Q1 2022 SVB Financial Group Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the SB Financial Group Q1, 2022 earnings call.
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After the Speakers' remarks, there will be a question and answer session.
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O'leary head of Investor Relations you May begin your conference.
Thank you Josh and thank you everyone for joining us today are president and CEO , Greg Becker and our CFO Dan Beck are here to talk about our first quarter 2022 financial results and will be joined by other members of our management team for the Q&A. Our current earnings release highlights slides and CEO letter have been filed with the SEC and are available.
On the Investor Relations section of our website.
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.
Found in our SEC filings and in our earnings release, now I will turn the call over to our President and CEO Greg Becker.
Great. Thanks, Meghan and thanks, everybody for joining us today.
We're pleased to be reporting an excellent quarter of strong earnings and profitability driven by healthy core fee income solid balance sheet growth and a significant lift from higher rates.
Based on this momentum we are raising our 2022 revenue outlook and our outlook for loan growth.
And have meaningful revenue upside if the forward rate curve plays out.
Also really excited to be introducing our new brand well, which highlights the power of our business strategy. So really.
Hats off to our entire marketing team, who has done a great job rolling that out and we're getting really positive feedback around that.
So we know you have questions and we want to make sure we get to all of them. So I'll ask the operator to open up the lines.
At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad. Your first question comes from the line of Manhattan Ghazaliya with Morgan Stanley . Your line is open.
Hi, good afternoon.
I was just.
A quick confirmation on the NII guide. So that includes just the March rate hike and the improvement in the long end. So far is that correct. It does not include the additional rate hikes, we havent the forward curve.
Hi, This is Dan back it it does not include any additional increases in fed funds.
Got it so can you help us just think through the puts and takes if we do get the additional hikes and the forward curve this year.
I know you've given us the rare chance do you have any metrics in the deck, but how would that impact your guidance for a loan and deposit growth as well.
I think it's better just to think about that sensitivity and net interest income obviously, there are a lot of variables. So.
So the expectation with the additional 25 basis points and we do have the growth assumptions in there are about $100 million to $130 million worth of annualized net interest income and now with every subsequent increase in core fee client fund fee income you would see another 20 to 50.
$50 million annualized so that's the best way to look at it that takes into consideration the dynamics of the balance sheet and we think for the rate increases and what's in the forward curve ahead of us that's a good set of assumptions.
Got it and how should we think about just loan growth and in general just.
Kevin I know you are seeing strong demand from both the fund banking and the.
The tech and health care clients as well, but you know any.
Any more color on like you know what you're seeing there that gives you.
You have the confidence that there is upside to your guide on growth guidance, even with the rate expectations moving higher.
Yes. This is Greg I'll start and Mike may want to add.
Think about it on the commercial bank side, and then also think about it in the private bank side. So if you start to see those rates play out on the commercial banking side.
We're seeing kind of what we're seeing now which is we believe there's going to be.
Some softness in the venture capital levels, and so equity, maybe a little bit harder to get as rates pick up and what we see on the opposite side is we do see a stimulation of loan growth.
Hi Tech and life science side, so that we believe has some upside there may be some softness.
In private equity and venture capital, but Theres a lot of dry powder, there and as they continue to do deals. We certainly don't believe rates are going to have that much of an impact on the velocity around it. So that's that's what I would say it's neutral to positive.
On the private bank side, clearly if rates start to pick back up.
We've already seen.
30 year rates pick up and seen some slowness there if they continue to accelerate.
They get higher we should expect I think all banks that are looking at mortgages to see some some softness there.
One way to think at least Thats why I think about the loan forecast on a go forward basis with with if the forward rate curve plays out over the balance of 'twenty two.
This is Mike <unk> on the only thing I would add is you did see strength in the lending and tech and life Sciences in Q1, and then when we look about the future of the pipelines and pipeline are at near or close to all time high. So we are still seeing some strength in the pipelines.
Great very helpful. Thank you.
Yep.
Your next question comes from the line of Ebrahim <unk> with Bank of America. Your line is open.
Hey, good afternoon.
Hey, Brian . So first question, maybe Greg just big picture, obviously, it's been a lot's happened during the quarter give us a mark to market means it was a fairly strong quarter I think our guidance is better than I think most people shared what would play out give us a sense of I get that late stage has been tough for ipos have been tougher.
Early stage still moving along when you talk to folks sort of in that ecosystem is it still wait and watch it like if we get another 10% sell off in the market would that negatively impact sentiment just give us a sense of where things stand in like the downside risk to sentiment appetite for DCP.
Investment.
Yes.
Thats about five questions in there.
Friday.
Hey, good apart.
Let me just start with client funds and I'll talk about.
What happened in the quarter, and then again as much as I can crystal ball.
There and then just the general kind of sentiment.
Engaging with when we talk to venture capital is store private equity.
<unk> so in the quarter. If there is if you think about four sources of funds flow you got it.
Venture capital.
Public funds international which isn't in the U S venture capital numbers, obviously, and then private equity.
Venture capital was generally healthy in the first quarter and part of that is just a carryover from the ended the end of the year.
We saw more softness in health care than technology.
But relatively flat to the flows there were pretty decent the biggest decline as you would expect is in the later stage public so public fund raising that.
That was down roughly 85% and that was most pronounced in health care and you know we've got a really great practice in health care and so we did see a lot of softness in funds flow.
From a public.
