Q4 2022 SVB Financial Group Earnings Call

Okay.

Good day my name is Emma and I will be your conference operator today.

At this time I would like to welcome everyone to the F. B B financial group Q4, 2022 earnings conference 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.

If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question again press the star one thank you.

Meghan O'leary head of Investor Relations you May begin your conference.

Thank you Emma 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 fourth quarter and full year 'twenty two financial results and our 2023 outlook and will be joined by other members of our management team for the Q&A our current earnings release.

Highlight slides and CEO letter had been filed with the SEC and are available on the Investor Relations section of our website.

We 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, some of our discussion may include references to non-GAAP financial measures information about those measures including.

The GAAP measures maybe found in our SEC filings and in our earnings release.

Great. Thanks, Meg and thanks, everyone for joining us today before we go into questions.

Briefly comment on our kind of our business and the market environment.

First I think it's important to set kind of context.

We continue to see strength and momentum in our business. Despite the broader market backdrop, which I'll talk about in a minute.

We had healthy loan growth across the board driven by global funds banking technology and private banking mortgage lending we had record core fee income from improved client investment fee margins we.

We saw healthy investment banking revenue driven by Biopharm pharma deal activity, which was great to see.

And we had more balance and client fund flows as client cash burn in the pace of VC investment declines showed signs of moderation, which was obviously very important and welcomed.

We saw continued strong new client acquisition of approximately 600 clients in the quarter.

Which is higher than pre COVID-19 levels, which is notable in.

And credit remains solid although our provision reflects higher net charge offs and nonperforming loans as well as our expectations for a deteriorating economic conditions.

Now the markets are still challenging we admit that and they are likely to remain so throughout 2023, we don't expect any dramatic change from where we are right now.

Back even a little bit more pressure in the first couple of quarters.

So in other words.

Again, not expecting a dramatic improvement.

Global market volatility has significantly reduced private and public investment in public Theres almost no. This is the longest time the window has been effectively shut.

And we don't really expect that to change until maybe but I think maybe in the latter half of the year.

And Theres still a lot of uncertainty over the direction of rates and inflation in the broader economy, and we hear about it pretty much every day in the in the news and on media.

So what does it mean for us for 23.

We expect these conditions will continue to put pressure on our growth in the first half of 'twenty three with net interest income pressure somewhat higher provision, although we still expect credit performance will remain good overall.

And other headwinds that are kind of come on a on a daily basis.

But in the second half, we expect continued momentum in the balance between.

Venture investment and cash burn.

And it does it is an important and it doesn't take much of improvement in fact, no real improvement from where we are on the deployment of dollars. It's more about the cash burn, which we again continue continue to believe is going to be pulled back.

We expect to shift towards interest bearing deposits to stabilize and could see an inflection point in net interest income and NIM in the second half of the year.

We believe that shift combined with progressive Paydowns in our investment securities portfolio again, roughly 3 billion a quarter will provide meaningful revenue tailwind that build throughout the year.

And we have enough visibility at this point to provide full year 2023 outlook. Despite the market uncertainty and those details are in our Q4.

Our Q4 'twenty two earnings deck filed earlier today.

We are prepared if those things don't improve again, which is important.

And even if the market challenges are prolonged or get worse.

It's important to note we have a high quality very liquid balance sheet, which I know there'll be lots of questions about <unk>.

Strong capital levels.

Our seasoned management team with which we experience experienced navigating challenging markets and adding a lot of new people with deep experience as well.

And a consistent focus on our long term business strategy. So when you when you put all that together.

We feel.

Clearly better about the outlook than we did.

Last quarter, where there was more uncertainty.

And we certainly believe that the innovation economy is the best place to be and even if we're in this prolonged period of time for longer or even a little bit deeper deeper.

We know we're going to weather that.

So with that I'm going to turn it back to the operator to open up to questions.

Okay.

Thank you as a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.

Your first question today comes from the line of Abraham tune Waller with Bank of America.

Your line is now open.

Brian .

Hey, So I guess, so I mean, they think it is good to see.

Guidance.

And just wanted to follow up on what you just mentioned around <unk>.

Having enough visibility to provide that guidance it sounds like youre feeling better today and you look at the slide 10 in terms of the client fund.

Outflows, obviously cutting half quarter over quarter.

If you don't mind, just give us a sense of just customer conversations that you're having with clients.

Adding to that visit watch attitude that visibility today was just two months ago and I understand all the things that can go wrong I think but what are you seeing in terms of green shoots of improvement.

Would love to start there.

Yeah, I'll start and I'm sure that Mike will want to add.

Even more even more color to my comments Ebrahim here.

How are you thinking about where the clarity is coming from is a couple of places one is.

I would say.

We were hoping we would have had seen more of this in the third quarter, and that's where I would say, we're disappointed and that's why we didn't give guidance because it kind of it didn't fit with what our expectations were and what we were hearing which was the following.

Companies realized that it's harder to raise money and the level of venture capital deployments coming down and we expected a more dramatic decrease in burn rates that really didn't happen in Q3.

We saw it clearly much more of that in Q4, and I think youre going to see more of it in Q1.

You hear about it because when youre, having conversations with companies they are talking about.

Gosh, we hired a bunch in the last couple of years and now we're going to pull back on some of that so we're going to we're going to cut back, 10%, 15%, 20% or whatever that is and we're going to look to cut costs in other areas and the only reason I don't think it happened as quickly as we thought it was going to is that companies had a lot more cash than they had in other.

Cycles, and so that was just a prolonged period. So we know that venture capital decline pretty significantly in the third quarter to continued in the fourth quarter.

But again, what our expectations are is that you're actually going to see a little bit more of a decline in first the first two quarters and then start to see a little bit of improvement in the second half of the year. So are our forecast isn't a.

