Q3 2022 SVB Financial Group Earnings Call
Please standby were about to begin.
Good afternoon, ladies and gentlemen, welcome to SB financial group's Q3 2022 earnings conference call. At this time all participants are in a listen only mode and please be advised that this call is being recorded.
After the Speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question Press Star One again and now at this time I'll turn things over to MS. Meghan O'leary head of Investor Relations. Please go ahead ma'am.
Thank you Bo 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 third quarter 2022 financial results and will be joined by other members of our management team for the Q&A. Our current earnings release slides and CEO letter had been filed with the SEC and are available.
On the Investor Relations section of our website will be making forward looking statements. During this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward looking information, which applies equally to statements made in this call. In addition to some of our discussion may include references to non-GAAP financial measure.
Information about those measures, including reconciliation to GAAP measures, maybe found in our SEC filings and in our earnings release and now I will turn the call over to Greg Becker.
Great. Thanks, Meghan before we go into questions I, just want to comment briefly on both our business and the market kind of environment. We're all we're all dealing with just briefly.
Let me start with the business.
We continue to see strength and momentum in our underlying business and it gets really important to highlight given all the other factors that are going on.
Global fund banking term sheets near record highs new client acquisition at all time highs.
<unk> credit quality record core fee income and investments in our four core businesses are driving better and deeper client relationships and really allowing us to give good advice to our clients as they weather this economic uncertainty.
Had great client feedback from the rollout of our digital banking platform S. V go and we hit some international milestones are the U K subsidiaries nation and opening up our Stockholm office, that's going to help fuel our long term growth.
These are just a few of the many good things happening at FCB.
And clearly at the same time the markets are undeniably a challenging.
Volatility rising from a number of global issues as reduced private and public investment in the innovation economy and this investment reduction combined with elevated cash burn is clearly pressuring deposit flow.
This economic uncertainty is making it very difficult to predict when the balance of investment and lower cash burn will normalize.
While we firmly believe the global innovation economy is the best market. It will get back on track and our Ford business platform is well positioned to capitalized on its return.
In the meantime, we're well equipped to manage these conditions with a strong liquid balance sheet with healthy levels of capital recession tested management, a resilient client base.
And it's important to note that we remain steadfast in our focus on our strategy and laying the foundation for our long term growth.
With that.
Turn it over to the operator to open up the line for questions. Thanks.
Thank you again, ladies and gentlemen, any questions at this time simply press Star one take our first question. This afternoon from Steven Alexopoulos at JP Morgan.
Hey, good morning, everyone or good afternoon actually sorry.
I wanted to start with a big picture question. So asset sensitivity has declined but youre still asset sensitive and we have rates basically moving up across the entire curve, which would suggest you should see some benefit potentially to NIM, but definitely to NII, but in the slides you're guiding to both NII and NIM have now peaked.
Just explain for us what's happening in the real world that Youre asset sensitive model is not capturing because the guidance almost looks like your liability sensitive bank here.
Yeah, Steve It's Dan. So if you think about what's happening we continue to have our asset sensitivity on a static balance sheet, but we continue to with a shift from noninterest bearing to interest bearing and use of off balance sheet client funds on the balance sheet driving.
Our interest bearing.
Have a higher levels of interest cost from an end of quarter perspective. So while we are still getting some benefit from a net interest income sensitivity perspective that shift in mix to higher levels of interest bearing in this environment, while we are seeing higher cash burn.
And slower deployment.
And the venture space is driving our weaker net interest income on a quarter to quarter basis.
Okay.
If we stay with that.
The chart on slide nine shows the inflows and outflows, which was pretty helpful.
<unk> now at two times historical rate simply because more capital was raised during QE. That's now getting spent or something else going on there and what level of VC spend do you need to see this stabilize.
Okay.
Yes, Steve It's Greg Let me, let me take that.
It clearly is a function of the first part of the money that was raised last year right and when you think about it. The reason that you didn't see an immediate jump in all the way to Max cash burn as it does take a while once you've raised.
All the funds they raised last year to kind of hire the people to start spending the money and there'll be a there'll be a lag the other way.
As well and Thats, probably one of the things in the last quarter that we didn't we didn't fully appreciate that there would be a lag there and so it's hard to answer your question because.
You have to look at both of those variables you have to look at the variable of dollars going in inflow, but it's both public and private and then you have to look at the <unk>.
Cash burn so as we think about that.
This quarter was basically going back to the early part of 2020 from a level perspective, and if you go back and look at that if we get back to it will take a little while to get back to that same level of cash burn. We certainly think that cash burn will continue to drop but.
But it may take 234 quarters to kind of get back to a similar level to the way. It was last year I think it's important to note that roughly we're capturing the same amount of venture capital that we have in the past which is roughly 50%.
You can go back and look at the analysis and say over the last several years when on average when venture capital gets invested in a quarter, we capture roughly half of that and that was still true.
This quarter and so it's really almost more of a function of of the cash burn than it is the level. My view I think we're going to start to see kind of this bouncing around at this level of venture capital where it's at prior at this level for the next several quarters. So what we really need to see is an improvement in cash burn.
We expect it.
But to be honest that crystal ball is a little bit cloudy exactly when it will happen and to what degree yes. The last thing to say Steve is that the chart that youre looking at in the earnings deck is on total client funds.
The other thing that we have an opportunity for us to continue to direct.
From off the balance sheet on as well as for net new money that's being deployed.
