Q2 2022 SVB Financial Group Earnings Call
Ladies and gentlemen, thank you for standing by.
Today's conference call is scheduled to begin momentarily until that time your lines will again be placed on music hold and we thank you for your patience.
[music].
Okay.
Ladies and gentlemen, thank you for standing by.
My name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the SB Financial Group Q2, 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
Like to ask a question at that time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one thank you.
It is now my pleasure to turn today's call over to Meghan O'leary head of Investor Relations. Please go ahead.
Thank you Brendan and thank you everyone for joining us today, we're sorry to be a little bit delayed had some phone issues with this afternoon are president and CEO , Greg Becker and our CFO Dan Beck are here to talk about our second quarter 2022 financial results and they'll be joined by other members of our management team for the Q&A our current.
Earnings release highlight slides the CEO letter had 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 may be.
Found in our SEC filings and in our earnings release, and now I will turn the call over to our President and CEO Greg Becker.
Thanks, Meghan and thanks, everyone for joining us today.
Before we jump into questions I, just wanted to share a few thoughts about the market and how we're positioned to navigate it before we again open it up to everyone.
Obviously, we've seen a lot of changes in the markets and sentiment regarding the economy in the last few months and the innovation economy has been impacted even to a greater degree we have unprecedented fed tightening record inflation, the persistence of Covid and geopolitical conflict of pressured public markets and increased economic.
Uncertainty, we've all seen that.
This environment is nearly closed the IPO market meaningfully slowed the pace of PE and VC investment in re valued private companies.
Just on these facts, where we've lowered our 2022 outlook to reflect these near term challenges.
The current environment, though challenging is a normal and necessary part of the innovation cycle and we've talked a lot about that with many of you over the last.
Several years.
The.
What we're experiencing certainly doesn't change our view of our markets or our opportunity in any way.
For us it's really just a question of when not if our markets will recover.
Now, we all know innovation drives economic growth, it's happening more and more everyday and digital adoption and activity in health care.
All accelerated plus.
Plus P. N V C firms have record levels of dry powder to invest and we believe they will do is to do so once valuations normalize.
Our markets have recovered quickly in the past and today, our clients are better positioned than ever before to weather a downturn record VC investment over the last two years has strengthened client's balance sheets in a way we've never seen.
In the innovation economy today is significantly larger than before again comments I've made before many times.
It's also important to note that were stronger and better positioned than at anytime in our history to support our clients as well we have a high quality balance sheet with ample liquidity and strong capital we have the right strategy and a powerful set of capabilities to meet our clients' needs at every stage.
Have a great team strongest in our history and one that has experienced managing through multiple cycles.
And we've always stood apart from competitors for our commitment to partnership with our clients our depth of knowledge and our effectiveness as advisers. These qualities are important differentiators in todays environment, especially in today's environment.
We've been here before and are better equipped to continue serving our clients and executing on our strategy. These are the times, although maybe not the most enjoyable times when we developed the best relationships with our clients and really show, who we are as an institution. So looking forward to answering your questions and with that operator, Please open up the lines.
Thank you.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad. Your first question comes from Steve Alexopoulos with Jpmorgan. Your line is open.
Hi, everyone.
Yeah.
I want to start so first on the deposit side for the high 20% deposit guidance, which basically looks like period end balances remained pretty flat through the rest of the year. Do you think you can hold flat on an organic basis or are you assuming at least for now that organically balances go down and you just move balances from the off balance sheet.
On balance sheet to fill the gap.
Yes, Steve This is Greg I'll start and then I'll turn it to Dan to add a little more granular detail.
So put it in context and in some of this you know, but I'll just give you a little more detail.
When you look at the last.
Four or five quarters.
We've seen rapid growth in quarterly venture capital flows and that's the biggest catalyst of deposits for US. It peaked out in Q3, we saw kind of flattening in Q4 declining Q1, and then a bigger decline in Q2. So that's obviously one one driver of deposits.
Flow, but there's another factor and we don't spend as much haven't spent as much time talking about and that's that's cash burn.
And what's interesting is you know when you when companies raise a lot of money and the expectation is they're going to invest that money and so we saw burn rates had accelerated for over the last 18 months so six quarters.
It's actually continued to accelerate.
And now the question is well with all the messaging out there from investors why would that actually be happening and the answer is we believe the following the.
The burn rate is a little bit of a lag. So you got the investment came last year, the burn rate increases and now you start to slow down, but when you start to slowdown burn rates you have with the companies and you're hearing about this severance you got real estate getting out of real estate and those sort of things. So the burn rate actually is a little bit of a lag this quarter was the <unk>.
Highest cash burn quarter that we had seen so when you put those things together that's.
What really created the decline in the softness in this quarter. So now to give you more color a little more granular detail plus the assumptions that we've made in our outlook I'll turn it over to Dan to give you a little more of that detail Yeah. Steve you know as Greg was talking about the public market that effectively shut in for the quarter.