Equity capital markets transactions International was a little soft private equity is a little soft and so when you add all that up that's where you get kind of a just a really modest growth in total client funds, but kind of gives you a sense of where it came from.
My view is that.
Yes.
If the public market continued to be soft right.
And you probably have as good of a perspective on that as I do on what that will look like that will more than likely continue to play out with some really positive parts in there I think it's important to note. One is that when you think of the venture capital flow and activity levels in the early stage incredibly strong we had.
Roughly 70 to 100, new clients in the quarter.
Which is one of the highest maybe the second or third highest numbers that we've had.
And you can look at the venture capital numbers. There is a lot of great flow in that in that market.
Mike as I spend time in the market here from our teams, there's an incredible amount of activity and so I think even if we saw volatility through the balance of the year the level of startup activity the level of.
Series, a I think it's going to be good.
Look theres just going to be softness in the later stage markets until there is what I'll call a price discovery that kind of find the right balance.
And I don't I don't think it's personally I think it's going to be that far off a quarter or two quarters out because I think the public markets. My view are going to be soft at these levels, maybe a little bit higher for a little while and then Intel recalibrate.
Into the.
Later stage private market, but just in general I think there's still a lot of positive momentum people are feeling good.
We're seeing incredibly strong deal activity or the pipeline for lending is strong pipeline for new deal activity, just bringing clients as strong so I'm I'm actually relatively optimistic.
In this environment that we're dealing with that again, we have talked about the long term innovations where that where it's where it is that money is still wants to be here and thats a good thing.
Craig One thing sorry, your brand to Ebrahim, one thing to add as we think about what we also did within the quarter not only do we have those factors that Greg mentioned in the quarter. We started to really put products to work that allowed for us to also open up some of the off balance sheet client funds to have them worthy.
For clients.
Move onto the balance sheet. So it's just another lever for us, especially in this short term rate environment. That's so strong to be able to help from a liquidity perspective, so with all of that will probably still be in the lower end of that 40% growth range from a guidance perspective.
Again lot lots of levers and good good flexibility to be able to manage it.
Just to that point, if I may follow up with one then.
Talk to us about what you assume in the mix shift for deposits on balance sheet and how quickly do we start seeing the deposit beta kick in for the interest bearing piece if the fed hikes 50 basis points, maybe 50 basis points June do we get to a 30, 40% beta or will it take time.
Yes, Ebrahim I think it's going to take a little bit of time for us to see the betas kick in obviously the timing.
It looks like we're going to see a 50 basis point hike here.
In May I still think it's going to take time to get to our assumptions.
60% deposit beta that we're using at least for our net interest income guidance. So I think.
We'll see that play out and it's going to be a progression to get to that.
Full 60, 60% deposit beta in terms of movement of noninterest bearing to interest bearing.
I think that.
If the forward curve were to play out will probably migrate into the 40% range of.
Interest bearing to noninterest bearing accounts.
And Thats up from where we are in the 30 30 ish percent range and that's all factored into our.
Sensitivity from a 25 basis point rate hike. So hopefully that gives us gives you enough color there.
That is helpful. Thanks, Bob Thanks for taking my questions Yeah, absolutely.
Your next question comes from the line of Casey Haire with Jefferies. Your line is open.
Thanks, Good afternoon, everyone.
I wanted to dig in on the on the deposit growth guide in the letter you guys referenced.
Help from liquidity solutions, which.
It looks to be taking taking money from off balance sheet onto the balance sheet. Just curious how much was that this quarter and then how much of that.
As contemplated as a lever for your for sustaining the deposit growth guide in 'twenty two.
Yes, Casey this is Dan as we look at the quarter on an average basis it within let's call. It two $2 billion range, so smaller part.
What we saw from a quarterly basis.
In terms of the full year.
We're not relying on.
Only on that from a growth perspective, we factored in some.
Along with what we're seeing from.
Traditional organic liquidity activity. So this is really looked at as a tool for flexibility.
And effectively it's all do that where we can utilize the rate environment that we've got in front of us and.
And really help clients all at the same time.
Okay very good.
The distributions you also made mention of that is that was that a significant headwind in the quarter and what's the outlook.
Going forward is that something that picks up or slows down for what we saw in the first quarter.
Yes, Casey it was one of the factors.
In the first quarter traditionally fourth quarter first quarter, the biggest quarters for distributions that we think.
Most of that is.
Is behind us.
For the year.
This is Mike mentioned, one of the thing I would add is when you think about deal activity and you.
Think about distribution rights of deal activity creates new dollars coming in and as we talked about earlier Greg mentioned.
Go down and exits of slowdown in IPO. So you don't have as much money coming in and so with these distributions going out that's what is getting a fair amount of headwind through some challenges in that area.
Okay, Great and then just last one for me just to clarify on Slide 32, you guys talk about.
That further rate hikes is not going to take your expense guide higher.
So this high twenties could be it could be a ceiling in terms of expense growth unless unless you guys really I mean, what else could drive that higher I guess fee outperformance or <unk> securities.
Yes, Casey, it's Greg I'll start and Dan will add.
As we said last quarter that were.
And if we saw some rate increases we're going to build some of that into our expense growth just as from an investment perspective, and we feel really good about the numbers that we're putting out there that they are real significant investments and so that's why we basically have.
<unk> said that we weren't going to cap out at the high <unk> of <unk>.
I will caveat it.
Caveat will be pay for performance is the biggest one.
And that's either with Seb Securities.