More towards the balance sheet to offset higher levels of cash burn so just something else to take into consideration, yes that ends up costing a bit more from a liquidity perspective, but when youre growing lending that's exiting the quarter.
Close to 5% from an all in yield perspective, that's still accretive.
Okay.
Thanks. So just final question so on the fourth quarter deposit guide the $1 68 to $1 72 billion. What do you see investment level are you assuming to get into that range and whats the assume mix of interest bearing noninterest bearing.
Yeah, So Steve again, you know what.
Well, we think about for deposits is two things macro venture deployment and client cash burn.
In this quarter, we saw total cash or client venture deployment, 40% lower than Q2.
If we're taking a look at our expectation to get to the higher end of the range. We would assume that we have a venture funding environment similar to Q3 with a continuation of higher levels of cash burn and continued success in bringing in deposits from off our balance sheet to on the lower end of that range assumes a lower <unk>.
Even lower deployment environment take another 20% down from their continuation of higher levels of cash burn and less success of bringing others off balance sheet funds to on the balance sheet in terms of noninterest bearing to interest bearing where probably exiting the year.
In that 45% to 50% range.
Got you okay.
Thanks for taking my questions. Thanks.
Thanks, Steve.
Thank you. We'll go next now to Ebrahim <unk> of Bank of America.
Hey, good afternoon.
I guess.
Just following up on this cash burn dynamic so.
If we assume that VC investment piece doesn't change from here I think as you point out Greg. This is still the best year extra into 'twenty. One so let's say if this is the new normal for the next several quarters or years.
Yes.
Do you have any visibility when that cash bond actually meaningfully slows down where you start seeing outflows in deposits as a result and secondly.
Is it fair for us to assume that unless we see a big shift in VC investments the mix shifting worsening gentlemen.
And noninterest bearing to total and we could see NII decline sequentially for the next few quarters. Thank you.
Yes, Ebrahim, let me answer the first part of the question and then Dan can take the second one.
The visibility into the into the cash burn is a function of kind of what we see on a on it in a day to day basis, and then we extrapolate that out.
<unk>.
What we saw is a slight decline in the third quarter roughly seven to eight 8% and it's again, it's not a precise math.
What I would expect to see it would be logical to see I should say as a similar decline over the next few quarters on a quarterly basis. So your question is if you keep it steady keep it flat the level of investment.
When would we start to see kind of I'll call. It a flattening youre probably looking at about three quarters out before you kind of get to that breakeven from a flow perspective.
Having done the back of the envelope math, but I would say, it's generally in that in that area.
And so that's that's what we track, but what are the other kind of communications and engagement that we have with clients that venture capitalists to kind of get a sense on that here's here's what I would here's how I would think about that.
<unk> six.
Six months ago.
Sentiment was.
Definitely a concern.
Three months ago. It was a greater concern and now if you've spent time, we talk to venture capitalists and we just had our global CFO summit for VC and PE the sentiments gotten gotten worse.
So the message that they're communicating our.
Cut your burn now it's serious even if you've got a lot of cash and we'll see how long this lasts and be more defensive.
That dialogue would imply that you should see cash burn continue to come come down I, just would say we were a little bit surprised maybe I was that it didn't come down even more quickly last quarter, which is why again, it's just a little bit difficult to predict.
And then to follow on to the question in terms of NII and net interest margin dynamic depending on how much of new money, we can capture onto the balance sheet, which is generally cheaper.
We may have to continue to replace.
Dollars that are rolling off in deposits with off balance sheet solutions, which are higher costs for sure. If I think of the overall deposit beta associated with those accounts those are in the mud.
Higher range than what's sitting on the balance sheet with the rest of it.
With the rest of the deposits at the same time to the extent that we continue to see good strong lending, we're picking up close to 990% on commercial bank lending of the data from from higher rates, so that that could be some offset but generally speaking I would continue to see some pressure on net interest.
Its margin and net interest income as we head into 2023 until the cash burn.
And overall deployment start to start to rebalance.
Okay, and then just tied to the liquidity. So you have a ton of excess liquidity of balance sheet and.
Ability to borrow is there any scenario, where youll see liquidating some part of the securities books too.
Funding and just kind of restructuring the balance sheet to meet as opposed to bringing on higher cost deposit funding on.
Yes, I mean, I think the way to think about it as he mentioned the balance sheet is really flexible.
We have been using and talked about it earlier off balance sheet deposits.
And wholesale funding effectively supported by the Securities book to bridge and I think this is really important in this period of time that were out of balance between cash burn and the amount that's being deployed into the market.
First and foremost the good news is that the securities portfolio is constantly paying down so we're roughly seeing about $3 billion a quarter, even as interest rates increase to meet those funding needs.
Additionally, as the burn and funding comes into balance that's going to open up opportunities. We've talked about this before we're going to be able to drive more expensive funding off the balance sheet to reduce wholesale funding and that will.
Provide opportunities to reduce the overall cost of funding so with all of that we've got a lot of flexibility.
With the portfolio at the same time, we're always considering ways to optimize the balance sheet. We've got a considerable available for sale portfolio and we've demonstrated that we've been opportunistic with sales like that in the past.
Got it thanks, I'll re queue.
Okay.
Thank you we'll go next to John <unk> at Evercore.
Yes.
Good afternoon.
Hey, John .
And just back to the cash flows coming off the bond book.
I know you mentioned can you just hit the $3 billion per quarter in pay downs is that the total cash flows coming off.
The bond book per quarter or is there a maturity that add to that.