Ah Rosier Q1, and Q2 with higher levels of venture capital deployment. In fact, it's the opposite a little bit more of a decline and then youre going to see again this continuation of of client burn or cash burn pull back. So that's that's the narrative that all when we talk to clients and again not all clients are the same as you know we have.

Some that are still spending more money there right, they're raising money still.

And that's going to happen, but that's that narrative is shaping our outlook in the first two periods first half versus the second half so Mike turn it over to you to add any color to that.

Sure great. Thanks, Thanks, a lot Greg.

Theres a few data points I think where investors are going to start to get even more clarity right. When we think about the inflation reports and whether or not the rising rates or have any impact on inflation. I mean, we just had a January 12th report and we have the February 14th inflation part coming up so we're starting to see that rates are starting to have an impact on inflation I think that's really important for investors.

Looking for clarity, what's happening the COVID-19 impact of the Covid policy in China like we're starting to see that go to China, and we'll know here.

January February about whether or not that actually has gone through and then supply chain start to come out again, having impact on inflation the energy impact in Europe , we're going to get to that and see some more data points about the impact of inflation, but perhaps most importantly is the valuations right. I think you have the auditors that are in the various companies here that are looking at the valuation.

And you're going to start to get these audit reports that start to come out and there'll be some valuation adjustments between.

The companies, who have been holding off in terms of readjusting evaluation. So I think that's really helpful. When and so right now obviously the investors are still holding off on investment try they are slowing the pace, but there's still a lot of good companies out there there's still a lot of opportunities there are still investing in early stage, but they have to prioritize their investments here and they know, they're probably going to have to hold on to these <unk>.

So a little bit longer than anticipated because theres just not a whole lot of exits as you know there's just no ipos, there's not a whole lot going on out there, but again I think there's obviously a lot of dry powder I think that's very helpful. Now when you shift to the lens of the entrepreneur and as Greg mentioned, they have had a lot of cash they've been sitting on that but we are starting to see.

See where they are resetting their spend levels right. The layoffs, you're starting to see that in news, which.

The good news and the Bad news, obviously, the bad news is the layoffs, but the good news is they're really starting to focus on their cash burn because they know they need to hold onto their cash flow.

For a lot longer advertising spends have been coming down over the last several months and so that's been a big thing that we're seeing here.

So they all getting back to focusing on client acquisition costs and profitability and so again.

Growth just for Growth's sake is no longer.

The thing to do so economics do absolutely matter, so they've been very I.

I would say very focus on valuations they've been holding off in terms of taking more investments, but eventually the cash starts to run out eventually they start to reset their expectations on valuations and so we're we believe we're starting to see some of that break through and again I think over the next couple of months I think that's when you would start to see as Greg described it a little bit more stabilization there and perhaps.

As a platform here for the second half of the year to start to see some of those shoots that you were talking about.

Understood and I guess, maybe a separate question for Dan.

When we think about from a balance sheet management perspective on the asset side.

Available for sale securities of about $25 $26 billion give us a sense is there any view off like pulling forward some of those maturities in.

Locking in higher interest rates today given one.

The Covid all the way already inverted who knows where rates might be six months from now just give us a thought process around any piecemeal restructuring of the <unk> book that we should think about.

Yeah Ebrahim good good question in the quarter for example, we did $1 billion sale.

Out of the treasury portfolio for us to be very clear.

And the rationale behind that as we look at the payback period on that sale is roughly nine nine months.

So that's really the way for us to look at it from a tangible book value perspective that payback period and opportunity. So I wouldn't say, there's any desire for our wholesale.

Change in the available for sale portfolio, but.

Periodically with.

And opportunistic lens on payback period, we can do these small sales that.

Bigger it can be offset by warrant gains and things along those lines. So thinking about it from a tangible book value perspective, but at the same time.

Looking opportunistically at payback period.

Okay.

Got it thanks for taking my questions.

Yes.

Your next question comes from the line of Casey Haire with Jefferies. Your line is now open.

Yes, thanks, good evening everyone.

Couple of questions on slide 12.

First off so the.

Noninterest bearing mix.

Hi, <unk> bye.

Fourth quarter 'twenty, three that's obviously very difficult to sort of handicap.

Just what's giving you confidence around that around.

Around that number.

Yes, Casey, it's Dan I'll start.

Might want to add as well there are two things that we're looking at that.

Give us a little bit more confidence on where that noninterest bearing mix is going to bottom out first and foremost the teams have spent.

A lot more time getting into the detail across our different segments on.

We're operating dollars ly versus excess dollars.

In these deposit accounts, so exactly how much.

From a deposit perspective.

He is available to be transfer now if that analysis is net never perfect, but it allows us to start to get a sense of where we think that noninterest bearing.

Pieces going to lie and then secondly, when we take a big step back and we've talked about this before and we look at the total client funds of the company and you start to think about noninterest bearing bottoming out in the high 30% range.

And looking at the fact that in total client funds as close to the $340 billion range that high Thirty's is really when you compare it to other banks that don't have off balance sheet in that.

Mid teens to high teens range, which we think route relative to our historical experience is a bottom and is a low so we've got the the.

The individual assessment that we've done plus just our historical experience on where that would bottom out in comparison to peer banks now it's not perfect for sure and we're encouraged by the slowdown in the pace of that change here in the fourth quarter and we expect that to continue throughout 2023.

Very good thank you.

And then in the letter you guys talk about you don't need to CVC deployment returned.

Two 2021 levels, which were obviously very strong can you just provide some color as to why that is because that that comes up a lot because that was such obviously a monster year for deposits.

No.

It's obviously.

Flowing out now.

And so it makes sense.

Pushback that it's going to be very hard to replace what was a banner year.