The institution overall.
So I think my guess is that you all would be happy if we end up having to pay more expense out and we go above that because it would mean for the most part that the performance overall is even stronger.
And Casey just one thing to add to that so if you think about performance relative to rate increases.
If the forward curve were to play out that expense guidance.
The satisfies what we would do from a.
Interest income performance perspective, so just wanted to be clear about that.
The guidance range incorporates what.
Pay for performance on Jeff.
Rate sensitivity.
Would be contemplated.
Got it thank you.
Yes.
Your next question comes from the line of Bill <unk> with Wolfe Research. Your line is open.
Hi, good afternoon, and thank you for taking my questions I wanted to ask about the outlook and at a high level.
<unk>.
We'd love to hear your thoughts on how a scenario where the fed is forced to push the economy into recession to tame inflation.
It would impact your outlook.
Yes. This is Greg I'll start.
Art.
And I think because we have the four business units now I think it's important to kind of talk about them, a little bit and separation. So.
On the bank side.
It's important to note that the clients are better positioned than they ever have been with lots of liquidity, there and theyre really strong strong positions and so we think.
We don't wouldn't expect any material change in credit quality based on.
The fact that we've continued to have a smaller percentage of the loan book.
In the <unk>.
Higher risk from a historical perspective.
Lending portfolio.
And again.
Our clients from a lending perspective aren't as rate sensitive on the commercial side.
So youre not going to see much of it much of a change there obviously.
Obviously, you see rate declines.
We are rate sensitive, but Dan and the team are working on ensuring that.
As protected as we can be if rates I know, it's funny, we're talking about potential rate decline or just not haven't even really seen the rate decreases.
You have to think that way being.
Being prepared for that.
I have a huge amount of confidence in Dan and the team that they are going to make sure that we are protected as much as we can be there. So that's.
The commercial bank.
SBB Silicon Valley Bank and the private bank.
Could you see if rates go down the long end goes down because they're worried about the economy could that stimulate growth potentially depends upon what happens with prices and so forth.
The securities.
Again.
I think you'd probably be similar to where you are in pricing softness in ECM, but M&A, probably would pick up and it's important to note on the SCB security side, when we talk about M&A, we're starting from such a small basis that.
We do believe there is a <unk>.
<unk> upside over the next few years.
Team really starts to hit.
Stride there pipeline is strong now and they feel I feel really good about it you can look at leveraged finance that looks like it would also have.
Upside there as well and.
There's still going to be an interest in money flowing in and the SCB capital from our fund side. So I think.
The balance sheet is much different than it was in prior economic downturns.
The levers the finance team puts in place to protect the balance sheet to protect net interest income is better than ever has been so will there be an impact sure.
But it's certainly my view is going to be more muted than it normally would be if you hit a.
Recession.
10, 15 years ago, Dan what would you add to it I think.
Everything Greg said, plus if you think about potentially a slower liquidity environment again looking at the total of the total pool of client liquidity, including off balance sheet solutions and the products that the teams are putting in place obviously doing the right thing for customers and clients.
It gives us more flexibility as part of a different toolkit that we have had from previous.
Downturn scenarios.
Okay. That's really helpful. Thank you if I could follow up.
And.
The credit side of that even if the credit environment remained relatively contained and the level of actual losses that you would experience was within sort of your expected range.
Could we still see you add to reserves a little bit more aggressively just to reflect sort of the.
Greater uncertainty or is the fact that you would expect losses to remain relatively contained.
Yes.
Would that lead to tier not having to.
Two to build reserves.
Yeah.
So thats why casual I'll start Dan may wish to add.
Yes, recalling that the reserve today is driven by economic forecasts.
Recession scenario you speak of.
Likely would trigger a reserve build hopefully not like we saw in the early innings of Covid.
Certainly depend on the degree of the downturn in front of us, but but I think in that scenario.
Irrespective of whether we're seeing a deterioration in credit quality, the economic forecast would probably take the reserve higher.
Dan anything to add.
I think thats right Mark.
And then if I may squeeze in a final follow up on your comments around the proactive interest rate risk management and sort of in that in that scenario.
I mean, it's impressive like in this quarter, where we've seen many many banks.
Aside the larger ones, where there is a direct impact to their regulatory capital and buyback capacity some of.
The others that are outside of category, one and two.
Don't have.
To recognize OCI headwinds for regulatory capital purposes, we've seen 12%, 15% tangible book value hits, and they've sort of been okay with it because there is no impact on regulatory capital or buyback capacity your earnings and so they haven't really been as focused on tangible book value, but you.
Maybe could you speak to.
<unk>.
I guess to the extent that you.
Protecting tangible book value is something that you hold as that's important and and how important that is to you. It seems like your hedging strategy.
It has made that a focus it just slipped to hear you speak at a high level.
Yes, that's really high high level associated with that we'd like to manage to ensure that we have flexibility and I think this is just another.
Area, where.
We provide ourselves flexibility by reducing our sensitivity to significant movements like that so, especially with the amount of liquidity that came in last year being able to protect.
Again to put it.
Have been a higher rate environment that is not now played out.
Which we think even though it's not counted for regulatory capital, it's still important to be able to manage capital from a strength perspective all in so.
We manage for flexibility and even as we're thinking about the higher rate environment today, Thats, what Greg was talking about thinking through how to sustain.
The rate environment that we're seeing today and to be able to protect against downside risk is kind of the shift in how we are starting to think about thing. So yes, I guess, it's important and.