Yes, that's the regular maturity as we go on in time, we'll start to see some of the bullet maturities come down from a treasury perspective, but the regular principal pay downs in the portfolio at least over the next four quarters are in that $3 billion three.
$3 billion range, and then again as we get out into later duration with some of the Treasury portfolio is youll start to see some of those bullet maturities come come through.
Okay and that 3 billion that is fully extended.
<unk>.
Yes.
I mean, considering where rates are now in the mortgage portfolios. We think we have most the vast majority of the extension in there.
Okay, and if you could just remind us again.
Margaret you can be more specific of what rates, you're bringing on the off balance sheet.
Positive like for example, this quarter what at what rate they.
They brought on.
Yes, so as a reminder, those off balance sheet deposits that were bringing on.
Generally said in money fund accounts are there theyre getting effectively money money market rates in order for us to effectively.
Drive.
The product that allows for us to.
Have those deposits both on or off the balance sheet, we have to pay a bit of a spread to that.
So we're paying in the let's call it.
High twos range associated with that and they do have higher beta obviously than the rest of the organic.
And deposits that are sitting naturally on the balance sheet.
Okay got it and again of the 91 billion in the off balance sheet.
Funds again, how much of that is eligible to be brought back on.
We'd say it's.
Roughly half a lot of it is obviously a client appetite and we always obviously do the right thing from a client perspective, and how we are paying from a rate perspective, but we would say it's roughly half from an availability perspective.
Yes.
Okay and then the last thing for me.
Just in terms of the you mentioned the optionality in the available for sale portfolio to held to maturity portfolio.
Are you still thinking that there is there is no.
To restructure that portfolio in any way.
There is no intent to restructure the held to maturity portfolio.
Okay.
Okay, Alright, thats it from me thanks.
Okay.
Thank you well go next now to Casey here at Jefferies.
Thanks, Good evening guys.
Wanted to touch on the.
The borrowings.
$10 billion last quarter and another $10 billion early in this quarter, just what what is the what kind of term and what kind of rate.
Are you guys paying on the borrowings.
Yes.
Yeah. So Casey it's Dan So we've got a mix on right now of short term borrowings in the 3% range. We've term some of that out to less than a year maturity. Some of that's in the high threes low fours low 4% range.
Okay.
That so that all all of that $20 billion 10 billion and <unk> and.
10 billion in October and the $10 billion in the second quarter.
So in terms of balances at the end of the quarter I believe we're sitting at $13 billion.
Along those lines and so all of that we're sitting with it.
60% less.
Close to a year and the rest of the short term.
Okay Gotcha.
Alright, and then just on the on the slide.
11.
The deposit.
Deposit beta assumption in the DDA.
It sounds like this.
This.
The cash burn is going to take a couple of quarters to normalize so whats the I am assuming that in 'twenty three.
<unk> mix is is moving consistently lower and then the deposit beta.
As obviously marching higher.
Yet again as we were mentioning earlier the visibility on exactly how that's going to play out as is harder to come by right. Now I think there will continue to be downward pressure on the noninterest bearing to interest bearing proportion.
You know as we continue to see higher rates.
That being said at some point I think you will get.
To some stability at those.
Those levels. So I think as we go further into 2023.
It'll be a little bit more clear where that reduction effectively slows down.
And I expect that we're going to really start to see a slowdown of that mix.
And shift from noninterest bearing to interest bearing in 'twenty, three and just how much and exactly at where it bottoms out.
That's a question Mark, but I think we're going to see.
That slow here as the fast pace in rates.
I think for those that are activated.
That that's already happening.
Okay understood and just last one for me.
On the fee guide for fourth quarter ex <unk> Securities.
$3 45 to $3 60, that's a pretty healthy step up from the third quarter run rate, which I have a $3 16, what's what's driving that.
Yes, we continue to see the benefits of <unk>.
Higher interest rates come through on the spread on the off balance sheet accounts.
And we will continue to see new spreads improve spreads improve there. So that that's really the impact of the rate increase on client fund fee income coming through as well as continuing to see good progress against our other payment categories. You look at car and if you look at FX.
And the rest of our activities. So it was granted Greg mentioned, our clients are really active in the midst of.
This slower deployment environment.
And we're seeing that come through in that business activity.
Okay. Thank you.
Thanks Casey.
Thank you and we go next Nancy Jared Shaw at Wells Fargo.
Hey, good afternoon.
Hey, Gerard.
I guess when you look at the the companies that have taken that down round VC financing are there any characteristics that stick out.
For those that haven't how long how long can they hold out before they certainly to take.
You take the lower lower pricing and are we closer to a point of capitulation for that.
Yes.
The biggest challenge with.
I guess, the private market repricing at a had a.
At a fast pace is the fact that the.
Many of them raise so much money last year. So if you've got three years' worth of cash youre not running out to raise more money at a down round.
And so it takes it takes time for them to do that now there is some things that are going to be happening coming up right. So at the end of the year you have to start looking at valuations because how you do price stock options and things like that so we could see and probably we will see.
More of a capitulation on valuations back to whatever the market is.
At the end of this year, which will filter through in kind of Q Q1 ish.
<unk>, because sometimes there is a little bit of a lag.
So right now we're not seeing a lot of down around where we're seeing more structured rounds, which means you keep the same price, but maybe you do a two X liquidation preference.
From a return perspective, we're seeing more of that.
But it's going to happen, we're going to see more of it and.
There is always a debate when you sit down with.