Yes, Casey I will just go to the results of the fourth quarter as an indicator of why that statement makes sense. We're looking at venture deployment in the quarter $35 billion or so so think of that as kind of an annualized run rate of 120 to 140 billion venture deployment in the quarter from.

A balance sheet perspective on balance sheet, while we did see the decline in deposits. It was much lower than what we saw in the third quarter and the reason for that gets to what Greg mentioned as well as Mike, where we're seeing that lower level of cash burn so even on a much slower venture deployment number.

Call. It in the mid $30 billion range, we starting to see that on balance sheet.

Deposit.

When we look at cash burn versus the <unk>.

The inflows get to a much more normalized level. So that I think is an indicator with cash burn continuing to slow based on what Mike and Greg just said that we can get back without going to the 2021 deployment levels too.

To not just the deposit being at the same level, but the potential for deposit growth.

Gotcha Okay.

Last one for me.

The premium amortization that you guys talk about.

For.

For the first quarter here, you have it down a little bit.

But it is predicated on a 375 tenure, which is a 10 year, obviously, a little bit lower today.

With.

Incremental pressure on that number if if it's if the 10 year finishes 50 bps lower can you just provide some color on the premium amortization because this this does create a lot of I think confusion.

Yes, so we would still anticipate the premium amortization to decline here in the first quarter.

And the reason for that is that mortgage spreads.

Continue to to come in.

Now after the first quarter to the extent that we continue to see the 10 year come down we do have the sensitivity to an increase.

In premium amortization from that quarter, but just from the fourth quarter to the first quarter consider that it's going to continue to come down just because of the decrease in mortgage spreads in the quarter.

Okay. Thank you.

Yes.

Your next question comes from the line of Steven Alexopoulos with JP Morgan.

Your line is now open hi.

Hi, everyone.

Steve.

So to follow up with the pace of cash burn now slowing as the amount of cash on hand, and the burn levels are those both of what you guys would consider a normal level right now are those each still elevated.

Yes.

Greg I'll start.

Trying to say what normal is is really difficult.

For a variety of different ways. When you go back in the one thing if you go back five or six seven years and try to say well or is that more of a normal period. Our portfolio. We have a lot more mature companies in our portfolio. So you to think about they tend to keep a lot more cash and so we don't have quite the same level of experience.

I think.

Towards the end of this year my sense is that youre going to get more to what I'll call more of a normal cash balance.

The level.

Because youre going to see the cash burn rates are still be elevated from the first half they're going to be reducing but there will still be higher and so we will get to this more more I'll call. It normal level and I think again when you get to 'twenty four.

We expect a.

Modest increase in venture capital deployment, but one more thing that gets factored in is which has been zero for almost all of 'twenty two and ended the first part of 'twenty three and most of 'twenty three we don't expect a big impact as private market or public markets.

Again, it's the longest time, but they haven't really been any any ipos in.

As we spend more time with our late stage clients there is <unk>.

Many of them that are doing really well and when that market opens up.

We certainly believe that.

We are going to be in a really good position to do two things one help them go public number one number to be the beneficiaries of that cash when it comes in and so all those things are factored in which makes it just hard to predict exactly how it will quote unquote settle out to a normal level.

Okay, that's fair.

And I know, it's not one for one but very roughly what type of year would you need from a VC investment levels to get to this 2023 guidance like what is this roughly based on.

Yes.

I'll start and data Mike may want to add.

Kind of give a little bit of this color my opening comments, but the way to think about it is that we still expect in the first half of 'twenty three that youre going to see kind of a 10% to 20% roughly decline in venture capital and then youre going to kind of pick back up in the in the from those low points in the first half.

And pickup but not a lot. So you are probably looking at again, if you annualize the fourth quarter you were at about 144 billion.

I think we're in that roughly 130 billion ish for the for the year again rough estimates because you factor everything and you got to think about burn rates and everything else, but but the point is that the run rate for the fourth quarter.

Our forecast for 'twenty, three is actually slightly lower than that when you aggregate. It. It's just more front end loaded the negative and we will see a little bit of a benefit in the second half.

Steve just to add to what Greg is saying.

It doesn't.

The increase in very much in the back half so were in no way shape or form being aggressive thinking that the market is going to come back with significant amounts of deployment.

The back half of the year, so youre not talking about material shift in Q3, and Q4 in investment levels, but what we do see in Q3 and Q4.

With the guidance that we're going to see the slowdown in the decline in noninterest bearing deposits plus the securities Paydowns each quarter that you can kind of get to.

Yes.

Normalization of <unk>.

Net interest income and margin right around the midpoint of the year and then can start to see some growth into the into the fourth quarter just with those just those factors alone. So a small increase in venture deployment.

A stabilization in the noninterest bearing levels that happened towards the back of 2023, plus the securities pay down starts to build momentum for net interest income.

Got it okay.

Finally, just to clarify you mentioned high 30%.

As the bottom you said, there's a couple of times a bottom in the noninterest bearing mix, but then I thought you said that deposits might bottomed the mid point of the year and then grow in the second half.

So do you actually expect noninterest bearing deposits to bottom below the high thirty's.

First half of the year, and then grow to the high 30% level.

Thanks.

Now Steve the expectation is that we're going to continue to see some mix shift from noninterest bearing into interest bearing really throughout all of 2023, and we would expect as we get into the fourth quarter, that's where we're really going to see that.

Bottom out from a noninterest bearing to total deposit perspective at the same time, what we can see in the back half of 2023.

With a small increase in venture deployment and the slowdown in cash burn that we expect to continue and improve many small improvement in the overall deposit levels. So there are really two different things okay.

Okay.

Interest bearing deposits, where youre looking for that benefit in the second half.

Right, yes, okay. Thanks for taking my questions, yes, Thanks, Steve.

Your next question comes from the line of Brody Preston with UBS. Your line is now open.