<unk> to just make sure that we've got flexibility.
That's very helpful. Thank you again for taking my questions.
Your next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is open.
Hey, good afternoon evening, Hey, Jared.
I thought it was interesting you said that your companies and you have the option to increase lending.
Some of the equity support cuts off did you see what is the utilization rate due this quarter among those tech and health care companies did you actually see some of that happen. This.
This quarter and I guess, how much of the loan growth projection is due to maybe a shift in and lending into that sector.
This is Mike Estonia, the utilization rate did not increase much at all so it's been pretty pretty stable and it was up a little bit in this quarter, but certainly not significant not really the huge driver of growth.
And in Jared This is Dan on a forward looking basis the growth forecast is still primarily driven by capital call.
Ending in.
In lending.
Exposure, there's a small increase from what we're seeing on technology healthcare and life Sciences.
But there again as a lot of.
New business there in the pipeline.
That's driving its a less from commitment.
Utilization usage versus new and what we're seeing from a.
Private equity global funds banking capital call lending perspective.
Okay. Thanks.
During the quarter and I think theres been a lot of <unk>.
Investor concern or it is concerned that higher rates would really have a detrimental effect on private equity venture capital investments and the need for capital call lending, but when we look at where everything was in 2018, we're at fed funds of $2 50, and things seemed pretty healthy there from your conversations with with I guess the GPS.
All of the rates really need to get to before you think that hasn't meaningfully negative impact on capital call demand.
Yes. This is Greg I'll start and Mike may want to add.
Yes.
I would say it's far enough away.
That it's hard to predict.
And what I mean by that is.
You referenced the last time when fed funds were higher and that really didn't have much of an impact.
Yes.
We may see those fed fund rates later this year.
The forward curve plays out, but there's a lot of dry powder out there and.
Innovation.
Again as I talked about the startup activity is incredibly strong.
The dry powder that exists adventure the dry powder that exists in private equity is very very very strong.
They need to put that money to work.
And maybe it slows down a little bit if rates pick up but.
There's just so much opportunity out there that.
<unk>.
It's just.
It's far enough away that I can't I can't give you.
That would be helpful.
Alright, thats good color. Thanks, and then I guess just finally.
Some great moves on asset liability positioning congratulations on that.
Referenced there are still $6 million or I'm, sorry, 6 billion of receive floating hedges here.
Is there any thought to unwinding more of that and I'm continuing to see that shift in second quarter or not necessarily.
Yes, Jared it's Dan.
We're always going to be opportunistic.
But there is still I think a lot.
At a risk of short rates moving.
Higher from here. So if you think about the hedging strategy and just being able to provide optionality to be able to execute.
And to gain access to liquidity, that's why we have such a large securities book to begin with keeping some of that protection. There really really makes sense for us. So we'll keep an eye on what happens from a rate perspective, if rates start to move.
We may be opportunistic.
But no no plans right in front of us right now.
Thank you.
Yes.
Your next question comes from the line of Steven Alexopoulos with Jpmorgan. Your line is open.
Hi, everybody.
Steve.
I wanted to start so far.
Looking at the first quarter. It was an unusual quarter more broadly given that the IPO market dried up but we still saw VC investment given all the dry powder, which you reference on the sidelines, but you also saw vcs raised a lot more money than they spent in the first quarter. So the mountain of dry powder didn't even come down Greg what do you hear.
From your VC partners that Theyre able to raise so much money in a pretty tough quarter and are you hearing that a slowdown in either fund raising or investing is coming.
Yeah, Steve There is as you said and I agree there is a lot of different things that are going around so underneath lets say the fund raising its important to note.
That it's not it's not equally distributed.
<unk>.
A lot of that money that was raised was raised by.
The strong funds the ones. The notable funds that have a long long track record.
Upsizing their funds pretty significantly.
And.
It was I don't know if anybody would ever say, it's easy, but it certainly was easier.
The 1% to funds that are having a harder time are the smaller funds. The first time funds.
The funds.
It's fun to our fund three but you really don't have enough distributions in.
The first fund or two.
And so there are some headwinds with that so youre getting youre getting a little bit of a mixed a mixed message, but the dry powder from the.
The more stalwart firms.
Incredibly strong in.
And so you are seeing I would say a bifurcation the large large funds that have a.
I'd say now there are strategies that you're employing are very different.
They have large late stage strategies, they have seed fund programs they have niche programs.
So they're much more diversified and both stage and the markets Theyre going after and then you have very successful.
<unk> that are.
Very niche oriented.
And the ones that are that are having a harder time are the ones that I have said the ones that don't have a long track record.
Or.
They're more of a what I'll call them meet to approach, where they don't really have a differentiated strategy.
So obviously you know this we have deep connections into all of those areas and so we're staying very close to it but.
The strongest funds clearly have have been have benefited from it and I think personally they are going to continue to benefit from it. There is a lot of money that still wants to come into venture.
But they want to come in to the funds that are proven.
And so I think it's going to be a headwind for the emerging funds and it is going to be continue to be a more of a tailwind for the funds that have been around a long time that a buildup of great track record.
Certainly with the volatility that's an assistant that makes it difficult and so it's something to keep in Ireland and deals that we're closing in Q1 as Greg mentioned, Greg mentioned, Steve There was a large theyre large funds and probably a lot of this is also agreed in 2021 right. As you kind of have these closed come in the first quarter, but it's definitely something to keep an eye on as Greg.