We had about $2 billion worth of inflow from the public markets, just putting that into perspective in Q3 of 'twenty, one that was $16 billion. So.
We're off pretty pretty significantly if you look at the private market were down roughly 20% on a.
Quarterly basis, and I think that's fairly consistent with what we're seeing with investments in venture those burn rates as Greg talked about are certainly accelerated and up on a quarter over quarter basis.
Look at those factors on a go forward basis for the guidance effectively looking at anywhere between $3 billion to $5 billion on a sequential quarter basis the deposit decline.
Me that public market effectively stay shot assuming that we see a sequential decline of 20% in Q3, our public market investment.
As well as in Q4 and that effectively burn rates slow slightly but stay at elevated level. So we've tried to build a forecast that takes all of those elements into consideration now if the public markets start to improve a bad public market.
Investment improves.
We can see upside relative to what we have and to the extent public market investments slow that can put additional pressure on the numbers, just and just to add to that Steve that the on the private side again, Dan as Dan said, we built in a continuation of a decline over the next few quarters.
So that's one aspect and we really haven't shown much of a change maybe a little bit of a change in cash burn rate. So you've got those three variables.
Kind of given you our assumptions and so if you see improvement in any one of those three.
Could see some upside from our forecast Conversely, if there actually on the downside to any one of those three you could see some softness as well.
And the last thing I'd say.
Steve is if I look at July deposit balances were effectively.
Staying relatively flat to where we ended the second quarter. So.
Seeing some consistency there.
At least the early July results.
Okay.
That's good color on the deposit side, if I can ask now on the loan guidance somewhat similar that it implies pretty flattish growth through the rest of the year at least to where period end was and thats pretty consistent with what signature bank guided earlier in the week, they really dialed down to our expectations for capital call growth in the second half and I am curious.
Can you give more color on this I get it why vcs with slowdown in capital call lending.
Lending, but arent VC PE firms typically more active during periods of stress.
Yes, Steve I'll start and then Mike Mike Ladd.
The drivers of that.
Loan growth.
We expect to see actually the tech and life Sciences that actually is going to be better than what we originally were forecasting.
Going to see more slowness in the mortgages for the obvious reasons around rates and then you really think about on the capital call. It's really.
About utilization rates.
And so we do have growth built into it but it clearly we pulled that growth that growth down.
Youre right on venture capital capital calls that has slowed but p/e is is somewhat.
Ill call cyclical they still need to find.
Companies that have recalibrated to lower valuations and that doesn't even though public markets are mark to market private markets are not mark to market. It takes a little while for opportunities to kind of come to the conclusion of our companies to come to the conclusion that the valuations have reset and it may not come back.
We're seeing a little bit of that softness now again.
If that changes and the stability of valuations start to balance out you can see that pickup there is one other factor in here that I would say that creates upside we've.
We've had.
Incredibly strong term sheets are new.
<unk> business.
Sign ups in the global funds banking, I think and Mike Correct me, if I'm wrong, but last quarter was either the highest or second highest of new deals signed up are term sheets signed so that also creates opportunities and the final piece I would say when you think of capital calls it's this <unk>.
Not only is it about new new relationships, but I would also say as our balance sheet has grown our ability to take larger sizes of loans has also increased that creates additional loan growth capacity. So.
The uncertainty of the market is kind of causing us to give the outlook that we have but I would say certainly as the market plays out there is definitely some upside that could be built in.
Okay.
Thanks. Thank you and then the final question. So if we look at the $137 million of investment losses, which are detailed on page seven that.
That declines a bit more than we've seen in other periods rise over 8% typically you are like two to three can you walk us through the three buckets. So we can understand that a bit better which is really fun to fund strategic and other investments in the <unk> securities.
Each of those held the public equities you are calling out thanks.
So just breaking those losses into the three three buckets. So we've got the public fund exposures.
God evaluation adjustments against the illiquid private exposures and then we've got in our hedged equity investment Thats included within those numbers. So while a majority of the portfolio is made up of those private investments.
There is a small portion of our warrant and an investment portfolio. That's made up of public exposures. During the quarter. We saw valuation declines in that bulk of close to $45 million and thats effectively marked mark mark to market.
So that makes up about 20% of the losses.
Probably more importantly.
Given our fund portfolios over time are somewhat correlated to the public markets. These are the illiquid private we took a downward valuation adjustment for the illiquid investments held in that investment and warrant portfolios in that reserve was close to $40 million. So the losses on investments and warrants are effectively mark to market through the quarter and if we.
C.
Yes.
The updates or evaluation that we've effectively captured that.
With those adjustments in the quarter lapping at least that hedged equity investment there is about $35 million worth of a law included there there is an offset to that in other income. So that is that's effectively flat. If you back out that $35 million, you're really looking at the losses on private illiquid and the public securities.