Yes, hi.

Good evening, everybody how are you.

Right.

Hey, I just wanted to.

Maybe just follow up on the line of questioning on the noninterest bearing.

I just wanted to get a sense for is there like a natural kind of.

Level of.

Noninterest bearing deposits from an account level perspective that need to be.

No.

These companies need to keep on hand, and I. Just asked this because you guys have actually done a pretty good job of actually maintaining account growth over the last couple of quarters.

So I just wanted to get a sense for if noninterest bearing account levels. There is an average account level are these things kind of naturally bottom out.

Brady, it's Greg I'll I'm going to start at a high level.

<unk> or Mike May want to add some color commentary to Italy.

The challenge with the answer to your question is that there is not any more than average client.

Because it really depends upon early stage mid stage late stage publicly traded all of those all of those things.

Here's one way to think about it again why again, Dan made the comment about kind of this bottoming out.

And it was said, but I'll repeat.

When you look at that high thirties kind of bottoming out of the non.

Interest bearing accounts you have to think about it and look at the totality of all the total client funds right now we're at about a 24%.

Of the.

All total client funds, but if you factor in this high <unk> as a bottom youre going to be in that mid to high teens against that total client funds.

We believe historically that would be low and when you factor in all of the types of clients that that that seems with all the data and information we have to be where we would will be bottoming out obviously it can change our assumptions can be wrong, but that's that's the analysis that we've done so think about it in the mid to high teens of total.

Client funds not just this $23 24%.

Kind of at the end of the year I don't know Dan or Mike. If you guys would add anything to that Greg.

Greg It really gets back to the same thing if you look at.

Most commercial banks.

Think of total noninterest bearing deposits even in these rate cycles being in the high teens.

It becomes a.

A low watermark on noninterest bearing.

And that's effectively where that on balance sheet high 30% noninterest bearing range turns out to be if you consider the totality of client bonds. So.

Thats, one marker plus like Greg said the analysis that we do internally. So I think when we look at those things, yes, and subject to change that at the same time it gives us confidence in the outlook.

Your next.

Next question comes from the line of Jared Shaw with Wells Fargo. Your line is now open.

Hi, guys. Thank you.

Hey, Jeremy it's restricting just a little bit over two to the loan side and the growth you saw in.

You talked about clients favoring that over or capital here.

Have you changed underwriting or have you seen any better terms.

On loans that are being originated now.

<unk>.

Earlier in the cycle for these early and mid stage companies.

Yes. This is Greg I'll start and Mark and Mike probably both of them.

Sure a perspective on that.

It's.

The growth the growth has been again in the three years that we talked about it's the technology side of the portfolio.

It's been in the.

Global funds banking, and then a little bit a little bit with the mortgages as well and on the technology side, we've seen price some of the best growth we've had in many many many years.

Clearly on an absolute dollar volume basis, and even on a percentage basis and Thats one.

Kind of a simple discussion we were competing and we said this on many conference calls we're competing as much with equity dollars and anything else. These companies you would sit back and go we would love to lend money to you because of all the great fundamentals you have but they just raised $200 million. So why would they want to borrow 20 million $30 million.

Obviously, it's gotten harder.

Not that they couldnt raise money, it's their choosing not to because of the valuation that they would like to see those are great opportunities for us. So the team is doing a great job of winning.

Some great great business, and the technology side and the global funds banking.

<unk> got again, we've been doing this longer than anybody else. So we've got a great experience.

That's the term sheets and the new business is still in very very strong demand and we've seen some people pull out of the market.

And so that allows us to.

In some cases get a little bit higher margin, but I would say, it's as much getting making sure we have the highest quality clients that we're bringing onboard to the platform.

So it's still competitive, but we're able to bring in some great clients and we are able to see some nice outstandings in this environment. So I don't know marker.

Mike.

So I'll just comment specifically on underwritings that was part of your question generally speaking, we try to keep our underwriting standards consistent.

And what that will mean generally in times when the environment is getting worse as fewer clients clearing the bar at the same time as Greg mentioned that has been offset by more demand and so we are continuing to see some great opportunities to grow loans really across the segments, including the core tech and health care like anything.

You want to.

Yes, the only thing I would add is I mean, clearly we're very cognizant of the economic environment that we're operating in so when we're looking at underwriting were very very conscientious of.

Business models that are relying on the consumer has been the consumer might be hit with inflation, starting to think about interest rates and how they might impact the business models as well are there the amount of financing. So all these things are coming into factor, but as Mark said right. We're very consistent underwriting standards, which has served us well for many many years.

Okay. Thanks, and then I guess, a corollary to that you look at the credit.

Expectations and the growth in the.

Allowance.

It looks like on <unk>.

<unk> 30 of your nearly at each stage losses.

We're very close to it for for coverage.

How much higher do you think we can see the allowance as a ratio.

Go with Servier your broader credit expectation backdrop for normalizing losses.

So it's Marc I'll start.

Banner or others may wish to chime in.

So certainly there is a fair bit of reserve build as you pointed out in 'twenty two because the reserve go higher in 'twenty three.

As I think you probably know economic forecast.

Can drive.

The reserve as it did for US this particular quarter. So thats one factor we could as we've noted see higher levels of nonperforming loans that could drive higher specific reserves.

So there is that potential for the reserve to go higher again, recognizing that we have.

A fair bit of reserve build behind us in 'twenty two.

Great. Thank you.

Okay.

Your next question comes from the line of Delek or cash with Wolfe Research. Your line is now open.

Thank you good afternoon, I wanted to follow up on the reopening of IPO market as being a clear positive for the business from a timing perspective would you expect that reopening to coincide with the fed pause or are we more likely to need to see rate cuts just curious for your high level thoughts there.

Yeah, I wish I had our SUV securities team on the line right now.

