SVB Financial Group
Q3 2015 Earnings Call Transcript

Published: 23 Oct 2015

[Operator:]

Hello and welcome to the SVB Financial Group Q3 2015 Earnings Call. My name is Miesha [ph], I will be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Meghan O'Leary, Director of Investor Relations. Meghan O'Leary, you may begin.

[Meghan O'Leary:]

Thank you, Miesha [ph], and thanks everyone for joining us today. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux, are here to talk about our third quarter 2015 results. As usual, they'll be joined by other members of management for the Q&A. Our current earnings release is available on the Investor Relations section of our website at svb.com. We'll be making forward-looking statements during this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information, which applies equally to statements made in this call. In addition, some of our discussion today 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 everyone for joining us today. We had a solid third quarter, delivering earnings per share of $1.57 and net income of $81.7 million. Our core earnings engine remained strong and we are seeing healthy activity across all client groups. Highlights of the third quarter included healthy average loan growth of $596 million or 4.2%, strong average client funds growth of $6.5 billion or 9%, solid core fee income growth of 3.5%, and stable credit quality overall. And although the exit markets were tempered, especially IPOs, we had very healthy net gains at $23.4 million on warrants and investment securities net of controlling interest. Our results reflect continued positive conditions for our innovation clients, despite certain broader market issues that have emerged in the last few months, market volatility has increased, there is concern about Chinese growth rate, and the Fed's direction on interest rates is uncertain. In spite of these issues, our clients are doing well and we see plenty of opportunity for growth and expansion ahead. Given that we are approaching the end of the year, I'm going to focus primarily on 2016, our priorities, a preview of financial expectations, and our view on the implications of some of the market dynamics we're seeing. We have three key priorities for 2016, each of which continues to -- continues or accelerates an initiative we currently have in place designed to maintain our leadership in the innovation space. First, continuing to enhance our strong brand and reputation. This means ongoing improvement of our client experience through investment in our digital platform. We need to operate the way our clients do and continue to make it easy to work with us. It also means differentiating ourselves even more through our products and services, but mainly through the value-add of knowledge networks that SVB can uniquely provide. Second, continuing to invest in our business for the long-term growth. This means developing our existing team and hiring expertise when we need it, so we can have the right team in place to focus on delivering better-than-peer growth. Also means ensuring we have the systems, solutions and infrastructure to support that growth in a scalable way. Third, maintaining our strong risk management. This means ensuring credit remained stable and healthy overall, even if we do experience a slowdown. It also means continuing to enhance and invest in risk management and compliance to meet increasing regulatory requirements, especially as we approach $50 billion of assets. We are confident in our ability to deliver on these priorities in 2016, in part because we have been focusing on investing in them for some time and are making good progress. Now let's look at our preliminary outlook for 2016. And please keep this in mind. In a departure from our usual practice, we are not basing this outlook on the latest forward curve. Given the unusual level of uncertainty over whether the rate increases will actually materialize in 2016, we believe that it's prudent at this time to assume no market interest rate increases between now and the end of 2016. Despite this assumption on our part, we expect solid performance. First, average loan growth in the low double digits. That would put us in the $1.5 billion to $2 billion growth rate that we talked about as reasonable from an annual pace perspective given our emphasis on smart growth and a competitive low rate environment. Second, average deposit growth in the low double digits. This assumes continued robust new client acquisition and reasonably healthy funding trends for our clients with continued success in our off-balance sheet initiatives. Third, net interest income growth in the low double digits. If rates did rise consistent with the forward curve, it would increase our net interest income outlook significantly to the low 20% range. Fourth, stable credit quality overall. Specifically, we expect full year net charge-offs between 30 and 50 basis points of average total gross loans, consistent with our expectations for 2015. Our fifth metric is core fee income, which we expect to grow in the mid-teens. This would largely be driven by foreign exchange, credit cards and payments. And if rates did rise consistent with the forward curve, that would increase our core fee income growth outlook to the low 20% range due to higher income from our client investment funds. And finally, non-interest expense growth net of NCI in the high single digits. And this includes the impact of the investments I mentioned in our priorities. Clearly we're expecting good things in 2016 even without help from interest rates and assuming no significant deterioration of the U.S. or global economies in our markets. Now let's talk about the backdrop. Although we are positive about 2016, there are a few areas we're watching closely. These include valuations, VC investment levels, and exits. Our view has been consistent. There's frothiness in the markets to be sure, but we do not believe we are in a bubble. So what do we think is happening? First, the best companies are getting more attention. They're raising larger rounds of equity and are staying private longer. This, more than anything, is what's behind the higher valuations, and one of the reasons VC investment is at such high levels, because they've been able to access healthy equity funding, these highly valued companies general have low leverage. In addition, many of them have significant customer and revenue traction, and many are disrupting industries and creating significant new market opportunities. Of course, some companies will prove to be overvalued and some will fail. Others will grow into their valuations over time, even if they're somewhat ahead of themselves at the moment. And some will become breakout companies. Second, despite solid overall new company formation, backed by a growing group of sources for startup capital, there are signs that fewer venture capital rounds are being raised. Although we haven't seen a trend yet, at some point, companies with more challenging business models, less differentiation or poor traction will have more difficulty raising funds. This is more likely given some of the market pullback we've seen. But let's be clear, this is the venture capital innovation model