Group of venture capitalists, some would say never do a structure around take you're paid your medicine and lowered evaluation to the market raise money when you can et cetera, and others would say protect your valuation if you can keep it and do.
Do a structure around it is not the end of the world. So we're just seeing that all play out but.
But thats. The main reason they end up with a fair amount of cash right now so they don't have to come to that conclusion, yet but more of it is coming.
Okay. Okay.
That's helpful. Thanks, and then I guess for the investments that you are all holding on and your own investments. How are you treating valuations if there havent been recent.
Brown to give that market check are you having to wait and take your lead from me from the company or are you proactively make.
Making any marks on your own.
Yes, Jared it's Dan on on the warrant positions, we get pretty regular updates and really current with those valuations where we have at least.
Some gap is in.
These illiquid positions. So we took a reserve last quarter associated with those.
And still had additional losses come through.
Some older funds, where we had an ownership position. This this this quarter so kind of as we think about it on a go forward basis, we would expect valuations on those illiquid positions theyre going to be updated as a part of fund audits through Q4, and probably all the way through Q2, and that's where we are.
May see additional losses, so think of that as a pool of about $600 million worth of illiquid positions, we could see kind of order of magnitude anywhere between 5% and 10%.
Of that in the form of write downs over the next the next couple of quarters now those losses may be offset by the occasional warrant gain which we continue to see you, but that I think is going to be a more limited quantities at this point in the cycle.
Okay. Thank you.
Yep.
Okay.
And we'll go next to Bill Kirk Rocky at Wolfe Research.
Thank you Ed a question on credit you maintain the ACL ratio at 77 basis points, it looks like but lowered the downside weighting from 265% from 40% can you.
Discuss what's behind the lower downside scenario awaiting any color on that.
Yes. This is mark <unk> I'll start on that.
And so in a nutshell. The most recent Moody's forecast was much more aligned with our view on the economic outlook.
And at the same time after the forecast, which included an assumption of 50 basis point fed increase.
75.
And so our conclusion in so many words was that closer but not quite and so we took our waiting of the S. Three scenario down but not all the way back to standard weights.
At 40% for this quarter.
Understood.
Separately.
Would you characterize the demand that youre seeing from customers seeking funding from you relative to your capacity to provide funding. How are you determining customers that gets funding maybe discuss a little bit on how competitive lending environment is.
This is Greg maybe I'll start and then Mike <unk>, who may want to may want to add.
There is no question, we've seen a uptick in demand and that should be expected rates last year, we were definitely competing more with the healthy amount of venture capital that was coming in.
Yes, while it was a competitive market, but definitely the major competition last year was with equity this year clearly.
Order to raise money and so on.
Our people when insurance policies. So that is now back in Vogue, so the level of activity new clients coming onboard in delivering term sheets or the pipeline or the backlog and this is specifically in the technology and life science area across all loan products is actually has been very healthy.
Your question on at.
At least I'll interpreted.
You have the capacity to fill all the orders that you may want to.
And the answer is absolutely as Dan said, we have the capacity.
And a lot of different ways to bring those loans onto the balance sheet, assuming the qualifying of course thats a given.
And when they do we're able to fill those orders so we see no slowdown in that.
Actually the one on one of these many areas that excites us about what we're seeing what we saw so far especially in the third quarter. So take a look at the growth in the third quarter and what we look at as we roll into or get ready to roll into 'twenty three.
Mike would you add anything to that.
I think I would just go down the questions around are we essentially entrepreneurs are we doing anything different or being more cautious about who we're lending to be little bit more particular and the answer is of course, yes. I mean, we've been through economic downturns. Our teams are very well versed in chip kind of what to recognize and to pay attention to in terms of companies that might be.
More vulnerable to this during this economic cycle. So for example, things such as the consumer area are definitely one areas that youre going to keep an eye on because given this macroeconomic backdrop and inflation certainly that's an industry or sector thats going to take some sort of hit or impact. So those are just one example of kind of how we're thinking too and looking at the different sectors, where we need to be a little bit more thought.
Paul didn't had if the economic environment was stronger.
Alright, Thanks, and maybe if I could follow up with one last one along those lines to the extent that you are.
Putting up that growth if you think about the yields that you're generating on those kinds of loans and if we think about this sort of funding environment persisting and perhaps.
Alright.
Market type.
Alright rates sort of being your cost of funds, maybe as the spread in sort of the NII accretion.
Is it reasonable that you would expect that.
Yes, essentially.
That you would be asset sensitive I think there is.
Certainly concern that some liability sensitivity could shine through given some of the dynamics that we're seeing I know youre, not giving guidance, but if you could just speak to that broader dynamic.
And the overall thoughts would be helpful.
Yes.
Bill I'll start and Mike might want to add if we just kind of look at the dynamics of the loan portfolio again, we've talked about it over 90% of that is variable rate and we're seeing on.
On the commercial lending side in particular close to a 90% beta coming through.
On on that lending.
So.
I feel good.
Our entire funding basis, certainly not going to reprice.
At those levels that not just will we continue to maintain a strong spread there, but we'll actually be able to continue to grow it. So I feel I feel good about that.
Lending side, Mike anything to add.
Yes, I think maybe we are getting to is the level of impact of competition on the spreads and then theres. The pricings that we had the premium we can actually happen. So for a long time as we all know it was competitive by the way, it's still very very competitive and so there was a drive or trend downward spreads were getting tighter I would say in this environment, particularly certain segments of the loan.