Okay got it so I guess, Greg you said, there arent that many down rounds, yet youre, saying, Dan as you guys marked them down not the public youre privates anticipating that it will come down is that right.
Based on our App.
And what was happening in the public market.
Evaluation adjustment now to the extent that public markets continue to decline you could see further adjustments, but we believe that we have effectively mark through the down rounds that could really trickle through in the next.
One or two quarters and it's.
Maybe just to pile on to that last part Steve as well.
Yeah.
The one advantage of seeing the rapid decline in valuations and public tech stocks as you kind of hopefully get to that floor more quickly as opposed to kind of a bunch of quarters in a row and I think you've seen over the last.
A couple of weeks there is more stability with the public tech stocks in at least from my standpoint, I believe and I, certainly hope, we've kind of gotten down to the floor no guarantees, but this just a flavor for how we approach the securities portfolio got it okay. Thanks for all the color.
Yes, Thanks, Steve.
Your next question is from the line of Ebrahim <unk> with Bank of America. Your line is open.
Hey, good afternoon.
Hey, Brian .
Hey, Greg just some I guess.
A step back one dose.
A follow up on your comments on deposits and loan growth one.
Like what's the degree of visibility that you have I mean, I appreciate the macro environment Sealy, Josh stocks could have had a bunch over the last two weeks, but as you pointed out.
We could see a sell off I'm just wondering the comment you made about deposits being flat month over month should we take it as well.
You would have another downward revision on loan deposit growth is it low probability event given how much you factored in in terms of downside risk would love to get a sense based on previous cycles, what <unk> seen and just how confident do you feel about this guidance.
Yes, I mean.
I think as I described it and then I'm going to ask again, Dan to reinforce what he said what we have built in is a.
A few different factors and then you have to kind of have your own point of view.
Does that assumption makes sense from your standpoint, what we built in and the venture capital flows is that we believe that there is likely to.
Additional quarters of decline that youre going to see in venture capital dollars going in right. That's what we built into it when we think that is a reasonable assumption.
The second part is on the cash burn.
And this quarter was the highest quarter that we have seen an almost 50% or actually more than 50% higher from an average quarterly cash burn compared to 18 months ago.
We believe that that was going to.
Kind of temper off rate and kind of flatten out.
And so we also believe that is a very realistic and reasonable assumption given everything we've heard talk to our clients.
You've read we've all read about the views that venture capitalists.
About the market when you put those two factors and together that that really creates the outlook.
Now competence level.
Confidence level is that you have that we're going to hit that mark perfectly.
Is I would say a little bit cloudy, so could you see it being higher or could you see it being lower the answer is yes.
It's possible.
We're giving you the kind of.
All the factors that build that builders outcome or build our forecast and kind of what are the drivers that could drive it up in one of the drivers that could drive it down, but we certainly feel good about the assumptions that we've put into our forecast.
The only thing I'll add Greg is as we.
Talk to other others in the market and in our channel checks and not that this market is completely stopped.
Good companies are certainly getting fundraising round. So we're seeing that play through so this is not a zero funding environment. So were showing another 20% a sequential decline in private venture invest in Q3, and Q4 that assumes that we're still seeing at least some some deal flow, albeit at low.
<unk> levels and that seems pretty consistent with what we're hearing from other others in the market and again a lot of it really just depends on cash burn.
Will we see the burn rates slowed down relative to all the conversations coming from our clients that they're trying to slow it down so that's where those competent factors are going to come come in on lending.
We expect to see order of magnitude.
I wanted to have $2 billion worth of lending growth a quarter.
In the loan guidance going forward. So that doesn't mean that were stopped in any way shape or form without question. We continue as Mike said to see substantial amount of commitment in term sheets.
And we're really waiting for that moment, where.
Middle market private equity feels like it's time to put that money back to work so that thats at least the color that we have around the.
The assumptions and how we're feeling about it.
And on that.
Then the one and a half to 2 billion how much of that is.
Dependent on fund banking private equity and I ask because you had blackstone on their earnings call talk about being volume slowing down. So I'm just wondering how much of that is fund banking given growth that you expect versus everything else.
Yes.
The majority of that growth is still coming out of the funds banking portfolio, but there is more contribution coming from technology and health care because were in the past we were crowded out from an equity perspective in those deals and we're seeing that at least picked up but still just because of the size of that portfolio.
The majority of that growth is in fund banking, yes, and just.
Go ahead, Mike Youre going to just go ahead and just my question on just one thing to add and pile on to what Dan said.
When we look at the pipelines for tech and healthcare they are at the strongest level of debt and in history, and Greg already mentioned and similarly on the global front banking both in terms of term sheets issued in term sheet signed in the quarter, whereas right up there with the first or second highest all time now it does take some time to come to deliver for them to.