[Mike Descheneaux:]

Thank you, Greg, and good afternoon everyone. We had a solid quarter marked by healthy balance sheet growth, strong core fee income, and stable credit quality overall. I would like to highlight a few items in my comments today, which I will cover in more detail shortly. First, healthy loan growth. Second, substantial growth in total client funds. Third, higher net interest income despite a lower net interest margin. Fourth, credit quality, which was in line with our expectations. Fifth, higher core fee income with continuing momentum in foreign exchange and credit cards and payments. And finally, lower expenses due primarily to lower incentive compensation. Let us start with loans. Average loans grew by $596 million or 4.2% to $14.9 billion. This growth was driven primarily by private equity capital call loans, although we saw growth across most client segments. Period-end loans grew by $1.1 billion to $15.3 billion, primarily due to growth in private equity capital call loans. Although we continue to see ample opportunity to lend, we remain focused on high quality, smart loan growth, with appropriate pricing, size and structure relative to our risk and cost of capital. In this low rate and competitive environment, they have all been pressured. Due to a moderately better than expected pace of loan growth year to date, we are raising our full year 2015 outlook from the mid-20s to the high-20s, although we expect to be near the low end of that range. Now let us move to total client funds, that is combined on-balance sheet deposits and off-balance sheet client investment funds. Average total client funds grew by $6.5 billion or 9% to $79.4 billion, and period-end total client funds grew by $4.9 billion or 6.5% to just above $80 billion for the first time in our history. This growth was due to continued funding for our venture-backed clients, healthy inflows from our private equity and venture capital clients, and continued new client acquisition. Average off-balance sheet client investment fund balances grew by $4.1 billion or 11% to $42 billion and accounted for 63% of total average client funds growth in the quarter. Period-end client investment funds grew by $3.5 billion or 8.7% to $43.4 billion and accounted for 71% of period-end total client funds growth. Average on-balance sheet deposits grew by $2.4 billion or 7% to $37.4 billion, while period-end deposits grew by $1.4 billion or 4% to $37 billion. We are maintaining our full year 2015 deposit outlook of growth in the high 20s and expect to finish the year near the low end of that range. Turning to net interest income and the net interest margin. Net interest income increased by $10.8 million or 4.4% to $255 million in the third quarter. This increase was due primarily to higher loan and investment securities balances. Higher average loan balances, plus one additional beta [ph] in the quarter, contributed $7.7 million in interest income. Although loan yields decreased by 3 basis points due to loan mix and lower prepayment fees. Average fixed income securities balances increased by $1.5 billion or 7% to $23 billion due to strong deposit growth, although yields on the portfolio decreased by 6 basis points to 1.54%. Yields were affected by a $1.8 million increase in premium amortization expense related to increased prepayments on mortgage-backed securities due to lower market rates. New purchases of $2.2 billion during the quarter consisted of U.S. treasury and Ginnie Mae securities, with an average blended yield of 1.5%. Portfolio duration remained stable at 2.7 years, compared to 2.8 years in the second quarter. Our net interest margin decreased by 8 basis points to 2.5%, primarily due to strong deposit growth, as well as lower loan and investment yields. For the full year 2015, we expect our net interest income to be at the low end of our outlook of the high teens and net interest margin to be at the high end of our range of 2.4% to 2.6%. Looking forward, if our investment balances continued to be bolstered by strong deposit flows and rates remain low, all things being equal, we would expect continued pressure on our net interest margin. If rates rise, that would certainly help our net interest margin and net interest income. Now let us move to credit quality. Our credit quality remained stable overall and generally within our expectations. Here are the highlights. Net charge-offs of $28.5 million, primarily due to one loan for which we had previously recorded significant reserves, an increase in non-performing loans due primarily to two newly-impaired loans, although non-performing loans are still low at $115 million or 75 basis points of total gross loans, and a higher provision due to period-end loan growth and specific reserves related to the additions to non-performing loans. Now, the details. Provision for loan losses was $33.4 million, compared to $26.5 million in the second quarter. This figure reflects $10.4 million related to loan growth, $20.1 million in specific reserves for newly-impaired loans, and $4.6 million related to charge-offs not previously reserved for. Net charge-offs were $28.5 million, reflecting gross charge-offs of $29.1 million, primarily related to one loan of $21.7 million partially impaired in the fourth quarter of 2014, for which we had prior reserves of $17.9 million. To keep things in perspective, year-to-date net charge-offs were 31 basis points, compared to 39 basis points for the same period in 2014. Non-performing loans increased by $14.7 million to $115.5 million, primarily due to the addition of two sponsored buyout loans totaling $41.3 million. This addition was partially offset by the $21.7 million charge-off previously mentioned. Overall our loan portfolio is performing within what we consider normal ranges. We saw no material change in criticized balances during the quarter, and to date, we are not seeing a discernible impact from recent market volatility. Non-performing loans also remained well within normal ranges. As we indicated last quarter, we expect non-performing loans to remain at their current levels for several quarters given the nature of sponsored buyout lending. We expect net charge-offs as a percentage of total gross loans to be at the low end of our full year 2015 outlook range of 30 to 50 basis points, and we are reaffirming our full year outlook for all other credit metrics. Now let us move non-interest income. I will refer to several non-GAAP measures in my discussion, and we encourage you to refer to the non-GAAP reconciliations in our press release for further details. GAAP non-interest income was $108.5 million in the third quarter, compared to $126.3 million in the second quarter. Non-GAAP non-interest income net of non-controlling interest was $102.1 million, compared to $117.7 million in the second quarter. The primary differences between third quarter and second quarter non-GAAP non-interest income were lower gains on warrants and lower, though still healthy, PE and VC related investment securities gains, offset somewhat by higher core fee income. We had warrant gains of $10.7 million, compared to $23.6 million in the second quarter, driven primarily by valuation updates and, to a lesser extent, by M&A activity. It is important to point out that warrant gains in the second quarter were elevated due to the $13.9 million gain from the Fitbit [ph] IPO. Further contributing to the decline is that there were very few IPOs in the third quarter, and as a result, no notable gains on exercises. We have private equity and venture capital related investment gains net of non-controlling interest of $12.7 million, compared to $15.9 million in the second quarter. This included $7.2 million of realized gains from distributions in our strategic and other investments portfolio, and $6 million of gains from our managed funds of funds. Turning to core fee income. Core fee income increased by 3.5% or $2.3 million to $68.4 million in the third quarter, primarily due to continued strength in foreign exchange and credit card fees. This represents a 28% increase in core fee income over the same period last year. As a reminder, core fee income includes foreign exchange, credit cards, letter of credit, deposit service charges, lending related fees, and client investment fees. As a result of continued strength in our core fee lines, we are increasing our full year 2015 outlook for growth in the low 20s to the mid 20s and expect to end the year in the middle of that range. Moving on to expenses. Non-interest expense decreased by $9.4 million or 4.8% to $184.8 million. This decrease was driven primarily by lower incentive compensation expense primarily related to a slight change in our full year earnings outlook, coupled with elevated levels of incentive compensation in the second quarter. Specifically, the decline was related to or incentive program based on our relative ROE performance against peer performance. We are reaffirming our 2015 full year outlook for expense growth in the low double digits. The key variables that could drive expenses higher than our expectations are loan growth, which affects our loan loss provision, and ultimately incentive compensation expense, and warrant and [ph] investment securities gains which also affect incentive compensation. If we outperform on any of these categories, it could lead to higher-than-expected expense growth for the quarter and the year overall. In closing, we delivered a solid performance in the third quarter and are on track to meet our 2015 outlook. As we expected, loan growth during the quarter returned to more typical levels and credit quality remained stable overall, despite the modest increase in non-performing loans. Although we are paying close attention to our loan pipeline and portfolio in light of recent volatility in the stock market, as well as concerns over momentum in the global markets, we see solid momentum in loans and fee income and are not seeing anything significant that would change our outlook on credit quality at this point. Competition and the availability of low-cost capital in the markets remain challenges to growth in yield and require us to be discerning about the opportunities we pursue. That said, there are plenty of opportunities, as our preliminary outlook for 2016 suggests. We remain focused on delivering high-quality growth today that will continue to position us well for the long term. Thank you. And now I would like to ask the operator to open the line for Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Joe Morford with RBC Capital Markets. Please go ahead, your line is now open.