Closer to its higher but as we've as we've talked about it.

I think.

We don't have a lot of expectations for things.

In 2003 with a few exceptions right I think.

My view when you start to see the top off of rates and so I don't think they need to go down I think they need to be stable at whatever level they're at.

And then I think just some confidence that that that's where we're going to hold and were not going to see a potential for another spike.

It's one data 0.2nd data point is as I mentioned this earlier.

When I have been spending more time with some of our later stage clients that are that are they have a lot of the metrics.

That we would say.

We are in a position when the market opens up to go public.

And I think.

When that stable stability happens you're going to see some go out and test the waters, we need them to test the waters and so I think could that happen in late Q3 Q4 the answers.

Yes, so I think if we see a.

Maybe a couple of more rate hikes of 25 basis points in a quarter or a little more than a quarter of a flattening.

Do I think that the market could open up for a few ipos the answer is yes.

Let me again take one more make one more point, even when it opens up.

Now going to be a flood it'll be a trickle because it'll be the ones that have the highest potential to go public and people are going to wait to see how they perform so I would say, yes, maybe in the late third quarter fourth quarter Youll see an opening but it's going to be a slow paced opening when that happens.

The only thing I'd add to what Greg is and we saw it in the fourth quarter on the Biopharma side in particular, good good deal flow good deal activity. There as that if you think about that business thats the normal flow of fund raising activity for those types of clients. So we're not expecting some.

Substantially.

Strong year on the Biopharma side, but I think that can become more constant.

And is embedded within our guidance expectations for 2023.

That's helpful. Thank you separately, how would you characterize the current willingness of companies to take down funding rounds, and how would you say that compares to the appetite for dry powder deployment. Just curious if you think where we were in any way getting closer to those two sides coming together.

Okay.

Yes, it's Greg I'll start.

It's exactly what you would expect.

We've seen this movie before it and you've got you've got companies that are and you can see this in the venture capital data that was released in the fourth quarter late stage rounds, there were a lot fewer of them, but the valuation actually didn't drop a whole lot and the reason for that is that.

Investors looked at this as an opportunity to go in on a flat round and some of the highest profile companies that had actually done really well since their last round, but they can still get in at what they would say is a decent a decent valuation.

You have another group of companies that are they're basically, saying, hey, I'm going to I'm going to take the lower valuation I'm going to get it over with those are fewer.

But we're going to see more of it over the course of 'twenty.

Three and then the final one is what I'll call. The in between it's the structured deal where it is.

It looks like it's the same round valuation as the last round, but they have preferences and things like that that that you would say when you really look through it isn't isn't keeping it at the same valuation theres structure involved.

All those things are happening.

But youre going to see more my view more down rounds occur in 'twenty three.

Youll see some more structured deals.

So all three of those scenarios I played out Youre, just going to see more activity.

Happening.

And again as we talked about earlier more in the second half of the year than in the first half year.

That's very helpful. Thank you if I could squeeze in one last one really wanted to follow up on your commentary earlier on the noninterest bearing deposit mix, sorry to keep coming to that question.

Stabilizing in the high 30% range, but the question is sort of around this broad concern.

Around the banking system in general.

We're hearing from a lot of investors that we could see the mix of noninterest bearing deposits revert to pre <unk> levels.

But when we look to the <unk> your mix of noninterest bearing deposits was in the mid to high 60% range, which is around where you were pre COVID-19. So I. Appreciate your commentary around looking at noninterest bearing in relation to total client funds, but maybe like a broader question is.

Do you envision a scenario, where we can sort of get back to that mid to high 60% noninterest bearing mix.

As we look beyond some of these more near term liquidity pressures that youre dealing with.

Yes.

People would say hope is not a strategy.

While it would be great to be there.

There is certainly is nothing in our forecast that would say were getting back to that.

At all.

So do we is there a scenario that we would see.

The uptick from the bottom that we think will happen later this year. The answer is yes, and we haven't come out with a guidance on what that would look like but.

It's going to be well below our historical level of non interest deposits I know, Dan what you'd add to it the other way to think about it is when you can go back to the history pre <unk>.

Global financial crisis.

Just the size of the overall balance sheet the types of companies.

That we bank are very very different and I think as a result of that change in client mix.

We're not going to get back to those levels of noninterest bearing deposits that doesn't mean that we don't have the quality of the deposit franchise, it's just a different mix of clients.

Now versus then with <unk>.

Close to 250.

$15 billion balance sheet, and maybe the only thing I would add onto what Dan said.

Thinking more about it is.

There is there is kind of.

The way you're describing it's either it's.

Market interest bearing or at zero and I think you could see scenarios and Mike and Mike and team have done a great job of this is looking at different products and solutions, so you're going to see a whole.

Different level on the interest bearing deposits of different yields based on the profile of clients. So I think you have to understand that yes.

Interest bearing is going to be a higher percentage, but the spread of yields on that will be will be varied.

Understood. That's super helpful. Thank you for taking my questions.

Yes.

Your next question comes from the line of John <unk> with Evercore. Your line is now open.

Good afternoon.

Hey, John .

On the <unk>.

<unk> balance sheet funds balance.

168 billion.

As of the end of the year can you just update US again, how much of that is available or youre able to bring on balance sheet and how much of that do you expect to be used under your.

That's baked into your guidance here.

And the other dynamics in terms of that could be impacting that that balance.

Yeah.

John John It's Dan and we can talk about it in the past.

We believe that there's still access obviously doing the right things for our clients.

Roughly half of that off balance sheet balance.

Balance so sitting sitting where we are that's still leaves.

Sizeable opportunity across what is classified as suite and what's classified as repo. So.

That's a substantial opportunity for us in terms of how much we're including in the forecast, we're still expecting to see some of that move onto the balance sheet, but the pace of that is expected to continue to slow into 2023 and Thats all included in our.