Draw down this gets back to the macroeconomic backdrop that Greg was talking about but we certainly have been increasing the volumes and feel pretty good about where we are positioned.
Got it and just one last these type of visibility you took a $20 million charge offs tied to one reserve losses I guess this quarter, just give us a perspective on credit in terms of visibility on.
Losses, as we look into the back half of the year and is it still the early stage and growth portfolios, where we should expect the losses.
Hi, Ebrahim its work out here.
And in a word yes.
So what we saw.
What's the unreserved charge offs effectively reflect is.
Sort of a speedier deterioration that I think was a function of the abrupt change and investor dependent clients access to capital or failing that M&A.
And so if you were a company low on liquidity or trying to get sold in the second quarter and and perhaps had already availed yourself of investor support previously.
Relative to a year ago that same company is still would've had more options to get out for enough to repay us that was different in the second quarter.
The.
Second answer to your question I think goes to the back half of this year I think as we've already touched on there is a high level of uncertainty.
As mentioned already right. The unreserved charge offs are assigned but the very beginning of assign and still at $20 million. I think you would acknowledge charge offs still remain pretty low the number of individual charge offs pretty low and so thinking about the back half of the year it really depends on weather.
This environment, we're in in the second quarter persists.
Or does it.
And I think playing into that as well will be.
The higher average liquidity that a lot of these companies have and so.
So we will see what happens again, it's hard to predict but I think it will largely be a function of again access to capital M&A and and if those remain diminished then we could see some degree of higher investor dependent charge offs in the back half of the year.
Got it thanks for taking my questions.
Yep.
Your next question is from the line of MS. Anne <unk> with Morgan Stanley . Your line is open.
Hey, good afternoon.
Appreciate all the comments on the environment and the <unk>.
Run rates at portfolio companies and that they have accelerated.
I guess, how much runway do you think they have been.
They have to raise money or they have to.
Look at M&A opportunities.
I appreciate it that would vary by company, but I just wanted to get a general sense of how much deposit balances could decline before they really have to go out there and raise money.
Sure.
So it's Greg I'll start and Marc would add you answered part of your question, which is it so company dependent.
The very good news and again, we've talked about this on previous earnings calls companies are more flush with cash than they've ever been in history by a wide margin.
From my standpoint protects two things that protects the overall.
Liquidity total client.
Funds from the standpoint that can slow the burn and money is still going to flow in and it helps protect credit quality as well.
I think it's important.
Go back and Dan and I spent a lot of time talking about the mix the balance of new money coming in and burn rate and I think it is just so important to understand that what we talked about.
Because my view is yes, you could see what we have in our.
Our outlook, which is a 20% decline in venture capital. The next two quarters, but there is we.
Talked about it a lot of dry powder. There is so much money out there with new funds being closed and while they may wait a little bit and be patient again, what I said the good news is that valuations publicly and now we're starting to see it privately have corrected and when there is so many good companies out there that money will continue to deploy.
From my standpoint at healthy clip. So they have they are flushed with cash.
Not worried about my view not worried about it from a.
Credit perspective relative to what we've seen in the past when companies are a lot lower on cash balances on average and it's Mark <unk> I will just add to that a historical point of reference mob and so thinking about 2015 and 16 right. We started to see some pressure build in the back half of 2015 and the front part of 16 <unk>.
Two quarters.
Is where we had that.
Elevated level of early stage investor dependent charge offs, but then yes back half of the year spring sprung and it was all off to the races. Again, if we saw that same experience today I think the higher average liquidity. These companies have might get them more of them through a patch.
Sure.
And so if it's longer than yes, more companies will be under pressure, but all other things being equal I think that higher average level of liquidity is a really good job.
Mitigating factor to what we're seeing now.
<unk> if it is not.
Terribly long Lyft.
That's great color. Thanks, and then just separately you talked about.
Interest rate risk management in the deck.
You are now focused on protecting against rates moving lower.
Any more detail on that and how much more you wanted to do in the coming quarters, because clearly that's going to reduce some of the upside from the additional.
To 100 basis points or so of great high so we have and the forward curve.
Yes. This is Dan.
Dan I think.
We're still well positioned to the upside for for higher rates, but at the same time, what we can start to deal with look at dampening the asset sensitivity and we've done this before back in 2017 to 18 timeframe to below 10%.
For 100 basis point parallel shock, so we'll do that progressively paying attention to what's in the forward curve. So that we can.
So that we can manage that further right now we're sitting at six 8%.
Asset sensitivity to to down rates and we think we still have a couple of percentage points ago, we'll do that through some receive fixed swaps and continuing to embed.
<unk> and our lending agreement.
That should help protect to the downside.
Great. Thank you.
Yes.
Your next question is from the line of Casey Haire with Jefferies. Your line is open.