[Joe Morford:]

Thank you. Good afternoon everyone.

[Greg Becker:]

Hey, Joe.

[Joe Morford:]

Greg, you touched on this I guess a little bit, but obviously with the chatter about the lack of new tech IPOs and the poor performance of those that have made it out, how important is it -- is that for your average client? And at this point, does it really matter if these unicorns of billion-dollar valuations can't go public today at these levels? Have they raised enough money in the private market to support the businesses for quite a while?

[Greg Becker:]

Yeah, Joe, it's Greg. When I think about impact of these more substantial companies, there's a couple of things. One is, if companies can't go out and go public, and this is broadly speaking, there's no IPOs that could impact our securities gains, warrant gains in some way, as I alluded to. When you think about the rest of the business, if these companies stay private longer, that's not necessarily a bad thing. They have a lot of liquidity, whether they're public or private, they have a lot of liquidity. And so, quite honestly, very few of them borrow money. So there isn't that big of an impact. And as I said in my comments, again, very few of them have these larger companies have a lot of debt. So from a risk perspective, they also don't present many challenges. So the short story is then directly, I'd say no. The question is, what happens to the rest of the industry, right, if there's more challenges with some of these larger companies. And that could have a ripple effect. I think it's manageable, and the question would be, if that were to happen, how severe could it be? I think right now we feel would definitely be manageable.

