sort of concerns you more than early-stage software or is it kind of be your bigger concern about kind of the near-term?

Greg Becker

This is how I would describe this, I think you're accurate. When we gave guidance in the second quarter, we really tried to look at the provision for the balance of the year and the outlook but we had a lot of cab [ph], we said it could be worse than this depending upon how the market plays out. How I look at what happened in the second quarter is that there was a lot more clarity and that's why we're more confident in the second half year, maybe volatile in the quarter-to-quarter basis but the outlook we gave -- we feel good about it and what drives that is what we -- 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, they've put themselves up for sale, they 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 15 it was around 10. So again, feel pretty good about where we are from an outlook perspective, and its more clarity which is where we are right now.

Brett Rabatin

Great, thank. Good point, thanks for the color.

Operator

And our next question is from John Pancari from Evercore. Please go ahead.

John Pancari

Good afternoon. Back on the credit topic, I just want to understand a little more around the drivers of the deterioration you're seeing in the mid and later-stage as well as sponsored buyout portfolios. I mean, I get the early-stage deterioration, even the pullback in inflows from VPs and private equity. I get how it can impact that part of the book. Can you give me -- is there any commonality between the deterioration you're seeing in the sponsored buyout credit and then maybe in the later stage, just to understand that better?

Greg Becker

John, this is Greg. I'll start and Marc will want to add some color. There is really kind of the three buckets; so one is the early stage, which we've talked a lot about and I don't think there needs to be a lot more discussion around that. The second one is the mid stage, and it's the buyouts. And then 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. What you have to remember is you go back -- we've been in this business for 7 to 8 years, and when you look at that, you're going to have one or two credits over time in a given year that actually do end up becoming non-performing. What Marc has said repeatedly is that, although they may go non-performing, because these are more substantial companies with stronger revenue, their cash flow may just be a little bit off. Once that happens, it takes a little bit longer for them to recover and get back on the right track. As we said with the two credits already mentioned, they're tracking, they're performing, in a solid way but they're just not there far enough for us to kind of take them back in becoming performing loans, so no real pattern that we would see.

Marc Cadieux

Hey, it's Marc. The only thing that I would add to that is that there is -- I think, part of your question, there is no correlation between what's caused distress in the early-stage portfolio segment versus what's happened in the sponsor-led buyout segment. In particular to the couple of NPLs that we have in 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 that I would just reiterate is that we are reiterating our guidance on net charge-offs for the balance of the year.

John Pancari

Okay, and then related to that -- of that, this will help with some of the clarity around that. The year-over-year increase in NPAs, the 23% year-over-year increase that we're looking at right now, I know you have a pay-off you've flagged, but obviously there can be movements in a quarter. Of that 23% year-over-year increase in NPAs, how much of that was early stage?

Marc Cadieux

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 non-performing loans. I think its $82 million in the aggregate. And that really was and remains the driver. It was the driver for why it increased year-over-year, or period-over-period, and why NPLs remain elevated relative to 2015.

Michael Descheneaux

And maybe the only thing I would add to that is those three that Marc in mentioning in the sponsor-led buyout, the roughly $80 million or so, we have roughly, not quite but roughly around, half of that has been set aside for reserves.

John Pancari

Okay, got it, Mike. And then 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 bit more? Would it be primarily coming from additional securities portfolio sales or how do you view that? Thanks.

Michael Descheneaux

Yes, John. So just on a quarterly basis, we expect to see maturity of our existing investment securities portfolio somewhere between $700 million and $900 million. And going back to Q2 and even in Q1, we just had such extraordinary loan growth in there, so we had to accelerate or sell some of the securities in order to fund the loan growth. So right now, again, if we're more or less averaging below that $700 million to $900 million, then I don't anticipate having to sell any securities. But again, if we happen to be pleasantly surprised by longer than expected loan growth, then yes, we would -- that one option would be to sell. We also do have borrowing capabilities as well to pledge our investment securities as well. So we just look at whether or not the funding shortfall is more permanent or more temporary before we make that call in order to sell securities.

John Pancari

Got it, all right. Thanks Mike.

Operator

And we have a question from Chris McGratty from KBW. Please go ahead.