Yes, thanks, good evening everyone.
A question on the <unk>.
The NII guide.
<unk>.
You guys are assuming for funding going forward, because if I'm understanding you correctly you expect some loan growth you expect deposits down.
I know you have the bond book cash following $2 billion to $3 billion a quarter, but is that enough.
Match funding.
On the loan growth.
And.
The deposit outflows.
Yes, Casey it's Dan here, we talk about it in the Investor presentation, there is roughly $3 billion worth.
Cash flow coming off of the investment securities portfolio quarter. So that that provides a solid foundation just the start.
On top of that.
We have and we.
We've had some short term wholesale borrowings.
At least outstanding.
That helps us at least manage periodic cash flow.
And then as we talked about in the past we have opportunities to drive deposits from off the balance sheet to on the balance sheet.
Effectively shore up liquidity flows. So those those are some of the options that we have to continue to manage.
Manage the cash flow and those options are all considered in the NII guide.
That we have.
Okay very good.
And then.
A question for you slide 28.
Pretty good color.
What the downside scenario.
Okay.
Moody's lays out that you guys sort of weighted 65%.
It speaks to the broader macro like peak unemployment of nine in GDP shrinkage of to do like that's great for a garden variety of regional you guys, obviously are a little bit different.
So is there a way to what does that mean for the tech and innovation markets are there any indicators that you could point to.
That way, we have a better understanding of.
How things change.
How conservative or aggressive.
Or was there a policy has been thus far.
Yes, so as Mark and what I will say here is that the.
Broadly speaking our portfolio, putting aside the investor dependent and particularly companies that arent going to have to sell a product or service to customers for some number of years.
The rest of the portfolio generally speaking would be impacted to varying degrees in different segments by a recession.
And so I think thats, the first thing and I think by extension there is some sensitivity in unemployment there are some of our segments of the portfolio that are consumer facing depend on consumer spending could see stress there so I'm going to stop and make sure I'm answering the question you're asking yes.
Yes, no that's great that's great it's not easy to address.
Casey, It's Dan I think another way to look at it is and the more risky segments. What do we have reserved relative to kind of the highest stressed lifecycle losses and we talked about this at the onset of Covid.
Our highest loss rates in the early stage investor dependent portfolio through the cycle of around 6%, while youre seeing us with this change in the Moody's economic scenario get very close to where the reserve rate on that book of 5%, So kind of seeing where that's heading from a reserve on our <unk>.
<unk>, so hopefully that helps a little bit and trying to point out how covered we are for a more negative scenario.
Gotcha.
Last one for me just on the capital front.
Obviously, not a lot of balance sheet growth upcoming wondering if.
If if share buybacks.
Being considered.
Capital ratios climbing.
The balance sheet kind of running in place.
Yes, Casey we're always open.
Obviously, the capital actions, we will see how the next couple of quarters play out.
Folks have seen this in our business we've been here before.
Once we get to a spot where valuation.
Folks are comfortable with that and that amount of dry powder. That's out there comes off the sidelines growth returns pretty rapidly. So we got it we got to be ready for that but obviously if this plays out over the next couple of quarters, we'll consider all of our options from a capital perspective.
Great. Thank you.
Your next question is from the line of Jared Shaw with Wells Fargo Securities. Your line is open.
Hey, good afternoon.
Hey, Jared.
Just looking at deposit betas IC.
Clearly, calling out the 50% to 60% beta through the cycle I mean this this quarter.
We got a pretty quickly to 46% it looks like.
How should we be thinking about additional.
Data growth from here or is it.
Are we going to get there basically next quarter or this was the initial.
Jump up and how you think you can moderate that growth yes.
Yes, Jared I think if you look at it this quarter or.
Through June 30th Beta is right around 41 basis points.
Yeah, we're still.
We're really projecting that 60 basis points throughout the cycle and we think.
Off to on balance sheet flow.
We did see this quarter is going to moderate a bit in our forecast for the remainder of the year. So there is some higher price deposits that increased the data more significantly within the quarter. So we think that we're still within that 60 day 60 basis points beta through the cycle range.
But obviously market conditions.
We will dictate that and most importantly, retaining our clients deposits.
And paying a market rate to them for their deposits.
It is important to us.
Okay.
Thanks, and then looking at the looking at the growth loan growth outlook.
How should we be thinking about spread compression.
From here and obviously, it's a competitive.
The market should that continue to be.
The accelerating.
But can you talk to in terms of load loan yield beta I think right now we're around 70% and as we get through some of the floors. You can start to see us be around 80 or 90% there as we go forward. So I feel pretty good here right now and again if you go back to the pipelines are full and it's still competitive out there, but again I think we're in a pretty good.
On loan data.
Yes, I guess I'm thinking about additional future loan growth with the new new pricing and the spreads on new pricing is that continuing to see compression.