[Joe Morford:]

Okay. And then the other question is, obviously, the charge-offs this quarter were over and beyond the 2015 and preliminary 2016 full year guidance, so -- in terms of the percentage rate. So I guess, what gives you the comfort that we're still dealing with more one-off or company-specific issues as opposed to something more systemic?

[Mike Descheneaux:]

Joe, I'll start, and Marc Cadieux can certainly chime in here. I think maybe just to step back a little bit, because when we talk about the net charge-offs, net charge-offs year to date around 31 basis points, and so it's still within our guidance of the 30 to 50 basis points for the full year. And as we said in our comments, our prepared remarks, we still expect it to come in between that 30 and 50. So I wouldn't say it was any change in our expectation with respect to net charge-offs.

[Joe Morford:]

Okay. Thanks so much.

[Operator:]

Thank you. Our next question is Jared Shaw with Wells Fargo. Please go ahead, your line is now open.

[Jared Shaw:]

Hi, good evening. How are you?

[Greg Becker:]

Hi, Jared.

[Jared Shaw:]

Just sticking with the theme on the OSH [ph] financings and I guess timing of the VC, PE utilization. Some of the data that we've been seeing, it seems like the pace of private capital deployment in the industry certainly seems like it peaked in third quarter, is falling so far in the fourth quarter. Are you seeing that sort of trend as we're entering the fourth quarter now or do you expect to see the VC, PE capital call line stay at similar levels into the fourth quarter?

[Greg Becker:]

So there's a couple of questions there, one is just the overall funding, and then it relates to outstandings on PE and VC. So I'll start, this is Greg, and then Marc would add on the utilization levels on PE, VC capital call facilities. We did see a drop in the number of financings in the third quarter, although the dollars were still exceptionally strong. And it goes back to what I said in my comments, money is really being more highly allocated towards the higher-profile companies, which makes sense. Again, a few of them are going public. There's still -- they're growing revenue and they're able to raise capital. So they're just taking private longer. One of the things we're looking at is the number of companies that are being invested in, and that is a slowdown. We are not seeing that impact our portfolio yet, either from a credit perspective or, clearly as you saw in the third quarter, from a total client funds perspective, which was incredibly strong. So we're just not seeing it yet. And again as I mentioned in my comments, we can see a slowdown clearly, but we don't expect anything what I'll call dramatic. Let me turn it over to Marc to talk about utilization and the capital call lines of credit for VC and PE than.

[Marc Cadieux:]

And so picking up there -- it's Marc -- utilization of these credit facilities was up in the third quarter, and yeah, it remains to be seen whether that will continue into the fourth quarter, though as we've seen in prior years, there can be some seasonality to the third quarter as well as the fourth quarter. Said another way, yeah, oftentimes there is a little bit of slowdown in the third quarter and it picked up in the fourth quarter. Will we see that this year, is unclear. But that is the point I would add.

[Greg Becker:]

Yeah. We'd expect to see some of that at the end of the year. The question is the magnitude. As you know, last year we had a significant run-up at the end of the year. We're not predicting that to happen to that level, but we expect to see some of it.

[Jared Shaw:]

And then, as you sort of gauge the temperature in Silicon Valley there with -- if IPOs did slow down and companies stayed private longer and held on to their VC funding longer, do you see that as primarily driving slower levels of future VC funding or that it would attract more money to the VC market and you could see actually that market expand for the private fundings?

[Greg Becker:]

You know, predicting the venture capital market is a difficult task. If somebody would have said this year we'd end up at the levels we are, I would have been wrong in my prediction. When I look out at the 2016, for me, I'd say more of a stable number is probably what I would look at. I'm hard-pressed to see it grow from where it is right now, even though you're going to see I think more companies stay private longer. Other things that come into play though, you were talking about the IPO market, just to clarify, that the M&A market was still robust. And quite honestly, we expect that to continue. You've heard some of these big announcements of mergers together, and while I don't think that will create a trend, I do think it helps, and I think more companies maybe look at these companies to say, we need to acquire them, we need to merge with them, to create a more critical mass. I expect that market to maintain or continue to be robust into 2016.

[Jared Shaw:]

Okay. Thanks. And then on the incentive comp, it seems there's like maybe a little bit of a disconnect with what we've seen in terms of loan growth and what the accrual was last quarter, that we've seen in the third quarter. So, most of that is due to the -- could you just go through again what the change in incentive comp was given the strong growth we saw in lending this quarter?

[Mike Descheneaux:]

Sure, Jared. This is Mike. Somewhat of a two-fold explanation. One, incentive compensation increased significantly in Q2, as you probably saw. Now in Q3, the mechanism we were referring to in the prepared remarks, it relates to our incentive program related to ROE performance, our ROE performance compared to our peers. And it's based on a ranking mechanism. And so it doesn't take a whole lot of movement in the ranking to move it up or down, and in fact we're having this quarter, with a slight change in our view for the full year ROE, our ranking amongst our peers slipped just ever so slightly, and what happens is you have this kind of a catch-up factor from Q1 and Q2, which also makes for some larger swings and some [ph] incentive compensation. But it does get back to kind of the pay-for-performance model and shows that ROE is very important for us.