Portfolio did downward pressure is not as significant as banks and other.
The non banks are being very conscientious of their cost of funds.
And so I think that is I wouldn't say, it's a <unk>.
<unk>, but nonetheless, there is a lot less downward pricing pressure on the spread there and a little bit more neutral at this time, maybe neutral to some possible bias to it little bit spreads extending a bit.
That's very helpful. Thanks for taking my questions.
Yep.
Thank you we'll go next now to Andrew Liesch at Piper Sandler.
Hey, good afternoon, thanks for taking the questions.
Just on the increase in criticized loans here I know, we're still a relatively small as a percentage of the overall, but is that concerning to you and I guess what drove that.
Hi, it's Mark I'll start.
Concerning in so far as CF any increase in criticized loans would be concerning.
I think reflective of the environment.
Worsening project economic conditions that we were talking about at the same time as mentioned earlier in the call. Our clients continue relative to past cycles I continue to have more robust liquidity and so while we are seeing that uptick in criticized as you can see in the third quarter, we did not see it.
<unk> to an increase in nonperforming loans or loan losses.
Got it.
Issues with any individual credits or just a general.
Downgrades.
I guess pockets of the portfolio that drove this.
Yes, I'd say it is concentrated in our tech and healthcare portfolio is as you would imagine.
And generally speaking there probably falls more heavily on our investor dependent segments.
Got it alright.
And then just kind of a housekeeping item on the client investment fees.
It's capped at all or you continue to benefit no matter, how fast or how high the fed raises rates.
Yes based on some good work by Mike and the teams over the last couple of years, they've renegotiated those agreements. So we don't.
See a cap on those client investment fees now with where rates are the expectation is every 25 basis points is probably another basis point versus the one five to two that we got at the beginning of the rate cycle, but that it is not capped and expect about a basis point for every 25 basis points.
Got it.
Alright that covers my questions. Thanks, so much.
Yes.
And next we go to them are non <unk> at Morgan Stanley .
Hi, good afternoon.
Most have been asked at this stage, but just sort of recognize theres no not enough visibility for 2023.
But I was wondering if you can just talk about the NII guide for next quarter as your jumping off point for 'twenty three.
Maybe there will be some more weakness in funding levels remain weak, but I was wondering if you could help quantify that and also on the flip side do you see a rebound in the back half of the RF.
Hi, Tim.
Funding and cash burn.
How quickly do you think the NIM and NII can pick up in that environment.
Yes.
As we've talked it's Dan as we talked about it's really hard with.
Looking at past Q4, where cash burn rates are and the potential for venture deployment to fluctuate to have a really good sense of exactly.
Where net interest income is going to at least start the year or John .
Jump off for 2023, I do think as long as we're in this environment where were unbalanced between venture funding.
And.
And the amount of cash burn that we're going to continue to see some net interest margin compression.
We're going to have offsets to that by the higher rates in the beta that we're seeing come through on the lending side of the book.
<unk> re mixing in the use of those off balance sheet funds again, where we've got flexibility to drive them off the balance sheet could continue to deteriorate margin and net interest income just how much I think thats.
The degree of certainty.
We get into the first quarter I think it is going to obviously be a lot more clear now how quickly can it rebound.
If we start to see cash burn.
Slow appreciably and not just the stabilization of deployment some effective increase.
And to some public market activities come in you can start to see inflows.
On the deposit side pretty quickly and from there as we mentioned in the past we have the ability to start to either pay down borrowings very quickly or redeploy some of those funds off the balance sheet, so exactly how and when that's going to play out is a question mark but as soon as it does start to happen, we're going to be able to re.
We start to move the balance sheet.
Quickly, so probably not a super satisfying answer just because there is a little bit more uncertainty, but hopefully you understand all the pieces.
Yeah, No that's helpful.
And then typically cash burn gets worse before it gets better because you have to spend on severance renegotiating contracts et cetera.
Is that already part of the story on cash burn this quarter.
Curious what are you hearing.
From the private companies.
Yes. This is Greg it's all factored into that one chart that we show.
So it's a party it's part of the equation that is built in there.
Yes.
Okay, Great and then.
Apologies if I missed this but.
How much of the sweep accounts are brought on in <unk> and what does the deposit guide for <unk> is shown.
Yes.
So in total dollars, we brought in in the quarter roughly let's call. It five $6 billion something along those lines.
And then in terms of the fourth quarter Guide I think I said to the higher side it assumes that.
We continue to be successful, albeit to a smaller degree on those off balance sheet to on balance sheet to the extent that the.
Thats slower and.
And you see slower deployment and faster cash burn that can get us to the lower end of that guidance range for the fourth quarter.
Alright, great. Thank you.
Okay.
Well go next now to Gary Tenner at D. A Davidson.
Thanks, Good afternoon.
On slide 24, the cloud investment for the clients on slide one of the considerations you pointed out was.
China policy changes and investment in Chinese companies.
Wonder if you could maybe talk to China policy changes and any considerations as it relates to your.
Strategy.
Over there.
So this is Greg I'll start and I know, Michael Mike will add to it.
From a policy perspective, you can look at.
There's a whole variety of things and that's the problem it changes kind of on a on a.
Monthly weekly quarterly quarterly basis, and so part of the policy is just the overall.
Stance at a very high level, I think about the policy and positioning U S versus China and.
The softening.
The weakening of the relationships. So that's at a high policy level, Mike may be able to give you some color on any changes in the local market local that is happening that would cause it on the ground. My view is just kind of at the macro level, Mike Mike What would you add to it.