And as well as having something like three four trillion dollars of dry powder out there.
Still a lot of dollars to get put to work.
Okay. That's helpful.
I wanted to drill down into the capital call growth a bit.
If I just a quarter over quarter.
<unk> off.
And <unk> could you tell us in the private equity capital calls, where youre seeing activity slowed down a bit the capital call sign and maybe where it's a little still a little bit more active it.
It looks like the other bucket went up I don't know whats in there.
Are you talking about just like a particular segment Steve Yeah within.
Within private equity capital calls.
It's an interesting I would take quarter, we start to go into the first quarter healthy strong February is a bit clunky kind of slow down a little bit and then starting to pick back up in March.
And it was across the board that we had to do really with no real outlier any particular sector that was up or down <unk>. So theres really nothing really to point to it and I can tell you at this time.
Okay.
And then thanks and then finally.
It's a little bit of a conceptual question, but Greg regarding the comment in the CEO letter that you would expect any potential pullback to be short lived.
Tend to agree with that but if you think about all of these factors that really hit this first quarter, which are probably worse than what we saw in the first quarter of 2016, and the fact that <unk> still invested $70 billion. In this backdrop is it possible that we are living today in the exact period you are describing.
And given how much capital there as we just will not see a pullback of any kind.
Yes.
Would love to tell you with absolute confidence exactly what's going to happen.
But im sitting beside our general counsel and he says I can't do that so.
The.
Steve I think that's possible I would say I would just follow through with what I, what I commented.
My Crystal ball right now with the information that we have does that its going to be we're going to have some softness.
It's still a very healthy market rate early stage is going to be healthy for all the reasons I talked about earlier, but.
There's companies out there that are trying to figure out where is the what.
It's the right valuation relative to the public markets.
The question is well if I wait an extra quarter or two to raise that round am I going to get back to that higher valuations when you add all that together.
I just I do believe there is going to be just.
This softness and I put that with a lower case as not a capital S. Because.
As you said first quarter was still very very healthy.
So it's kind of a.
Again, that's probably the simplest way for me to describe it it's a it's a lower it's a lower case softness versus upper case softness.
And.
A lot more will come out in the next 30 days 60 days 90 days and we will be able to share that next quarter.
Okay.
Thanks for taking my questions.
Absolutely question comes from the line of Chris Mcgratty with <unk> W. Your line is open.
Great just a quick one on the timing of the warrants.
If we stay in this environment, if Q2 arguably just more of it.
A step down in Q1, because there's a little bit better than I thought this quarter.
Yes.
First of all you've got a very diversified portfolio.
Number number one number two.
But as you lift thousands of companies that make up your warrant portfolio and your securities portfolio and so.
That's one one factor.
Second factor is you are right in some parts and there is multiple parts that make up the securities portfolio right. So the warrant.
Try to get obviously, the most recent information from the quarter and we use that we can always get that so there is a little bit of a lag there as we try to gather that information to value that you also have it in some of the funds that there could be a lag.
In our fund of funds, where it's a quarter lag there and some in some cases so.
Could could there be some softness.
Higher softness in the second quarter or the third quarter relative to the first quarter. The answer is yes.
And I think thats, a reasonable expectation to play out but I would.
So that's the crystal ball as far as.
Trying to characterize how big it could be that's where I go back to the part about the diversification of the portfolio domestically globally.
It's such a diversified portfolio of that.
My view right now is the volatility won't be as great probably as many people may expect.
Chris It's Dan just one thing to also pay attention to in the quarter. We did have fixed income securities gains both a 49 million. So thats in that number as well so backing that out you certainly do continue to see the softness there, especially compared to.
To the experience of 2021, but I agree with Greg the diversification factor and just thinking about the number of funds in the number of companies and.
The the different investment time horizons in those.
<unk> of investments, where it really does protect from.
The quarter over quarter significant.
Declines.
Okay, great and if I could ask one more.
Capital levels are pretty stable due.
Due to the mentioned.
Limited hit there maybe updated thoughts on just capital levels.
Yes, Chris if you take a look at where again, we're capital constrained tier one leverage at the bank. We ended the quarter within our target range between 7% to 8%, but certainly on the lower part part of that range take a step back when you think about how we manage capital in the past <unk>.
<unk> is senior debt.
From there looking at preferred and then obviously opportunistically.
From a common equity perspective, just considering the.
The market.
We continue to look.
The.
<unk> for our senior debt preferred.
Type transactions to manage that.
On a go forward basis here.
And you also have the ability to move some capital down right.
Thats correct.
Good amount of cash sitting at the Bank Bank holding company that we can continue to use to manage tier one leverage ratio at the bank.
Okay. Thanks.
Yep.
Your next question comes from the line of Brian Foran with Autonomous Research. Your line is open.
Oh hi.
Hi, Brian .
But.
I think one of the concerns was that 2016 all over again.
<unk>.
Recognizing you gave some of the puts and takes but for.
For people, who are worried about kind of 2016 style.
Are pocketing growth what would you say is like the biggest difference in your mind.
Today versus then.
For your business and for your clients.
This is Greg I'll start and then Dan may want to add to it.
I'd say the balance sheet is it is very different compared to what it was back then.
There's a lot of differences.
It's an interesting comparison.
What I continue to reinforce on earnings calls and meetings internally.
Is that.