Yes.
Got it.
Jared It's Dan I think as we look at loan growth for the rest of the year, we've factored in kind of where theres new origination spreads are there is a little bit.
Compression on it but that's all factored into our net interest income got and I think youre still in that 80% beta range.
Just based on what we're seeing in the market.
Okay, great. Thank you.
Yes.
Your next question is from the line of John Kerry with Evercore ISI. Your line is open.
Good afternoon.
Hey, John .
On the.
Charge off.
Expectation and your expectation that you could see rising charge offs.
In coming quarters.
And also I guess the decrease we saw for the second quarter.
As you look at it by portfolio could you maybe.
Quantify where you see that pressure, perhaps for the second quarter and then for the outlook. I know you had mentioned a little bit Abrahams question, but specifically the innovation portfolio versus the growth stage and early stage can you just where do you where do you see the lowest concentration would be great.
From what your expectations considering thanks.
Yes, it's mark and generally speaking I would say history as most instructive here.
And to the extent, we were to have a prolonged downturn.
Any severity generally early stage investor dependent charge offs is where we have historically.
<unk> seen the highest losses in wood.
Make the related point here.
That that particular portfolio segment.
Has come down quite dramatically as a percentage of total loans to roughly 2%.
Now.
And then we would expect to see probably.
Fewer but potentially larger charge offs and mid and later stage investor dependent and then after that it's really a yes.
Functionally I wouldn't expect to see higher losses, but again I'm going to stop there because the uncertainty is high and want to resist the urge to try to predict the future here.
Got it so the key areas of the highest loss content would amount to 8% for your portfolio. If you look at the growth in the early stage piece correct.
Correct and if you were to go back to slide referenced earlier 28, you see the breakdown of the allowance for credit loss by that segment and as Dan alluded to earlier early stage investor dependent.
Almost up to.
The 2008 2010 levels at $4, 93% for that segment.
John as you think about them in the early stage investor dependent is only about 2% of the total loan portfolio.
And that's what we're referring to is the highest loss rates historically right yes.
Yes.
Got it got it thanks, Mike and then.
On the.
And the private bank portfolio getting some questions just regarding.
Credit exposure there given the stock based compensation and everything so maybe just talk about how you're viewing potential frequency and severity out of that book.
Yes.
I would say, it's Marc again and reflective of the reserve we have on private bank. We continue to expect pretty strong credit quality there. It is.
By and large.
A mortgage portfolio to.
To your point there may be some diminished income, but at the same time these tend to be fairly.
Whilst the clients gainfully employed.
And most importantly, very well margin.
Mortgage mortgages from a loan to value standpoint.
And so that being the bulk of our portfolio feel pretty confident about that there are certainly other segments, there too, but not seeing anything in the second quarter, that's giving us.
Cause for concern at this time.
Yes.
Got it okay. Thanks, Mark and then on the.
The core fee income.
The guidance increasing that to the mid fifties, maybe could you unpack that for us in terms of the drivers how does that break out by your core fee businesses in terms of your growth expectation.
Jonathan I'll start.
First and foremost when we look at new client activity.
<unk> continued to see really strong new client acquisition. So that that's kind of the foundation for continued transaction activity.
When we look at.
The drivers for the increase in guidance. The vast majority of that is coming from client fund fee income. So very quickly we have gone from eight basis points to very close to 17 basis points on the off balance sheet client funds now with every additional 25 basis points, we will see.
Another one to two basis points worth of spread that is not incorporated in the guidance forecast. So you are just seeing what is already transpire with fed funds at $1 75, and the balances in the portfolio as it is so there is upside from there should we get additional rate hikes.
Okay, Great alright, thanks for taking my question.
Yes, Thanks John .
Your next question comes from the line of Chris Mcgratty with K B W. Your line is open.
Great. Thanks.
Dan and Greg on the on the off balance sheet.
Trends can you remind me what you moved on this quarter and then within your forecast for the updated deposit growth. What are your what are your assumptions I guess for total client funds like I'm trying to give you a size of the off balance sheet.
Chris It's Dan when we look at total funds from off to on the balance sheet. It gets a little bit complicated because we also had funds flowing generally from our global funds banking clients off the balance sheet for higher rates, but when we look at it order of magnitude we saw something.
<unk> to $10 billion of funds move from off the balance sheet to on the balance sheet within the quarter now we've tempered that.
Expectation in the third and the fourth quarter, but that effectively is there and stands ready to the extent that.
From a pricing perspective, it makes sense for us to bring more of those funds on onto the balance sheet.
Okay great.
And then maybe my follow up would be you guys move your bond portfolio to held to maturity a lot sooner than others and protected book can you walk me through a scenario, where you would have to be allowed to reverse that and if so I assume there'll be a mark on that.
Yes, Chris we have no.