Chris McGratty

Good afternoon, thanks for taking the question. If I could ask the credit question a little bit differently, the charge-off guidance of 30 to 50, it sounds like, is unchanged, and I think, in June, Greg, you said it was kind of high end to that and that's what we were tracking. If loan growth remains a little bit stronger than we thought relative to the last quarter, should we be thinking about a provision, maybe not like the first quarter but maybe more like the second quarter, if not a little higher.

Greg Becker

Yes, I'll start. This is Greg and then, maybe Marc may want to add. If you look at the provision in the second quarter, roughly $10 million of that related to loan growth and that's because, again, we had such a strong -- both average and period and loan growth. So if that continued at that pace, more than likely the provision would be on the higher side because you're supporting that higher loan growth. So yes, it probably wouldn't 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'd see a higher provision.

Chris McGratty

Okay. And then the charge-offs still kind of over-run based on what you see today?

Greg Becker

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

Marc Cadieux

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

Chris McGratty

Got it. Thanks a lot.

Operator

Our next question is from Steven Alexopoulos from JPMorgan. Please go ahead.

Steven Alexopoulos

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 maybe how did that change quarter-over-quarter?

Marc Cadieux

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

Steven Alexopoulos

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

Marc Cadieux

So as Greg mentioned, we did see quite strong growth or acquisition of new clients. We had over 1,000 new clients coming on. So they're still bringing in a healthy amount of flow in there, and maybe it's probably a little smaller sizes than we've seen in the past, given the PE/VC funding environment. So it's -- there's certainly a little bit of slowdown in that area and I think that the rest of it would probably be coming from the growth in corporate finance stage that's affecting some of the deposit levels.

Michael Descheneaux

Yes, and just to add on to that, Steve, again, what we're seeing is where maybe a Series B round was going to get $20 million to $25 million of round, that's down to $15 million to $20 million. 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.

Steven Alexopoulos

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 calls below $20 million, which are typically VC. So you're saying fundraising is down but investing is up. So you're saying VC is used to deploy existing capital that's already been raised but having a tough time raising new capital?

Michael Descheneaux

So fundraising is -- was basically down a little bit but not much, and it depends upon, again, what numbers you look at. We're using MBCA numbers and it was roughly $12 billion in the first quarter and roughly $9 billion in the second quarter. But net-net still a very strong fundraising cycle, so I guess that's one way to look at it. The pitch book had even higher numbers; I think $13 billion in the second quarter. My view is that 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.

Steven Alexopoulos

Got you. And then just one final one for Marc, just give a little color on the reserve decline on performing loans, which you cite in the release?

Marc Cadieux

So that decline was driven by the source of the loan growth, with the vast majority of it, I think it was 70% plus or minus, having come from the high-quality capital call borrowings where our credit quality experience has been very good. That change in portfolio mix is the driver of the 2 or 3 basis points decline.

Greg Becker

As we have talked about this before, as you look at the composition of our loan portfolio, today the Private Equity Venture Capital, the wine and the private bank represent 50% of our total loan portfolio and if we see historically those that perform exceptionally well in terms of credit quality, so yes that's something to remind ourselves about the risk profile has actually been improving over the years.

Steven Alexopoulos

That's very helpful, thanks guys.

Operator

And we have a question from Joe Morford from RBC Capital Markets. Please go ahead.

Joe Morford

Thanks, good afternoon, just a couple of follow-ups. I guess first curious about the increases in the off balance sheet, sweep money market funds, is that just kind of a greater focus internally or there is this perhaps the beginning of any kind of broader trends type behavior?

Greg Becker

Yes, Joe this is Greg. It is mainly just a product that we had in place and it is setup mainly for early-staged companies and so this is one of those things setup over the last 18 months as we have this big onslaught of deposits over the last couple of years. We were looking at ways to kind of balance that on and off balance sheet numbers and the off balance sheet sweep wanted us to do that. We did that very successfully as you see in numbers and it has grown dramatically so I would say it's more of a product guidance that we have as opposed to any shift in behavior of clients.

Joe Morford

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

Greg Becker

You will see growth in that product and the question will be, I think the question we are asking ourselves which is how do we want to look at the balance of early stage companies and how much is appropriate to be on the balance sheet and how much of it is appropriate to be off the balance sheet. I think you will see more of it come on but it may take a quarter or two to see that behavior change.

Joe Morford

Okay. And then the other just a follow up on the UK is curious and I recognize it is probably early but just what kind of impact did Brexit have on business activity in general amongst startups and you know loan demand and things like that?