Mike I think you're still on mute.
Okay.
Thank you Greg.
I think.
Certainly a policy changes impact.
All of US right I think the key focus is kind of the U S. China relationship there.
And a good relationship will certainly help overall, but again, it's still too early to tell where that is actually trending but setting policy. Aside I think really the bigger picture and the bigger question is just on the impact of Covid in the supply chain on how thats going to impact different business and level of activity that we actually have in terms of engaging with China as we all know.
Economically it had been extremely challenged and that certainly affected our business levels and business activities in Asia. Overall, so it is something that to continue to watch, but no direct impact one way or the other it's really just more about the macro picture here at this juncture.
Okay I appreciate that I wasn't sure if there was referencing president choose more recent comments.
Or not and then just lastly for me just theres been several questions about cash burn and obviously, it's not slowed to the degree that.
It would benefit the balance sheet yet.
Why is that I mean, I think we were at this point for several years. It seems like we're kind of scale at any cost and money was free or close to it.
How much has the.
I guess the founders or the startup.
Ceos of some of these companies how is that population changed maybe over the last decade.
Potentially.
Slowing the ability or desire to kind of really focus on that.
Things that sunk in yet on that side.
Yes.
Some of that does exist.
I will acknowledge that but highlights.
How I think about it is how I answer to an earlier question about this which is.
If you raise a.
A bunch of money, let's say, you've raised three years or four years worth of cash.
And your business is as you think about it you are still the business itself is fundamentally sound. Although it definitely is going to be harder for you to raise money in the future.
Part of this is.
The mentality is why would you cut back costs.
Lay people off and make the hard calls if you really believe that youre going to be needing to add value grow revenue and maybe grow back into your evaluation over time right.
The old, saying you can't cut your way to growth or you can't cut your way to success and so some of that exists and it's a function of again a lot of it is how much money has been raised so but if you fast forward.
Six more months nine more months neither for the companies that are <unk>.
A long runway.
They're going to have to look at either cutting cutting burn or raising more money at that time and theres a lot of companies out there that are still performing well right sometimes it feels like.
The.
Sure.
That.
Oh My Gosh, all these companies must be really having a hard time, that's not the case theres a lot of them Theyre doing doing really well and one last point.
Again, if you go back two years ago, and you remember what happened in Covid. It was cut your cost.
Could it be a horrible situation they did that.
And then literally 90 days later were 120 days later people said no. We're just kidding, let's go back.
Raise more money and increase the burn so the COVID-19 call. It fake out was definitely one that I think is still in some of their some of their heads. So do I think it's fully set an across the board. The answer's no thats, just a little bit of a.
A complex answer because every company is slightly different but those are just kind of the reasons that you wouldn't see or we haven't seen yet.
More of a dramatic reduction in burn.
Okay.
Thanks, I appreciate the answers.
Yes.
The next now to Chris Mcgratty at kw.
Great. Thanks.
Dan just on the on the average balance sheet.
The bond yields can you just speak to me a little bit about.
The yield at which stuff rolling off I know you gave the dollars.
Yes, but the yield kind of in stock stuck around 2% on HCM and around 178.
I was just wondering what the outlook is for those.
Yes, it all then yields.
Exiting the quarter or roughly 2% there was some pickup in yield from lower premium amortization in the quarter that just so everybody remembers is also part of the decline in our expectations from Q3 to Q4 net interest income, but net net net.
At least as we look ahead, we are going to see some lower yielding securities roll off, but I think we're going to kind of bump around.
This 2% range here.
Four.
For at least the next couple of quarters.
Okay.
And then just maybe Greg a question on charge offs.
As you see the world unfolding, if we are going to get losses like I'd love to elaborate a little bit of color on when you think that the cadence would be you built the reserve last quarter and a little bit less this quarter, but when you what do you think the losses will come.
Hey, Chris well I can help answer that question Mark is probably better.
Yes so.
I think consistent with all of the uncertainty we've talked about in.
The challenges with guiding for 'twenty three I think that's a really very difficult question to answer.
I think it really comes back to <unk>.
Again that robust average client liquidity, the ability to last longer and wait for that.
<unk> so to speak for capital to start flowing again, and I think generally speaking when I think about the portfolio and where borrowers are positioned going into whatever is next relative to past downturns.
Yes more of these companies will probably outlast right, though they will live long enough to.
To make it to that other side than it might otherwise have been the case, but exactly when the losses come if they come is just too difficult to predict at this point and to add to what Mark saying, Chris If you take a look at the reserve the area that we continue to expect if we were to see those types of losses to see the most would be.
The investor dependent early stage and if you think about the 2008 cycle and we're not saying that we would see something to that magnitude that was about a 6% through the cycle loss aware is up four 3% range right now so feeling pretty pretty good relative to.
What that could look like in that type of environment from a reserve perspective, so even if those losses were to come we've got.
Sufficient reserves associated with it and the last thing to say is just again remember the overall lending portfolio and the concentration of capital call lending and our loss experience there and then when thinking about to the extent that we have a slower period, what that might look like in terms of credit losses.
Great. Thanks.
Yes.
And we'll go next now to Ebrahim <unk> with Bank of America.
Hey, Thanks for taking my question again.
Yes.
One question in terms of Big picture Greg.
A lot of what's happened in terms of the earnings outlook for the company is.
Mark.