[Jared Shaw:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question is Ken Zerbe with Morgan Stanley. Please go ahead, your line is now open.

[Ken Zerbe:]

Great. Thank you very much. Good evening guys.

[Greg Becker:]

Hi, Ken.

[Ken Zerbe:]

A question for Mike actually. So you guys have talked about the loan growth guidance, call it roughly $1.5 billion to $2 billion going forward from here annually. And I know a lot of that seems to be based on the ROE model by putting on business that actually meets your ROE hurdles. Could you just help us understand? Because you, like I said, you've been talking about it for a couple of quarters, but at the same time, Fed funds futures over the last several quarters has really come down a lot. How much is your ROE estimates based on interest rates? And does the forward curve actually change or could it lead to changes in your loan growth guidance? Thanks.

[Greg Becker:]

So, Ken, this is Greg. Let me -- I'm going to start with it and then Mike can add. I -- when we think about, we call it smart growth, our way of looking at it from ROE perspective, we're looking at the return we're going to get, quite honestly, without a lot of impact for interest rates. So when you look out -- and again a lot of these credit facilities, as you know, are shorter-term in nature, so it'll be a little bit different maybe if you were looking at a longer, you know, long end of the curve, but obviously we're looking at what prime is going to be doing, Fed funds rate, LIBOR, etcetera. And so that hasn't changed a lot. So the fact that the short-term, medium-term has come down, quite honestly, really doesn't have a lot of an impact on the number that we gave. Again one of the things that could change, right, and we talked about upside, we could say, see in 2016 some upside from private equity or private bank, as Mike articulated, and that's one area. But we're still comfortable even with the change in rate outlook with the $1.5 billion to $2 billion.

[Mike Descheneaux:]

And I would just add that, when we came out and talked about the warrant up to $2 billion in Q1, that was contemplated given the backup of the low rate environment and the competitive rate environment. So, hence, that was one of the reasons why we came down and kind of booked in those ranges there.

[Marc Cadieux:]

And it's Marc. I'll add one more thing, lest we focus entirely on the ROE and the economics of it. Smart growth is also about credit structure and deal size. But in the increasingly competitive environment we've been in, that is another thing that we think about every day, that we're looking at opportunities as to whether its price size and structure are within our parameters.

[Ken Zerbe:]

Got it. Understood. Okay. And then I generally get the concept of why that could actually be higher if competition eases, but given how competitive the market is today, do you view the $1.5 billion to $2 billion really as a floor, or is there anything that is possible that could really drive that growth even slower than that?

[Greg Becker:]

This is Greg. I mean, yeah, I mean there's clearly things that could happen. I mean you could have a market downturn the way I described it, and we don't expect that to happen. But if you did see a dramatic change in the economy, if you did see a dramatic change in venture capital activity and companies couldn't get funded, you could see a slowdown. As I said, deleveraging is one of those things that could happen again, because technology companies tend to have more liquidity, right? So that could happen. But as we are, you know, given perspective on our views for 2016, we don't expect that to happen. We're comfortable with that $1.5 billion to $2 billion level.

[Ken Zerbe:]

Great. Okay. Thank you very much.

[Greg Becker:]

Yeah.

[Operator:]

Thank you. Our next question is from Julianna Balicka with K.B.W. Please go ahead, your line is now open.

[Julianna Balicka:]

Good afternoon.

[Greg Becker:]

Afternoon.

[Julianna Balicka:]

So I have a couple of questions. One, in terms of your outlook for next year, you are reducing your core fee income growth to the mid-teens from your current run rate which you just increased to the mid-20s. And given the fact that you've been taking market share gains and expanding these businesses, why are you reducing your year-over-year growth expectations this much?

[Greg Becker:]

Yeah, Julianna, this is Greg. I'll start. When you look at the numbers, the key growth is coming from, again, FX, we believe, and credit cards, are the two drivers. And we've seen substantial growth in those areas, and the teams have done an excellent job. That being said, you do have a little bit of large numbers coming in to play. And I would argue, when you look at kind of a mid-teens level, that that is still extremely strong growth when you look at the base that we actually have right now. So, could there be upside? You know, yeah. But I'd say right now, again, our perspective as we look out into 2016 is we're comfortable in that mid-teens range.

[Julianna Balicka:]

Got it. Okay. And then when I look at your average deposit growth in the low double digits, and just kind of trying to do some basic arithmetic around -- so your -- for your deposit growth for the year already into the high-20s implies some $44 billion of average deposits next quarter, to just make the math work, and then for that -- for then -- then to make the math work for 2016 for your average deposits to grow in the low double digits, are we looking at declining deposits? I mean it just -- it doesn't tie up arithmetically?

[Mike Descheneaux:]

Yeah, this is Mike. I'm not quite sure what the math is, perhaps we can maybe take it offline and I can kind of walk you through. But certainly, as Greg said in his remarks and my remarks, we are seeing continued growth of funds, so I don't -- we don't necessarily see a contraction. Obviously they could happen, but again given the nature of the last several quarters and years, it just -- you tend not to see that. But perhaps I can help you offline.