Greg Becker

Joe, this is Greg, I will start and one way to look at it is what the FX exchange of what was happening. You had a little bit of a slowdown in April. May actually had a pretty big drop off and then towards the end of June, once the announcement was made, we had a lot of activity in the end of the quarter. You know how does that play out? You know I think given the volatility again our outlook is we are going to see decent numbers in second half of the year. But it was interesting to watch the actually transaction volume. There was definitely a hesitation of 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 and along with interest rates and just the activity in the UK. We spent a lot of time talking to our team of clients and what's great about our client base is that they are very resilient. They look at this, they saw it happen, they adjusted it very quickly and now they are executing on how this will impact them but in the end we don't think it will be a dramatic impact.

Joe Morford

Okay, that's helpful. Thanks, Greg.

Operator

And we have a question from Ken Zerbe from Morgan Stanley. Please go ahead.

Ken Zerbe

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

Greg Becker

Ken, this is Greg, I will start and Mike may want to add some things. When you look at the quarter, part of it 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 rate 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 the card revenue, you can look at the penetration of cards that is still happening. You can look at the deals that were winning at either virtual card or other card solutions. You can look at what we just announced with first data and that will bode well for the second half of the year but really for the 2017, we still expect growth in the second half of the year of our card revenue.

Michael Descheneaux

And the only thing I will add is also mind the off balance sheet funds that we had given the tempering and the fund raising and investing levels, that is also bringing down our outlook, kind of our estimates for those off balance sheet funds which as you know we capture a fee on that as well too so certainly some of that core fee income adjusting downwards relates to that.

Ken Zerbe

Got it, okay. And then last question, on Page 18, you obviously break out the private equity venture capital between the $20 million, above $20 million and below $20 million, can you break out private equity capital cost versus capital cost?

Michael Descheneaux

Just on an overall basis, we are probably somewhere about an 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.

Ken Zerbe

Did VC capital calls virtually decline in the quarter?

Marc Cadieux

It's Marc. I don't -- I would have to go look at it to be sure but I don't believe they decline, I think they were relatively speaking stable with Q1 but if we were to compare to 2015 utilization on the venture capital side sort of reflective of the slower pace of venture deployment, and it would have been down.

Michael Descheneaux

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

Ken Zerbe

Okay. Thank you.

Operator

And our next question is from Ebrahim Poonawalla from Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawalla

Hi guys, just a quick question for Marc in terms of the sponsor led buyout books, if I got you correctly I think you said you had about 50% in reserve set aside those three non-accrual loans. I am just thinking if you can remind us in terms of, is this portfolio generally hire lost content portfolio or you have got to look at it on one loan basis, just sort of give us sense of how should we think about the lost content on this book if you actually have these one off non-accruals?

Marc Cadieux

Right, so 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 4 not performing loans and 0 lost 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 lost content. But then we look 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 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.

Ebrahim Poonawalla

Got it, that's all I had, thank you.

Operator

And we have a question from Aaron Deer from Sandler O'Neill and Partners. Please go ahead.

Aaron Deer

Most of my questions have been addressed but one on the guidance for loan growth, I'm just curious historically you guys have had a fair level pay downs trickle in the capital call lines early in the year, last year it seemed to kind of drag down into the middle of the year, how does, is that seasonal factor, not really evidence this year or how does that play into the guidance which you have laid out?

Marc Cadieux

Aaron, it's Marc again, and 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 pay downs 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 and 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.

Aaron Deer

Okay, that's helpful. And then on the tax rate, I believe there were a couple of items that were referenced in the text of the press release, but no values of that I saw anyway, were those kind offsetting, is that why we saw what appeared to be a fairly normal effective tax or do they just too small that they'd -- they'd didn't show up?

Greg Becker

They're just too small Aaron.

Aaron Deer

Okay. Very good thanks for taking my question.

Operator

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

Greg Becker

Great, thank you. Just want to thank everyone for joining us today. As you can hear from our remarks, although I did -- our innovation market is still a little bit soft. The good news there is we feel there is a lot more clarity than working in the first quarter and that gives us kind of a more confident and in kind of what our outlook is. That being said, again as we try 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 a long-term growth for us and develop kind of a broader product set for our client. So we are talking about where we are and we talked about the clarity and just want to thank all our clients for their trust in us. And also thank all our employees for their incredible work. Thanks, and have a great day.

Operator

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

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