Is there anything from a self help perspective, and I don't mean to say you need to cut your way to prosperity. As you mentioned, but is there anything either balance sheet wise expense wise capitalized if you could do to alleviate some of this market share on the earnings Donato.
Yes.
Yes, let me.
Let me talk about it from an expense perspective, and then Dan or Mike when you want to talk about the balance sheet anything else and Mike, but when I think about the expenses ebrahim.
And as you know I've been here a long time.
<unk>.
That standpoint.
The long term belief in the potential opt the opportunity we have in front of us Hasnt changed.
And in so doing anything that is going to.
Truly diminished the growth potential of the outlook.
In a year or two years or three years, just doesn't doesn't makes sense. It may it may feel feel good or feel better in a short in a short run but it won't it won't be helpful. In the long run and as you know we're playing we're playing the long game, but what are we doing.
One area that we're taking a look at it over the last two years, we've had a lot of growth as we build out our <unk>.
<unk>, our risk based function large financial institution functions and a lot of that actually came at the back of professional services, because we need to build up the kind of core foundations now as we brought in the expertise in the form of Ftes.
We expect and it's going to happen faster than than even maybe it was planned and we're going to be reducing professional services in a very aggressive way.
We've got an incredibly talented team that we brought on board to help us manage through this I feel really good about it and so what are you what are we going to do we're going to again.
Biggest thing is reducing professional services as as aggressively as possible.
That's probably the biggest thing the second part is really taking a hard look at our overall.
The projects that we have in that project portfolio, and prioritizing and say, which ones are the more of a nice to have versus the must haves and from that standpoint, we're looking at that and we'll make some changes there and not eliminated not not.
Not to say never but it'll definitely be put on the back burner as we concentrate our efforts and focus on the highest priority must do initiatives, which includes things like the digitization.
The platform as I mentioned in my opening comments, we've been rolling out our digital banking solution and have gotten some incredibly positive feedback and we're going to continue to invest in that and rollout more of that over the course of 22% and 23. So we have to continue to make those investments so while the expense growth will.
Lower than it would have been.
It's still going to be healthy as we roll into 'twenty three.
Daniel.
It would add anything I'll start and Mike might have something to add I think we just won.
To add on expenses continue to go back to 800, new clients added to the platform in the quarter.
Half a trillion dollars worth of dry powder, a raise from a venture capital perspective, those are all opportunities for us in the medium and the long term so for us to really materially pull back on investment.
Even cut investment levels, probably cuts into that opportunity here over the longer term. So we are we're still really bullish on that.
At some at some point, we anticipate to play through the franchise. So thats number one number two ebrahim talk about capital and the balance sheet, yes in this environment, we clearly see.
Some reduction in the overall size of the balance sheet growth in the tier one leverage ratio is now close to 8% at the bank.
As we think about next year slowing cash burn potentially seeing.
Venture investments start to pick up we could very quickly start to be in a spot where.
You need that capital to be able to support growth on a go forward basis. So I think that that's the way we're thinking about it is that you've got that pent up amount of venture flows waiting to be deployed and at some point it'll be good to have the capital to be able to support that.
Last but not least we talked about.
The investment securities portfolio, the available for sale investment securities portfolio to be really clear like we have no intent to restructure that portfolio at this at this time, we're always evaluating options and Thats. The thing about this balance sheet is that it's highly flexible.
And we've got a lot of options associated with it.
That's helpful. Thank you.
Yes.
Yes.
We'll go next now to David Smith at autonomous.
Great. Thanks for taking my questions.
With SBB Securities does the current environment change at all how youre thinking about the build out there in terms of when or if to bring on new products or hiring new teams.
Yes.
As Greg.
So the answer is no.
It's an interesting I guess a couple of points. So one is when you look at the league tables, which is obviously one of the ways you kind of look at how you are how you are.
Investment Bank is doing the team is doing an exceptionally good job and put the market aside and you just say how are they competing in the market against everybody else in there.
Moving up the league tables, or they're definitely hanging in where they have been getting in getting their fair share and in some cases more than their fair share.
The team is truly exceptional.
I see it when I go out in the market and spend time with them meeting with clients and.
That's number one number two what we had set out for the beginning of the year for our goal for.
The Tech and life Science team that team is all of the people we brought on board.
We're going to exceed that hit or exceed those numbers and so that's pretty amazing given what's happened in the environment. So feel really good about that the addition of Moffett Nathanson again, what an amazing group of people and research analysts and they have exceeded their expectations.
People, we've added on the research side to that from a tax perspective are also leaders in the market and the final piece is this one of the one of the benefits of a slow down in the ECM market is that it actually gives that team that really strong team time to spend time with the <unk>.
The profile companies, who will be going public when the market opens back up and those meetings are going really well and so I believe that when that market does open up and it will eventually it always does.
We're going to be really well positioned so.
If anything.
To be honest I've gotten more more bullish on not only that team of people the whole platform, but how well it is collaborating with our commercial bank that collaboration is actually going exceptionally well. So I feel I feel good about it but I'd like the market to be more cooperative answers of course.
But while we're waiting for it to cooperate more.
Guys are awful working awful hard to get us set up for future success.
Great and.
Just to dig in on the securities yield a little bit more.
I appreciate the guide for 170 to $1 75 in the fourth quarter.
When we talk about bumping around the 2% range for the next couple of quarters.
Is it going to be like.
Is it are you seeing any kind of meaningful uptick going into 2023 or.
Yeah.
And the lower guide of 2% more likely for the next couple of quarters, given that fourth quarter starting point.