What gives me comfort every everyday on top of a lot of things is the fact that the innovation economy is going to continue to be up into the right over time. So if you have a.
A quarter or two of softness.
<unk>.
Our the way our balance sheet is constructed now.
Our loan portfolio the way it's constructed.
I feel very good about that and I.
Also feel good that.
That we Shouldnt overreact.
If there is a little more softness that looks more like a 2016.
That again my view is it will be short lived.
It could change.
Maybe we will see something that is more severe than that but again my crystal ball would say that we will get through it.
On a on a.
Faster pace and start back on that same.
The trajectory based on the innovation economy strength.
Great. Thanks for taking my question.
Yes, absolutely Brian .
Your next question comes from the line of Andrew Liesch with Piper Sandler Your line is open.
Alright, Thanks for taking my question.
Just looking at page 16 of the slide deck, just the international loan growth International core fee income growth just curious what was driving that any particular region and what's the outlook for both of those.
On the fee side predominately going to be seeing FX foreign exchange.
Some of the key drivers investments securities and client investment fees had been also strong.
This is also.
Average balances. So we had really significant activity coming through last year at the end of last year and Youre seeing really the continuation.
Of those balance levels from the end of last year.
Carryforward into the first quarter. So just good good good growth there.
Got it and how is that trending so far.
As we move progressively into.
End of the year.
So I think as we look to as Greg mentioned just all in from.
Our liquidity and growth perspective things are softer in the first the first quarter and that was not <unk>.
In the international market so.
Still still growth, but clearly softer than the levels that we saw last year.
Got it okay. Thanks for taking the questions.
Yes.
Your next question comes from the line of Jennifer Gamba Truest Securities. Your line is open.
Thank you good evening two questions I'm, just curious as to how you feel the Boston private acquisition has gone versus your internal plan, thus far and my second question is how much more hiring do you need to do in the investment bank.
Yes, Jennifer I'll, let me start with the question on the private bank first off.
I feel very good about the platform, we now have an SCB private when.
When you look at.
The team of people we brought on board.
And when you look at the new hires were bringing onboard the quality when you look on the breadth of capabilities. So from my standpoint.
The opportunity is.
<unk> is at least as good if not stronger than I originally thought.
One of the things I would say were.
Probably underestimated.
My part is capacity.
And so when you think of when we brought Boston private onboard.
Their advisers their teams were already fully fully leverage.
So we.
I would say, we probably hoped for more capacity.
Look with market volatility and everything else people are spending a lot of time with clients, which is exactly what you would see exactly what you'd want.
So our focus is on attracting attracting talent.
And Thats, where.
I am.
Feeling really good.
We've got a great team already and when you look at the people we brought on board in the fourth quarter. When you look on the people that are in the pipeline to come onboard and that we're in the middle of negotiating with I feel.
Credibly positive about that and then the last part is what were the feedback we're getting from.
Our clients in the market about having this capability and that's also very positive so I would say.
Underestimation on my part about capacity.
But the feeling about the potential and the opportunity is stronger than originally thought.
Second question on FCB Securities.
Yes, we have some additional hiring to do but I just wanted to first pause on the fact that I feel incredibly positive about the people that we've added well the original platform that we acquired with Leerink partners, Let's just start with that and then the team of people. We brought on board and that is in both.
Healthcare services, the technology and the team that we brought on leveraged finance fees.
Feedback from market the pipeline deal wins et cetera had been been extraordinary.
Your follow up question may be well, if you feel so good about it why was first quarter soft.
So let me let me answer it I think anyone that has a capital market business right now would clearly agree that the softness in the IPO market cap.
Capital markets equity capital markets has been exceptionally soft 85% decline from the fourth quarter.
So what's positive positive we're still signing up deals we are signing up new opportunities for companies to go public and when the market starts to open up and M&A is strong.
And so I am I feel very bullish about the team of people, who are very bullish about our capabilities and.
And when you combine the strength of the commercial bank that we have under Mike's leadership, the private bank and the investment bank.
That's really why this concept of one SCB all working together is again, while you probably hear in our voices.
Very very positive as we think about the balance of 'twenty, two and into 'twenty, three 'twenty four et cetera.
Thanks, Greg.
Yes.
Your next question comes from the line of John <unk> with Evercore ISI. Your line is open.
Good afternoon.
Hey, John .
I just wanted to ask around the close.
A question and a little bit different way I guess.
I hear you in terms of.
Youre seeing a little softening in where the risks could be but also the benefit of dry powder and how thats buffering flows.
How.
What incremental slowing.
Flows are.
Included in your guidance right now.
As you look at the full year expectation.
Yeah, I'll start and then Dan will give you more color around it.
This is how I think about it I think about the.
What we saw in the first quarter.
We kind of look at softness for.
Another several months that's going to continue.
And then just start to see some uptick in and kind of the market and money flowing back in at the pace that we talked about capital markets opening up clearly more than they are right now, which you could argue it's close.
So that's not a long along leap from where we are right now so that's what we have what we have in the forecast.
And where we are when you think about that range or the lower end of that range of deposits that we have in that forecast. So that's that's taking the forecast lower end of that range and combining it with what I said about what were kind of how we think the crystal ball is right.
So if it plays out differently, obviously more positive more than likely we probably wouldn't go I'd have a hard time seeing how we would go above.
The range and go to another range, it's a pretty big step up you'd have to see a pretty big pick up from where we are right now.
Conversely on the other side.