[Julianna Balicka:]

Okay, very --

[Greg Becker:]

And then let me just -- I'll add to it. When you think about the growth we've had this year and the level of venture capital activity being as high as it has been, my comments for venture capital activity would be kind of a stable to maybe even a slight decline from where we are right now, given how strong it has been, and a little bit of the turmoil in the market or uncertainty. And if that were to happen, clearly you could end up seeing the growth rate of deposits slow down. Remember though, we're still driving towards more than half of the deposit balances for the client funds moving off-balance sheet, and we would expect that to continue. So, still expect it to grow, and feel good about the outlook, but it will be tempered compared to where it was in 2015.

[Julianna Balicka:]

Okay. Thank you.

[Operator:]

Thank you. Our next question is from Steve Alexopoulos with JPMorgan. Please go ahead, your line is now open.

[Steve Alexopoulos:]

Hey everybody. I wanted to start on --

[Greg Becker:]

Hi, Steve.

[Steve Alexopoulos:]

Hi. I wanted to start on credit. [Is this the three] sponsor-led buyout loans that have been impaired over the past two quarters?

[Marc Cadieux:]

It's Marc. And yes, that is the statistic.

[Steve Alexopoulos:]

Okay.

[Marc Cadieux:]

Having said that, I think it's important to step back and just -- to give that three in two quarters some context. We've been in the buyout lending business for nine years now, the currently portfolio is 130 loans, of which three, to your point, are now in our non-performing. And so, yeah, hopefully that helps.

[Steve Alexopoulos:]

Go ahead, Greg.

[Greg Becker:]

Yeah, let me just add on to it. So when you look at that, it is 3 out of 130. And as we said when we've been on road shows with you and other people and talked on the call, clearly there's going to be a period of time when you have these companies that have issues and challenges and again can, you know, our goal is that we're working with the right sponsors to help turn these companies around, which we certainly believe they will, and will occur. You know, I would say, focus on the outlook that we have given for 2016 as a kind of point of view for our expectations on what may happen. Bottom line is we don't expect it to happen. We clearly looked at the portfolio. It doesn't it can't or won't. But we're comfortable with where we are right now, and again in context, it's 3 out of 130.

[Steve Alexopoulos:]

Right. Maybe to follow up on that though, are these three related? It just seems unusual to go nine years and have none of these become impaired and then have three in two quarters.

[Greg Becker:]

Sure. So I would first say that, yeah, there's a portfolio seasoning aspect to this that, as we've made more loans and they've been on the books for larger period of time, inevitably you're going to have a couple of that turn out this way. Having said that, there really is little that these companies have in common. The two from the current quarter are from our life science segment. They both sell to hospitals. That's really where the similarities end. I would liken these to sort of individual circumstances, company-specific issues with all three of them, which by extension is not indicative of any systemic issue or emerging trend that we can see at this time in the portfolio segment.

[Steve Alexopoulos:]

That's helpful. Maybe to shift gears for a minute. Greg, to follow up on your comments that you're seeing maybe less potential VC funding, are you guys already seeing startups adjust cash burn? And what's your expected impact on deposits from that, if it's happening?

[Greg Becker:]

You know, Steve, it's Greg, the -- it's being talked about. Have we really seen it a whole lot? The answer is no. Yeah, I'd just say we just haven't seen it yet. Do I expect it to occur? Yes. I do expect that companies are going to be more disciplined as they go into 2016. And we've seen this before where there becomes noise in the market about different people talking about high burn rates and giving advice to their portfolio companies to be disciplined, and it takes a quarter or two or three quarters for them to realize that and start incorporating it in their plans. So, do I think it's going to happen in 2016? Yeah. I think that'll happen. But as of yet, we haven't seen it.

[Steve Alexopoulos:]

Okay. And then you mentioned that you were seeing reductions in valuations, right, rounds [ph]. I'm just curious, how widespread is that? Is that really contained to the larger, more public ones that we read about? I mean you guys are arguably one of the best light sign [ph] into what's going on there, right? Is it just widespread?

[Greg Becker:]

Yes. Just to be clear, the amount of venture capital is, you know, was very strong in this quarter. When you look at the number of rounds being raised, that was lower, and that was especially true at the seed and early stage. And so a lot of the money, as I mentioned, where the companies that had been around a little bit and are getting traction and more people are putting bigger chunks of money behind them. So when I think about the level of the series A or seed round, again it's slow. Do I expect that to continue? My point of view, my crystal ball would say it's going to probably stay at about this level and we'll probably see again slower than what we saw for a good part of 2015. But I think the level of rounds, the number of rounds for seeding early in third quarter is probably going to be more consistent to what we're going to see fourth quarter, in the first quarter and to 2016.

[Steve Alexopoulos:]

Okay. Okay. Thanks for all the color.

[Greg Becker:]

Yup.

[Operator:]

Our next question is from John Pancari with Evercore. Please go ahead, your line is now open.

[John Pancari:]

Good afternoon.