Yes, I think yes.
Where we're exiting.
2023 apps.
Absent.
Additional hedging.
Opportunities.
We think there's still room for us to effectively.
Put on some received flowed swaps to open up additional asset sensitivity in the rate environment that we're in that that could provide some additional upside should rates be higher than what we're seeing from a forward curve perspective. So I think there's some opportunity there I think over the next couple of years, you will see some roll off.
Even lower yielding securities, but to see a material bump up off of those levels.
I don't see that.
And the actual cash flows coming off of the portfolio.
Thank you and lastly, as you know it looks like we're getting closer to peak fed rates is there a point, where you start to work to reduce the variable component of the lending book or otherwise protect.
Protect asset yields in some way.
Yes, I think first and foremost I think the positioning right now for US is to continue to look to open up the physician for asset sensitivity at the same time.
Yes.
Our contractually.
As we've done in the past continuing to embed loan for the floors, just as a matter of practice.
Associated with that portfolio and that benefited us quite significantly.
And one way protection here during the <unk> post 2018 move down and I would expect it to do the same thing. So thats. The vast majority of the protection that we're putting on right now if we see fed funds in short term rates move even further you'll see us find ways to continue to manage.
No down rate sensitivity.
But as folks now with the higher levels of interest bearing accounts right now with the off to on balance sheet moves that's another great source of potential protection.
No two downside rates for us.
Great. Thank you thank.
Thank you.
Okay.
And we'll take our last question from John Armstrong at RBC capital markets.
Hey, thanks for hanging on to the end.
Just just a follow up on that last question would a fed pause help hurt or no difference in terms of your outlook, how would you answer that.
Well I'll start Greg might want to add I think if you take a big step back and.
Look add venture deployment, there's like we talked about half of it half a trillion dollars worth of funding that's been raised.
What what's really stopping that from being deployed as this disconnect in valuations between public equity markets that are bouncing around and the expectation.
All of these amazing founders that are were.
And management teams that are working on these ideas to the extent that we see fed pause or slowdown I think thats going to start to bring some more certainty into public market valuations reduce that uncertainty and really start the flow of funding across our markets. So one just I think for a broad deployment perspective that would be held.
For a second.
Right, a pause or a slowdown from a rate perspective.
Could be helpful. Just as we would continue we would see.
Likely additional deposit flows that are coming in.
But in terms of the asset sensitivity a pause boom really helped that at this point.
Only thing I would add as Dan said, it but it's just the market's looking for certainty. They are looking for clarity and there isn't any right now so.
A clear paws and the data that backs up a career pause I think would be well received by the by the market right now.
If you talk to.
Five different economists, what they would say what their crystal ball would be is literally all over the map.
That clearly isn't helpful right now.
Okay.
And then just speaking of uncertainty but.
What I would do the crude calculations on your fourth quarter guidance I get.
And the midpoint, excluding gains or losses somewhere between $5 56 for EPS and correct me if im wrong, but.
Do you feel like that represents a trough for you for EPS or is that just too difficult to predict from here.
Hey, Ed.
As we mentioned earlier.
There are so many variables that are going to drive.
What things look like heading into the first quarter and the level of cash burn what we're seeing in venture deployment and ultimately the interest bearing to non interest bearing mix or is it going to be big drivers of what happens from here from a net interest income perspective so.
That could be pressured down and where we can see stability of cash burn.
Materially reduces from here so to.
Go any further than that I think would go go against us not giving given the guidance.
Okay.
Okay, Alright, thank you very much.
Yes.
Thank you Mr. Becker I'll turn things back to you Sir for any closing comments.
Thank you.
Thanks again, everyone for joining us I know for people on the East coast.
You're into the evening. So I appreciate it I'm going to close where I started the conversation by really highlighting that I know most of the discussion was about the balance sheet and flows and clearly.
Very important part of the equation.
I just want to make sure that it is not lost on everyone.
And that's both investors, but also our employees who are listening.
All of the great things that are going on inside the platform.
I talked about it you can look at record term sheets.
All time high in client funds and strong credit quality and there is so many really positive things that are going on.
We just cant lose sight of that.
There is no question the uncertainty is out there and as we've said based on the fact that we're not going to give guidance into 'twenty three.
That uncertainty clearly is difficult to predict exactly what will happen. Although we clearly we've given you some framework to think about.
For $4 23, and what the what the drivers will be and how that could change.
First off as always I want to thank.
All our clients.
There are stressed right now a lot of them are and to be honest, that's where I think we ended up shining because.
We've been through a lot of cycles before and we know how to support them and we know what the right questions asking and how to be there for them in difficult times and so honestly from my standpoint is challenging it is to be an environment like this.
It is actually enjoyable to sit down and really really add value to clients.
The first.
The second one.
The bigger one maybe even is thanks to the employees. We've we've got a lot of people that have been here for a long period of time, we've added a lot of new people that haven't been through cycles and people are working really hard and sometimes you don't feel that youre getting all the all the recognition and benefit from all the hard work so on behalf of the executive team.
On behalf of the board just wanted to say a huge thanks to the team for doing such a great job supporting our clients weathering this difficulty in uncertainty and hanging with us as we navigate it.
So with that have a great rest of your day and thanks again for joining us.
Thank you Mr. Becker again, ladies and gentlemen that will conclude the SBB financial group's Q3 2022 earnings conference call, we'd like to thank you for joining us and again wish you a great evening Goodbye.
Yes.
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