If the.
Numbers that I talked about what you saw from first quarter of the funds flow and venture capital public international private equity or worse.
You could see US go below that range and ticked down to do the next range below that so just to give you a little more color of the outlook was what's built into the outlook and what could cause it to kind of go above or below that range.
The only thing I would add to that Greg is again.
Off balance sheet, the ability to be able to serve clients needs and with in the short term rate environment, where it stands to be able to drive.
Some of that money on the balance sheet to support.
Liquidity management.
It is another thing that we consider as apart.
The scenario that Greg this laid out so that we do have more flexibility, we do have more options as well.
Got it okay. Thanks for that and then separately I know in your CEO letter indicate that warrant gains could moderate from here, even though you typically don't guide on warrants.
Can you help us maybe think.
Frame out that potential moderation.
And how we can think about that and then.
Get a ton of questions in times like this.
For you guys that could these warrant gains turned negative in crude your inbox.
Investment gains turned negative so could you talk about that thanks.
Yes.
We don't we don't guidance, we don't give ranges we don't give.
Details around it because quite honestly, it's too hard to predict and we could be off.
In a meaningful way just based on market. So.
Obviously, the reason that we don't we don't guide.
But we wanted to give additional color to say look.
There is clearly a possibility that there could be more softness.
In there and we talked about this a little bit earlier on the call. There is a little bit of a lag in some of the some of the investments right so that could.
Go through and you can see a.
A decline a decline there.
Your specific question was could you see warrant warrant.
More decline and actually be a negative number the answer is yes, you could.
Possible.
And so again, we expect.
Some softness do we expect it to go negative the answer is no.
But.
What we'd like to do with our confidence levels. When you look at our guidance wed like to clearly have a pretty strong competence, 70% to 80%.
And that's why we don't give guidance on warrants and securities because the confidence level quite honestly. If I said. This is the direction. If I said this is where it would be the competence level would be below our comfort zone.
Clearly John I mean, as you know.
Hal go the IPO markets, how those the exit markets, it's really going to driver determine what those numbers are going to be used to take a view on where do you think the IPO and exit markets are going to go.
Okay.
John the last thing I'll say.
John last thing I'll say to stand again, the granularity here really matters and the fact that.
Vast majority of what we've got in the warrant and investment portfolio are in the private markets. If you think about it you've got 500 fund.
Close to 5000 companies and thousands of individual investments that are made over time. So there is a lot of diversification and the timing of those investments and the number of companies. So.
You have to have a prolonged and quite sustained reduction in value to start to see that really come through all of those private private investments. So hopefully that gives you a little bit of extra color.
Yeah that does thanks, Dan and lastly, also in your CEO letter, Greg you indicate the increased expense outlook.
It's partly influenced by the investments that youre, making in the business can you just talk about like what are the largest.
Areas of investment that you are putting new money into right now.
Yes.
It's really it is across the board.
It's digital it is.
It is head count and a lot of different areas to increase capacity.
And clearly, it's under and risk management as well when you think about.
The growth that we've had in going to category three bank.
There's a lot of investment around there and so we look at all of those areas as opportunity investment to really.
And again, it's not just it's not just building forward today, it's building for the future and we've talked about that over the years that we.
We look at these as <unk>.
Opportunities with this additional revenue that we have to really just keep.
Pressing on our ability to deliver for our clients and that is across every one of our four businesses plus the support functions.
So what are the highest.
It really is.
Almost every area on the on the in the sheet in the deck that goes through and talks about our investments.
Significant across the board.
John the only thing I'd add to what Greg said is it's all of our people as well and we are strategically continuing to make investments in bringing new people onto the platform as well as making sure that we retain the incredible talent that we have across the franchise today. So all of those investments really the.
The core of it also continues to be the.
The great people that we've got as part of the franchise.
Got it alright, thanks, Tim.
Your next question comes from the line of Chris Kotowski with Oppenheimer. Your line is open.
Good evening. Thank you.
Just wanted to make sure I understood the dynamic in the NIM in the first quarter properly because like on January 20th you guided to 192 and it came in at $2 13 and was the Delta in those 70 days just the premium amortization or is it just as simple as that the long end of the curve.
Let go and therefore premium amortization went to a de minimis level.
Well.
This is Dan is a combination of like you said.
Substantial slowdown in premium amortization from what happened with 10 year rates were highly sensitive to that premium amortization.
Low 10 year rates of 2% and now looking at the 10 year starting to get close to 3% that's materially slowed down you saw a big improvement there in the quarter on that secondly, just reinvestment.
In the quarter from this.
Incredible.
And the investment securities portfolio being able to reinvest.
With short term rates so much higher also.
From a NIM perspective, so and add all of those things together in the quarter plus some of the benefits on the short term cash.
You get to a better a better yield.
Okay, that's quite a dramatic change in 70 days the other.
I was wondering about is.
In your press release, you show that.
The duration of the held to maturity portfolio extend it about a year one one years to five two years.
Is that mainly a function of the movement in rates extending the maturities of the portfolio or was it a function of the new securities that you added.
You've got it really a function of the duration extension, especially of mortgage securities of which there is a good proportion sitting in that held to maturity book So.
That reduction in premium amortization also comes.
As a part of all of that so, yes mortgage securities and held to maturity versus net net new purchases.
And knowing that there is like a huge difference between duration and contractual maturities.
Looking at your 10-K, its roughly two thirds of beer.