Our net interest income guidance.

And the interest bearing.

Bearing deposit beta guidance.

Okay.

Got it got it alright and then.

Any action considered for your available for sale.

Curious portfolio at this point.

Yes, John it's Dan again, very clear that we're only talking about available for sale in the quarter.

Did opportunistically sell $1 billion worth of Treasury Securities at a very short payback period.

Limited impact to tangible book value considering that we also had some warrant gains in the quarter. So I think what youre going to see from US is less of a broad review across available for sale and actions, there, but youll see us opportunistically, where the rate environment.

Payback period makes sense.

And also protecting tangible book value, we take some of those actions to effectively accelerate.

Accelerated paydowns of that book again, Thats the opportunistic thats full.

Core net interest income generation purposes.

More than anything else and again, we did $1 billion of that in the quarter.

Alright, so, but nothing immediately planned beyond that $1 billion.

But.

But so now rolling it out.

And again anything we're talking about is within available for sale and it's opportunistic and <unk>.

Protective of tangible book value.

Got it got it okay. Thanks and then.

And then separately.

On the credit front.

Just because the field a fair amount of incoming from.

Investors regarding.

Potentially underappreciated credit risk in your story is there where are you seeing stress.

Materializing.

Debt.

Noting where you expect.

Losses materialize and go against some of the reserve build that you've already put up what are the most.

Noteworthy areas, where youre beginning to see some of that stress.

Hi, it's Mark I'll start, Dan and Mike May wish to contribute.

But it is consistent with our historical experience its the early stage venture backed investor dependent cohort.

We have and would expect to continue to see the most stress.

Okay, Alright, Thanks, and then lastly for me.

Capital markets.

Thank you pipeline.

Maybe just comment there what youre seeing sorry, if you've already touched on it but just wanted to see if you can talk a little bit about what youre seeing there in terms of deal opportunities as you look out into 2023.

Yes, it's Greg we don't we haven't talked about pipeline.

Good.

Give guidance on what we expect.

Outlook to be from a revenue perspective, which is an uptick from where we saw it in.

'twenty two.

So maybe just kind of walk through like why would we why would we show an improvement.

<unk> got Theres kind of three parts actually for parts of the business you get the Biopharma business, which is really what we brought on board an incredible franchise with Leerink partners and then we added health care services, we added technology.

And they had the team had sales and trading and the head of research, but now then with the addition of Moffett Nathan you have to look at the entire platform. So now you've got M&A capability full ECM capability across all three verticals you have strong sales and trading and you have actually I would say.

Incredible research when you look across the entire platform. So you have a full stack platform and its actually.

People are in the saddles, and they're productive and so even though the market is going to be a challenge we look across that whole portfolio of opportunities and actually feel feel very good I feel very good about.

The team the strategy and their ability to execute.

This is going to be a tough year, our outlook shows it's going to be a tough year, but I'm actually really excited about <unk>.

24% and 25, and having that team beyond the platform longer and really I think take advantage of an improving market at some point, but.

It's going to be a tough market, but still an uptick in revenue from what we saw in 'twenty two.

Your next question comes from the line of Jennifer <unk> with curious Securities. Your line is now open.

Thank you good afternoon.

Hey, Jennifer.

Question on.

On credit quality I know you have a very small commercial real estate portfolio, but I wonder if you could just kind of give us a characterization of what's in there.

If you have any concerns about any piece of it I know, it's really small, but a lot of banks have been talking about concern about commercial real estate.

And that tougher.

Hi, it's mark.

And that is a segment certainly bears watching particularly if there is a.

Recession in the orphan, but generally speaking as you pointed out it's 3% of total loans.

We are well diversified across several different categories and probably what's most important is it is that it's on average well margins relative.

Relative to the underlying real estate collateral so.

That was certainly going back to the Boston private acquisition. It was a portfolio we were more concerned about in part because it was we were in the depths of Covid at the time and it has continued to.

Really outperformed my expectations.

Okay.

Is there any office exposure on that.

It is not a enormous part of that 3% is significant and again so far has continued to outperform expectations.

Thank you.

Youre welcome.

Your next question comes from the line of Chris Kotowski with Oppenheimer. Your line is now open.

Yes, good evening. Thank you.

That's a question I guess mainly for Dan.

And I hear you and I understand exactly why you are saying the only securities restructuring would be in the available for sale portfolio, but I wonder as you are looking at that held to maturity.

Charities portfolio Im looking at your average balance sheet like the $85 billion taxable held to maturities portfolio I Wonder just if you can highlight a few of the diamond Nymex of the runoff there and the first thing I'd say is I noticed like the yield went down from like 192 to $1 72.

Two from the third quarter to the fourth quarter, presumably that's the $50 million of amortization, but I'm wondering what's the go forward I mean was the third quarter, a $50 million good guy or is the fourth quarter of $60 million Bad Guy I guess, that's the first thing you know should we expect something with like with a 170 handle or one.

<unk> 90 handle.

And then.

Secondly, I guess I'm wondering.

From the disclosures in the 10-Q, it looks like that had a very long maturities profile is there like any significant run off that.

Kind of on a natural basis.

Take that portfolio over say, 3% yield handle that anytime in the next.

12 to 24 months.

It's Dan I think FERC first and foremost.

Payoff profile, there, we're getting off of that book anywhere between $2 billion to $3 billion a quarter, so think $12 billion annualized.

Run rundown in that portfolio and those assumptions were where 10 year rates were.

Just just a couple of weeks ago. So we now think about 10 year of $3 $33 40, you can pick up some paydown.

Paydown acceleration associated with that we'll see how material that becomes and where the 10 year ultimately land. So I think we're going to continue to see.