Expectation or intention of doing that.
Take a look just as the overall liquidity of the balance sheet. We're in a really solid position. So no no intention to do it.
Okay. Thank you.
Okay.
Your next question comes from the line of Vilas Abraham with UBS. Your line is open.
Okay.
Hello, everyone. Thanks for all the market color on the call today very helpful.
I hear you on the abundance of dry powder that's out there.
Can you discuss what youre hearing from Lps that have committed capital.
Capital, but much of it is presumably still in their bank accounts are they getting uncomfortable at all particularly as private market exposures in their portfolio may actually be moving up as.
As the public side, yet gets marked down just how are they thinking about things right now.
Yes. This is Greg I'll start Mike.
Mike has spent even more time with limited partners recently, and we'll give you even more real time color about what he's hearing.
From my standpoint, I'm not hearing.
Seeing any.
CERN about the about where they are where they are at their balances clearly, they're getting they're having write downs for the position to markets that the dollars. They have right now, but they still look at the returns they have made over time in private equity and venture capital and its at the top of the return food chain over time.
So that's number one number two a lot of firms looked at who didn't have money in the market back in.
Oh, eight <unk> 2010, because they were concerned that the market turned down and it was about investment and they missed out on that incredibly trajectory over the last decade, and so we're seeing an interest for people that haven't been in the market to say Wow, what a great time to come back in right now now what they are saying so.
So thats part of it second part of it is.
If there is if your underlying question has any.
Part around worried about defaults from limited partners.
The answers there is zero, we haven't seen any we don't expect any we didnt see any in the last cycle.
And so not worried not worried about that.
They are saying is while you raised a lot of funds very quickly.
And can you slow down the pace somewhat for new formations in the answers. Yes firms are doing are doing that not surprisingly.
But as far as the limited partners go.
My view is they're very optimistic about the innovation economy much as we are Mike what would you guess.
The key thing that I mean, what you saw here coming out recently the data set of 362 trillion dollars of dry powder at the end of June 30, So there's a significant amount a lot of interest and certainly deploying in the areas. The one thing to keep in mind, though in terms of public valuations in the so called denominator effect that you do have some endowments and pensions.
Look I'm, a little bit more overweighted in the private sector because of public market valuations have come down and so there is some anecdotal commentary about hey, maybe slow down a little bit, but my interest has not waned and so it's just a little bit of buying time, and clearly with the economic backdrop. Some of the states in terms of tax dollars could be coming down so they may be needed saving dollars for the year.
But again strong demand strong interest and during these cycles.
Tend to create great companies. So I don't see that slowing down is just maybe as Greg said, a little bit slow down the pace just a bit.
But again still tremendous opportunities for them going forward.
Okay got it that's very helpful.
Just back to the excuse me back to the Tech and life Science life Science in the portfolio. It sounds like you guys are looking at that.
Opportunity here as <unk>.
Equity capital access gets a little bit more challenging for some of these companies.
Can you talk about just the underwriting box from here on out has that changed at all from a from a couple of quarters ago as well.
As the environment changes that you put out those term sheets.
It's Mark I'll start Mike May wish to add.
And so.
Historically speaking, we try very very hard to be the consistent predictable dependable provider of services to our clients at every point in the cycle no matter, where we are and so we are very much interested in the loan demand, we're seeing and at the same time as you might expect we are being thoughtful.
About <unk>.
Which new clients, we take on our new deals we originate.
And obviously that would differ from sector to sector segment to segment and so but that's again nothing new we strive to be consistent.
We will of course be.
Be thoughtful when the environment changes around us as to how far and to what degree to lean in to given opportunities and that is a.
Practice that has served us well for a long long time, Mike what would you add yes. There's a few different things are we're watching I mean, when you think of the backdrop what are some of the things that are going on in the kind of inflation. So how does the company handle increases in pricing do they have pricing power or some things we are watching for increase in interest rates can they at least absorb some of the interest rate increases. So those are things that we're looking.
But to Mark's point, I think it's a great opportunity for us to lean in and help our clients, particularly some of the good clients, having those discussions with the vcs about which ones, they're going to lean on and making sure that we're there to continue for the support.
Great. That's all I had thank you guys.
Thanks.
Your next question comes from the line of Andrew Liesch with Piper Sandler Your line is open.
Alright, thanks for taking the questions.
Just a question on the expense guide from here.
Backing out the merger charges looks like it's a pretty big ramp in expenses in the second half of the year I'm, just curious where are these investments going in.
And how do we how do we get to that expense guidance.
Yes, it's Greg.
We still obviously have a lot of initiatives that we're investing in you can look at it from the standpoint of.
Digital investment, we're still adding head count to support growth.
Infrastructure build.
There is a lot of things, but in fact actually what's happening is we're excuse me.
Lowering the trajectory.