[Greg Becker:]

Hi, John.

[John Pancari:]

A question on credit again, kind of related to Steve's line of questioning. And so if these credits are unrelated and non-systemic as well, why should non-performers remain high? Is it just because the cure [ph] rate is lower on these types of credits, or do you -- could give us more color there?

[Marc Cadieux:]

Yeah. So I think it's maybe best -- it's Marc again -- best to start with the historical perspective on SPV where generally speaking our non-performing loans have by and large been early-stage loans that tend to resolve themselves more quickly. With these larger loans and, by extension, larger companies, they take longer to turn around. And it's that, yes, several quarters or sometimes a year or more to make that turnaround happen and give us the confidence that it's being sustained that results in this being stuck in that category for longer periods of time.

[John Pancari:]

Okay. And then also related to that, there's a seasoning aspect as you indicated, is it fair to assume then that there's more on the way as the portfolio continues to season? Because you grew that book pretty -- at a pretty rapid clip over the past couple of years.

[Marc Cadieux:]

So while we did have rapid growth that really has slowed over the last seven [ph] quarters, and I think that is a function of the discipline that we've maintained in terms of loan structure leverage levels, etcetera, and that's the first point. I think that the portfolio we have today is positioned pretty well. The second point I would make is, you know, I think as Greg already mentioned, we took another hard look at the portfolio looking for exactly the kind of issues and trends that you might expect we would have looked for. And at present, don't see any indication that we're going to see more at least in the immediate future.

[Greg Becker:]

And then just to add on to it, eventually we're going to have more of them [ph], but obviously our plan and expectation is that some of the ones that are on non-performing right now will roll off. Others may be added, but we still expect to be in a comfortable range of NPLs, and as you know, our guidance right now is kind of that 50 to 100 basis points. And we're still comfortable with that and we'd expect to be comfortable with that through cycles. Now, again, maybe at some point may inch up above that, we don't expect to see that right now, that's our crystal ball, based on again Marc's review and our team's review of the portfolio. But that's kind of just this -- the structure of this type of loans.

[John Pancari:]

And if I could just ask one more on credit, a quick one. You indicated that the criticized loans levels remained relatively stable. What is the level? What is that percentage?

[Marc Cadieux:]

Five-point-seven percent -- sorry, 5.6% of gross loans.

[John Pancari:]

Okay. Do you have what that was a year ago?

[Marc Cadieux:]

A year ago, I don't -- last quarter it was 6.1, so it came down quarter over quarter.

[John Pancari:]

Okay. All right, thank you.

[Operator:]

Thank you. Next question is Jennifer Demba with SunTrust. Please go ahead, your line is now open.

[Jennifer Demba:]

Thank you. Good afternoon.

[Greg Becker:]

Hi, Jennifer.

[Jennifer Demba:]

Could you talk about your expectations for growth in the international market in 2016 and what you're seeing out there in terms of demand?

[Greg Becker:]

Yup. Jennifer, this is Greg. I'll start. When we look at, you know, I've bucketed our global stuff in two -- I guess three categories. One is what we're doing in kind of the U.K. and Europe, and I would include Israel in that set as well. And then I would also look at -- and look at Asia in two ways. One is what's happening in our joint venture, and the second one, what's happening in Asia for SPV. So what we look at is in the U.K. and Europe, we've seen very good growth. We expect to continue to see very good growth in that category in the kind of 30% plus range, and that is just because there's still a big market opportunity, we still have low market share, and we feel good about the outlook there. When you look at the other part, right, it's more deposits less loans. So we have some capital call lending to private equity firms in Asia, which is a few hundred million dollars. And that will grow, but it's still going to be small. And then you look at the next category which is the joint venture, in the joint venture, again it's -- we treat it as an equity method as opposed to a consolidation in our balance sheet. So we don't expect to see really much change in that number on an equity basis during the course of 2016. We're in the middle of, as we've talked about, we got our RMB license, we're building that out, and we feel good about that, but as we've said and we'll continue to say for a while, that's a long-term growth proposition. It won't contribute truly for a number of years, although we do benefit from that from cross-border activity that comes from those introductions and from those relationships that are being built in the joint venture.

[Jennifer Demba:]

Great. Thank you very much.

[Greg Becker:]

Yeah.

[Operator:]

Our next question is from Brett Rabatin with Piper Jaffray. Please go ahead, your line is now open.

[Brett Rabatin:]

Hi, good afternoon.

[Greg Becker:]

Good afternoon.

[Brett Rabatin:]

Wanted to just ask, I know I've asked this a year or two ago, but just thinking about the profitability, you guys have currently and maybe your growth is slower, you have almost 40% of your earning assets and pretty low-yielding securities and cash. Would at least some modest level of a barbell strategy eventually become appropriate with the outlook for interest rates continuing to push out further lower for longer, so to speak?