Held to maturity book has had.
Maturities of over 10 years.
What is the.
Stenson risk on that portfolio, if we get into <unk>.
Good.
Another two or 300 basis points.
The long end is the curve.
Like that.
It's a good question I think with the rates, where they are you are seeing extension risk.
Youre seeing the extension of the book already playing out from a duration perspective going much higher from here, we will have some impact to the overall duration and extension risk, but not as material as the move that we've seen here.
Secondly, in the 10 year getting close to 3% by the by the end of the quarter that that's where we had the most sensitivity. That's why we had those bonds sitting in held to maturity to begin with you won't see.
You will see some extension of risks from here, but not as significant because we played through a lot of that already.
Okay, great. Thank you so much.
For me.
Great.
Your next question comes from the line of Brock Vandervliet with UBS. Your line is open.
Hey, everyone at <unk> for Brock Thanks for taking the question just wanted to.
Revisit.
On balance sheet off balance sheet flexibility.
Flexibility conversation again, and I think you mentioned 2 billion came came on from off in Q1, how are you thinking about the deposit beta for those and decided that fit into your broader deposit beta assumptions.
Yes, the deposit beta there will likely be.
Higher.
Then what we see from.
Some some of the rest of the deposits in the portfolio, but still in total fits into.
And I think this is what's important the overall as we said through the cycle of 60% deposit beta so these might be a bit higher and as you look at our portfolio segmentation.
For larger corporate clients I think you end up you end up seeing that but again in total from a guidance perspective.
Bidding.
Quite well and inside of that through the cycle, 60% deposit beta.
Okay, Great that's helpful and.
To talk about what percentage of deposits you guys hold are from later stage companies and.
How you think about the deposit behavior of those relative to the.
The other segments. Thanks.
Okay.
So.
In total percentages I don't have them sitting off hand.
But as we look at the overall I gave some metrics earlier of the migration we expect.
Interest bearing to noninterest bearing.
We think that.
With the forward curve that could move into the from the 30% to 40% range that considers all of those later stage clients.
And at the same time the deposit beta that we mentioned that 60% deposit beta also takes into consideration. Those later later stage clients and we think through the last tightening cycle.
That we've got that incorporated in there.
Very helpful. Thanks, everyone.
Yep.
Your next question comes from the line of Jon <unk> with RBC capital markets. Your line is open.
Hi, Thanks for squeezing me in.
Yes.
Just have a longer term philosophical margin question for you if fed funds go back to the levels of what we saw in 2018 and 19, so around two 5%.
Any reason your margin can't go back to 2018 levels anything different.
Prevent that from happening.
Yes, John This is Dan I think that the structure of the portfolio is really different.
From 2018, the investment Securities portfolio, obviously larger.
You take a look.
At the level that we have from a cash.
Balanced perspective that that's different in the mix.
Capital call lending still.
Much higher than where we were back in 2018. So when you look at those factors. The terminal margin that you end up getting to even if you had a comparable rate environment is lower now at the same time, but the size of the balance sheet. Obviously, you can start to do the math on what that means from a net interest income perspective, so while the margins.
Clearly lower the opportunity to be able to drive sustainable core net interest income growth.
Is much stronger than what we had during that last tightening cycle.
Okay. Thank you very much.
Yes.
Yes.
That is all the time, we have for questions I'll turn the call back to CEO , Greg Becker for closing comments.
Great. Thank you just wanted to thank everyone for joining us today I know it's late in the day for the people on the East Coast and you guys are the analysts here that a lot of lot of different things to digest. So thank you for joining us.
We are obviously very positive about the year ahead, even with the prospects of market volatility and we've talked a lot about on the on the call today.
We do have strong momentum from all the growth we've experienced the last couple of years and.
Strong and meaningful pipeline and additional upside if there are future rate hikes that we talked a lot about again on the call.
And as we've said, we're continuing to invest in our strategic priorities.
All about delivering on this kind of four pillar platform for business units all in service to our clients. So.
To me again continue to be extremely excited about that with the market even with the market volatility.
As always I want to thank our employees for all of the incredible work that they do every single day.
For me, it's been a great quarter getting out and spending more time in the market is more.
Office is open up and spending more time I was in Israel I have been spending time in New York and other markets and just spending time with our teams of people has been.
So rewarding our offices are opened up now and the energy and excitement as we gather people together for events as we gather people together for.
Team meetings and.
The excitement and energy that people have about being together is just great to see.
Obviously want to thank our clients as well because that energy and that excitement is translating into <unk>.
Spending time with our clients and all of the incredible things that Theyre doing.
In every aspect of innovation is also <unk>.
Credibly exciting and we certainly thank them for their business and working with us.
The final thanks, I want to I want to do is is an important one.
To give a really huge shout out to our retiring chairman Roger Dunbar.
Roger Dunbar has been.
With SBB as a board member as an advisor since 2000 as a board member since 2004.
And when you think about that time period, 2004 to 2022 and the last decade as chairman.
It's hard to think about other institutions banks that have performed better over that period of time and having Roger at the helm as chair for the last decade.
Really appreciate his leadership.
I know for me personally as Mentorship and friendship and.
Just wish him the best in the next chapter of his life and again just so appreciate what he has what he has done for US and also welcome our new chair K Matthews, who.
Who is stepping in to the role later today.
So really want to thank Roger for his service and welcome to the new chair role and with that I want to thank everyone again and everyone have a wonderful day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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