Some improvement.

But in this kind of $2 billion to $3 billion a quarter like a clock just continues to pay down with the opportunity to accelerate if 10 year rates.

<unk> come down from there.

We think about yields themselves I think as we look at Q1, we're still talking about the high 170 to the mid 180 range in that book and a lot of that.

Really it comes down to where premium amortization comes in 4%.

For the portfolio. So those are those are really the factors watch the 10 year yield to the extent that that continues to come down you could see an acceleration of.

Payments on that book, which obviously just make things go faster faster there.

And get us closer to that inflection point of NII and NIM sooner if that were to occur.

Okay. Thank you that's it for me.

Thank you.

Your next question comes from the line of Andrew Liesch with Piper Sandler Your line is now open.

Thanks, everyone. Thanks for taking the questions.

Just curious if you look at the Investor dependent cohort right now how much cash runway. They have obviously they've been trying to sell their cash burn and it sounds like they have been successful at doing that but how does the cash position stand looking out for the next year or so.

Yes.

So we track remaining months liquidity, we call it.

Otherwise referred to as runway and the majority of that portfolio at last check still had over a year's worth of cash on.

On hand.

Got it alright thats helpful.

And then just shifting gears on the funding side when investment activity does come back and client funds come in how do you expect the mix to trend with respect to deposits versus off balance sheet funds.

Okay.

Yes. This is Dan I think.

Based on.

A potential recovery in venture deployment again, we don't have a.

A substantial pick up at all in the earnings.

<unk> for 2023, but imagining that we do start to see pick up pick up there I think we're going to continue to direct those funds on the balance sheet. We think about the composition of those funds as they come in they will likely be less expensive than what we've got from the off balance.

Sheet to on balance sheet product so over time to the extent that that accumulates will look add over time shifting more of those expensive deposits thats one of the benefits of that product is that it's not a one way door, we have the ability to ship it off balance sheet.

To accelerate the improvement in net interest income and net interest margin. So.

<unk> will for if you think of the switch and how we toggle switch the switch will be continued toggled on the balance sheet.

As we drive some of those higher costing deposits off the balance sheet and to be very clear. We don't expect this to come in.

Is all noninterest bearing it'll certainly be more heavily weighted to interest bearing in this higher for longer environment, but still be cheaper than those off balance sheet client funds.

Got it.

That covers my questions. Thanks, so much.

Yep.

Yes.

Your next question comes from the line of David Smith with Autonomous Research. Your line is now open.

Hi.

The capital call lines and Global fund banking could you just say a little bit about how much of the growth was driven by new lines commitments versus any change in utilization.

Okay.

So as far as the <unk>.

New client business I mean, most most of it was from utilization the change from an outstanding perspective.

So we did have some new obviously, new new client fundings, but.

No.

I'd say it varies from quarter to quarter, So, it's probably not anything to make AR.

To have a dramatic change so I don't know Dan if you would add anything to it.

I think when we look at the quarter our from a funded perspective, we did have growth in capital call.

And.

At the same time that was off of lower utilization. So you've got some net new clients in there I think more notable is the increase in the amount of term sheets and net new unfunded commitments, which over the next six to nine to 12 months are really.

You're going to be a tailwind for us from from alone loan growth perspective, I think that's most notable also drove an element of the provision increase in the quarter.

Okay.

Okay. So just to be clear lines were up but utilization was down slightly both on net the outstandings were higher.

Thats right.

Okay.

And just unpacking, the S&P securities outlook, a little bit more.

Largely biopharma driven in the fourth quarter as I understand it well.

What kind of tech recovery is contemplated in the guide for 2023.

Very little.

Very little.

Again, as I said now having the full.

The full platform and people in the saddle for longer and deeper relationships being built it's really just been able to pick up some market share.

We don't we just don't have a lot of new activity in there.

Okay is it fair to call. It is still largely a biopharma story for next year.

No I think it's clearly you're going to see more of a mix.

Biopharma will do fine, but it's but it's it's M&A and technology, it's M&A and healthcare services. So M&A is going to be the bigger parts. So here's I would describe it biopharma is probably going to be still be a mix of of ECM and M&A technology health care services is going to be.

More driven for the year with M&A and maybe towards the end of the year, you'll start to see a little bit of a pickup in ECM.

And the technology side.

Okay. Thank you.

Yep.

Okay.

Your next question comes from the line of Christopher Mcgratty with a K VW. Your line is now open.

Oh great.

Greg your balance sheet historically has been one of the more asset sensitive we're going through a period of.

Really big rate increases so you've moved to the other side. If we look at the forward curve, which begins the pricing cuts and I know your guidance doesn't.

Factoring cuts.

How do we think the margin will perform if the fed funds rate gets cut.

As we look into next year should the balance sheet.

Flip to being liability sensitive in that respect.

Yes, Chris It's Dan I think if you look at our disclosure of what we're talking about for potential rate increases.

When you start to see that that.

Which is factored at least the next couple of increases are factored into our guidance.

You start to see that we could be liability sensitive associated with that so in the case that the fed starts to decrease rates and again, we don't have any of that baked into our estimates that could start to be a bit more of a tailwind from an NII perspective, reducing.

Overall pricing on some of those more expensive deposits faster than what we have incorporated in our model.

I think you can look to the asset sensitivity disclosure.

And look too.

The same potential for a reduction to the extent that rates come down.

And maybe Chris just to add on.

You've kind of had two questions. One is may be short term and long term.

I think.

When we settle out to find out kind of that.

Can normalization.

And then when you see let's say you got back to whatever that normal floor is.

Flattening of rates at some point, some lower level and then.

At that point I think if you saw some rate increases modest ones.