[Mike Descheneaux:]

Well, I wish we knew exactly what was going to happen so you could make definitive judgments on where to invest. But having said that, we all know that's not going to happen. So, one of the things we're always very, very conscientious is the size of our investment securities portfolio. And so when you have a size of the portfolio as we do, approximately say 55% to 56%, plus or minus, in that range, you really got to be very focused on liquidity in the shorter-term duration. So that's what our philosophy has been for the last several years and it's served us very well and will likely continue to maintain and keep that shorter-duration security and managing that duration extension risk until we get more clarity on where rates are going to go.

[Brett Rabatin:]

And I guess a follow-up question on that is, when rates do rise, what are you assuming happens to the on-balance-sheet deposits and what actions might you take with off-balance-sheet to mitigate that?

[Mike Descheneaux:]

That's a very difficult question to answer. I mean it's very difficult to understand how our clients will be thinking about what will happen when rates do go up, because nobody has been around these last few years to even understand what an interest rate is. So the behavior is a little bit uncertain. Again, having said, you have to be prepared for that, if there is pressure or migration to go off, that you have to maintain a very liquid securities portfolio, which we are doing. So we are well-prepared for several billion dollars if it does need to move off. Again, if we don't want it to move off, we can certainly afford to pay up to keep it on if necessary, because in that sense, if deposits are being pressured to go off, that means you're probably in a high interest rate environment which you're making more money on net interest income that you can afford to pay off. So it's a bit of a complicated question, but the short answer is we're prepared for, if there is pressure, to be able to handle that if necessary.

[Brett Rabatin:]

Okay. Great. Thanks for the color, Mike.

[Operator:]

Our next question is Tyler Stafford with Stephens. Please go ahead, your line is now open.

[Tyler Stafford:]

Hey, good afternoon guys. Just to follow up on Jenny's question earlier. Do you have the global loan and deposit balances as of 3Q?

[Greg Becker:]

So this is Greg. The deposit balances, you know, again roughly haven't changed a whole lot. They're about kind of $6-1/2 billion when you look at it, and this is mainly deposits -- a little bit off-balance-sheet, but it's almost all deposits. And lending side, you can look at it and you're roughly around, again, roughly around $1.1 billion. And again it's grown a little bit, but again part of the fluctuation up and down ends up being some of the capital call loans to private equity firms, and that literally can swing $100 million or $150 million in a month. So -- and that's just because the portfolio hasn't built up enough concentrations so that the, you know, the advances and payoffs offset each other enough to create more of a standard growth rate. But again that's kind of what we're building from. But we feel really good about where we are and that -- and the opportunities ahead. And as I said before, we still expect that's going to be at a growth pace much higher than what we see with the rest of the portfolio.

[Tyler Stafford:]

Okay, thanks. And then your bank level leverage ratios, a little over 7% now. Just curious as your current thoughts on capital and then what's the cash at the holding company as of 3Q?

[Mike Descheneaux:]

Yeah. So we continue to watch that tier 1 leverage ratio very closely, at the bank level and the holding company level. And as you pointed out, it is lower this quarter because of deposit growth. It's still within our acceptable ranges. As you've heard us say before, we're fine between 7% and 8%. And there's certainly certain things we can do to continue to shore that up. And the answer to your question about cash at the holding company level, because you're implying that we could downstream some of that to help the ratio at the bank level, we probably have somewhere around $365 million or so currently at the holding company level. Now, naturally you wouldn't downstream all of that to help it out, but certainly you could downstream some of that to help out if necessary. But again, right now it's still within our ranges.

[Tyler Stafford:]

Okay, thanks. And then one more, if I could sneak it in. Of the off-balance-sheet client fund growth this quarter, how much of that came from new client adds versus existing clients moving to the off-balance sheet products, roughly?

[Mike Descheneaux:]

I don't have the exact numbers in front of me, but, defining what a new client is, I mean new clients within the quarter or new client within the last six months, it's very difficult to assess that. But I would say generally what we have seen is somewhere between 15% and 20% per quarter is coming from new clients kind of originate in that quarter. But again that's kind of a -- it's a bit difficult to really pin it down to define what truly is a new client. Because when a new client comes onboard, they're not necessarily funded right away and they may be funded a couple of months later.

[Tyler Stafford:]

Okay. Thanks guys, I appreciate it.

[Greg Becker:]

Yup.

[Operator:]

And our next question is Aaron Deer with Sandler O'Neill & Partners. Please go ahead, your line is now open. AAD

[Greg Becker:]

Thanks, Aaron.

[Operator:]

All right. We have no further questions at this time. I would like to hand it back over to CEO Greg Becker for closing remarks.

[Greg Becker:]

Thank you. Thanks everyone for joining us today. As we talked about, we are -- we feel really good about the third quarter and again the balance of 2015. And as we talk about 2016, although some of the numbers are tempered with deposit growth in a few other areas, the numbers are so strong when you look at it from a guidance on loan growth, outlook in fee income and other areas. So we feel good. And the reason we feel good is not just our ability to execute, it's because we are in the right market and have the right team of people and of course have the best clients. And so, feel really good about where we are, despite the kind of turmoil we're all dealing with in the market. And I want to thank all our clients for trusting us and our employees for supporting our clients. And so with that, have a great day. Thanks.

[Operator:]

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