And so from that standpoint, we're looking at professional services, we're looking at open reqs and pulling back on that.
But I will give Dan to give you a little more color.
So.
If you look at the expense trajectory first and foremost in the quarter, considering the pullback of our expectations for the year. We did have some overall reductions in expenses around incentive compensation and the like so when do we really look at run rate for expenses you are a little bit lower in this quarter just because of the.
The reduction in that area when I look at the expense run rate for Q3, we're probably in the $9 50 to $9 70 range just to put a little bit of color around it. So we're clearly focused.
In on in investment management.
Expense management, we absolutely know that we need to invest to take advantage of the opportunity in front of us, but we win revenue.
<unk> balance sheet was growing with the right opportunity is at a much higher pace, we clearly hit the accelerator on investments and now we have the opportunity to be able to dial some of that back.
Through professional services consultants.
The light so just really turning the dial.
On that or ways for us to be able to temper some of those investments.
In a slower period again, we must continue to invest though because we see this opportunity in front of us.
Understood.
Thanks for taking the questions you've covered everything else.
Thanks.
Your next question is from the line of David Smith with Autonomous your line is open.
Hi, you spoke earlier about how the balance sheet, having grown means that you can take on larger sizes of loans does that mean, you can go above the mid market and global fund banking you could potentially go above the mid market fund space that you've historically focused on.
This is Greg I'll start.
I think there is always an interesting definitions of mid market. So I think you have to start there I would say when you look at.
When we've done our analysis, we can go up by <unk> compared to a year ago or two years ago. You are looking at more than 50% growth in capacity from where we were and selectively even higher than that for the highest quality firms.
You combine that with our ability to syndicate. So you have to look at those two things together and our syndication capability. It gives us even more headroom, we can support very large PE firms now when you get to a certain size. It becomes I would argue so large and the returns arent arent there so actually.
I think we've got lots of headroom to grow and we're we can go again, two very very large large firms, Mike what would you add anything.
The benefit of the increase that we mentioned here is allows us to continue to grow in certain funds as they become larger and they bring on more funds even larger size on the new strategy. So I think thats going to be very helpful for us going forward.
Great and then.
Bradley, it's been a tough period for the innovation economy are there any.
Bright spots within that you would highlight or has it been.
<unk> been pretty uniform in terms of.
The weak instrument investment and valuation front or in your view.
I'm glad you asked a positive question.
So there are a lot there are a lot I mean, there's so many bright spots. When you go out there and you spend time with clients and there's always been the best part of what we get to do and what's so amazing. It is it is across the board you can look at.
There are so many things in AD tech there are so many things in the broad energy and clean Tech that's getting so much so much excitement so much in healthcare broadly speaking in health care services in biotechnology and digital health.
Is literally in every area and so when you when you hear US talk about the reason we're optimistic about the medium and long term of the innovation economy. It's when you get to spend time on the ground with these companies and watching them grow at such an incredible pace. So to your question is there one area is there one segment that stands out above the other ones the answers.
Not really they're all doing amazing things in <unk>.
I actually believe like a lot of like a lot of times when you have a.
A recalibration, where we are right now companies end up being better in the end because when you have money that is free the way. It was the last couple of years you are just not as disciplined and I think companies are going to get back on the right track.
And really make the right decisions for the long term so as much as you'd like to say nobody wants a correction a recalibration I think it's actually going to be healthy in the long run.
Yeah.
Got it thank you.
Yes.
There are no further questions at this time I will now turn the call back over to Mr. Greg Becker.
Great. Thank you John and thank you everyone for joining US obviously, we spent a lot of time talking about the market and the markets.
Volatility has a lot going on.
But it's a great way to close with the last question, which is the view of why we view, where we are and where we sit and what do we get to do every day is being so so optimistic and positive.
Clearly, we've taken our outlook down given the uncertainty that we have and we talked a lot about liquidity and.
Client flows and I think we've given you a lot of context behind that so that you can look and look at where we're headed and where we assume we're going to end up the balance of this year and into next year. There's also so many positives that have gone on in the last few quarters, such as the core fee income growth and new client acquisition and <unk>.
This strong loan pipeline the team enhancements across all four businesses and even the support infrastructure that again, we look around the table and just feel really really good about.
What's being built and you look at it with the four businesses and SUV Securities and this would be private and all of those businesses working together in right. Now is the time right now is the time when they want advice.
Our ability to sit in front of the most amazing companies right now and get their attention and have them work with us to come up with solutions is never better never been stronger. So there is there is definitely an optimistic.
Tone, despite the challenges that may be in front of us huge thanks to our team. They are the ones that have to do the heavy lifting every single day and also the positive side of working with our great clients. Appreciate our clients for their support of us in working with US and we look forward to working with them.
Through this through this market. So thanks to everyone for joining us have a wonderful day. Thank you.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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