I think we'd be back into the more asset sensitive side I think it's just right now and you said it we see we saw such a rapid increase in rates, which we've never seen before and Thats what kind of made the biggest change. In addition to the kind of construction of the balance sheet. Those two things caused it to be kind of.

Out of out of historical norm, and it's going to take a little while for us to get back to that place where we can.

Eventually get back to a base level, although less.

Level of asset sensitivity.

That's great. Thank you if I could just follow it up.

One of your competitors.

Last week talked about dish.

<unk> costs into the out year, given given the environment.

Appreciate in the low single digit guide for expenses this year.

We're certain projects just pushed to next year or is there I know you talked about hiring slowing but is there a natural ramp that comes back into the.

Expense growth rate once environments.

I'll have a better.

Yes.

I'll talk about philosophically, how we've operated from an expense perspective over over a years in cycles.

More specifically about the guidance that you gave and then Dan can add comments to it.

And we've said this.

Can you go back and look at the pace of investment we made in.

Digital.

In infrastructure and a whole variety of risk management, a lot of different things.

We looked at it and said look we'd mark when times are better and we are earning more money, we're going to we're going to kind of accelerate that investment level.

Because we have an insatiable appetite for investment because of our target market and the market overall, and where it's where it's growing and how.

How large it is and so when you have times like this it's just a more challenging more in certain market or more headwinds youre.

Youre going to take a look and youre going to say youre going to basically prioritize and youre going to kind of optimize what you have so does that means slowing down some projects. Yes. It does does it mean potentially pushing things out into future years. It does but we have that prioritized list and as things start to improve we're going to start to.

Put more money behind those those projects we have in the deck, where we're making the investment focus of our prioritized list. So it's more in the.

Private banking wealth management kind of go to market strategy.

Secondly in the commercial bank.

Kind of focus there and digital enhancements third is this one SUV collaboration just making sure that we're working across the entire platform and Thats, just really important to make sure that we leverage our investments leverage our acquisitions and really take care of our clients deliver for our clients in a meaningful way and then the last one is risk management.

Again, we continue to enhance.

We are in this <unk> status in both expectations and just our own needs are increased and so that's how we think about prioritization.

And so forth so Dan what would you add to that yes.

I think as long as it's clear we're going to continue to invest here, even even in a more challenge 2023 across the elements that Greg mentioned that that's key I think for us to emphasize we're able to optimize that spend also as we're looking at.

Changing the mix between professional services.

And cheaper fulltime employees, that's just another way for us to get optimization from from a cost perspective, and we're doing that and that also helps us from a sustainability perspective, and then I think the last part of your question is to the extent that the environment improves or we're going to go back to.

To that.

More and more traditional higher expense run rate and I think thats going to be a balance and I think for us. The overall return the profitability of the franchise is continuously important.

So we'll have to continue to balance those investments.

As our profitability returns to more normal.

Normal levels.

That's great that's great color. Thanks, and then maybe just a last one entity environment's uncertain, but.

Thoughts on a buyback overtime given the valuation.

Yes, Chris I think we've said this in the past, we're always going to remain open.

Looking at our options from a capital perspective.

Obviously 2023, we're not expecting a lot in terms of new.

A major acceleration and deployment.

But to the extent that deployment.

It does come back in does come back quickly you can start to see.

The balance sheet increase and again no more pressure from a tier one leverage perspective. So we certainly don't have that now, but it's something that we need to continue to be cognizant of so I think as we look ahead, we're just going to continue to keep our options open.

But again I think growth over the medium and the long term is the thing that we need to prepare for.

Great. Thanks for all the color I appreciate it.

Yes, Thanks, Chris.

There are no further questions at this time I'll turn the call back over to Greg Becker for final remarks.

Great. Thanks.

Thanks, everyone for joining us today.

We tried to give as much detail.

Again, I give a huge amount of credit to our IR team to put together a lot of information a lot of detail on on kind of what we're seeing.

The outlook.

What are the key drivers and so I think that's really helpful and I think again just to reiterate when.

When you go back and look at fourth quarter.

There is a lot of really healthy signs, whether it's loan growth core fee income growth.

Nice growth in investment banking.

And probably maybe most importantly, this kind of stabilization of this inflow of adventure with.

Pulling back or slowing down of cash burn so that was great to see that being said look the market is still very very choppy. There is still a lot of uncertainty out there which is why we gave guidance in two ways. One is the annual guidance and the second one is the quarterly guidance to make sure that you kind of really have a good sense of how we're feeling about about the.

About the quarter.

We talked about what it means for SCB and again just to go back we think the first half is going to be.

It's going to be bumpy, we expect that youre going to see venture capital decline in the first.

Half of 'twenty, two and then kind of 'twenty, three and then stabilize and start to improve so our expectations are not for a a big improvement from where we are right now and Thats. Just the outlook. We think is realistic and could there be some upside certainly there could be some upside, but that's not what we have.

Our plan and especially if it gets worse as we went through and you can see in the deck, we have ample resources and liquidity in other ways to make sure we're taking care of our clients and still being there for them when they when they need it so that.

That's kind of our view.

Again, thank you guys for joining as always I want to thank our clients.

It's <unk>.

One of my favorite parts of what I get to do is spending time with our clients.

And just hearing their stories about what Theyre doing is theyre still excited and yes, they are making hard decisions but.

There are well positioned and quite honestly I think markets like this in many ways as much as we'd like we don't like it we don't enjoy it.

It is actually healthy because it allows those companies to run more efficiently run more effective and position themselves for growth and then finally, thanks to all of our employees.

I can't thank them enough for what they have been doing to support our clients.

We're doing to support each other and.

Look, it's a tough market and so keeping that positive attitude and client centric mentality is super important. So we appreciate that.

So thanks, everybody. Thanks for joining us and have a great day. Thank you.

This concludes today's conference call. Thank you for attending you may now disconnect.

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