SVB Financial Group (NASDAQ:SIVB) Q3 2022 Earnings Conference Call October 20, 2022 6:00 PM ET
Company Participants
Meghan O’Leary – Head of Investor Relations
Greg Becker – President and Chief Executive Officer
Daniel Beck – Chief Financial Officer
Marc Cadieux – Chief Credit Officer
Mike Descheneaux – President, Silicon Valley Bank
Conference Call Participants
Steven Alexopoulos – JPMorgan
Ebrahim Poonawala – Bank of America
John Pancari – Evercore ISI
Casey Haire – Jefferies
Jared Shaw – Wells Fargo Securities
Bill Carcache – Wolfe Research
Andrew Liesch – Piper Sandler
Manan Gosalia – Morgan Stanley
Gary Tenner – D.A. Davidson & Company
Chris McGratty – KBW
David Smith – Autonomous
Jon Arfstrom – RBC Capital Markets
Operator
Good afternoon ladies and gentlemen. Welcome to SVB Financial Group’s Q3 2022 Earnings 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’ remarks, there will be a question-and-answer session. [Operator Instructions]
And at this time, I’ll turn things over to Ms. Meghan O’Leary, Head of Investor Relations. Please go ahead ma’am.
Meghan O’Leary
Thank you, Boh, and thank you everyone for joining us today. Our 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 have 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 reconciliation to GAAP measures may be found in our SEC filings and in our earnings release.
And now I will turn the call over to Greg Becker.
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, the environment, we’re all dealing with just briefly.
Let me start with the business. We continue to see strength and momentum in our underlying business, I think it’s really important to highlight given all the other factors that are going on. We got Global Fund Banking term sheets near record highs, new client acquisition at all-time highs, strong 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.
We’ve had great client feedback from the rollout of our digital banking platform SVB Go and we hit some international milestones, the U.K. subsidization 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 SVB. And clearly at the same time, the markets are undeniably challenging. Market volatility arising from a number of global issues has 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 four business platform is well-positioned to capitalize 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.
So, with that, turn it over to the operator to open up the line for questions. Thanks.
Question-and-Answer Session
Operator
Thank you, Mr. Becker. [Operator Instructions] Take our first question this afternoon from Steven Alexopoulos at JPMorgan.
Steven Alexopoulos
Hey, good morning, everyone or good afternoon, actually. Sorry.
Greg Becker
Hey Steve.
Steven Alexopoulos
I wanted to start with a big picture question. So, asset sensitivity has declined, but you’re still asset-sensitive and 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? Can you just explain for us what’s happening in the real world that your asset-sensitive models not capturing? Because the guidance almost looks like our live liability sensitive bank here?
Daniel Beck
Yes, Steve, it’s Dan. So, if you think about what’s happening, we continue to have asset-sensitivity on the static balance sheet. But we continue to with shift from non-interest bearing to interest bearing and use of off-balance sheet, find funds on the balance sheet driving interest bearing to have higher levels of interest costs, 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’re seeing higher cash burn, and slower deployment, in the venture space is driving weaker net interest income on a quarter-to-quarter basis.
Steven Alexopoulos
Okay. And if we stay with that line, the chart on slide nine shows inflows and outflows, which was pretty helpful are the outflows now at two times historical rates 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?
Greg Becker
Yes, Steve this is Greg, I’ll — let me take that. It clearly is a function, 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 is 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 that’s 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 cash burn. So, as we 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’ll 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 it may take two, three, four 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 this quarter. And so it’s really almost more of a function 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 because 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.
Daniel Beck
Yes, the last thing to say, Steve, is that the chart that you’re looking at in the earnings deck is on total client funds. So, the other thing that we have an opportunity for us to continue to direct both from off the balance sheet to 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 you’re growing, lending, that’s exiting the quarter, close to 5% from an all-in yield perspective, that’s still accretive.
Steven Alexopoulos
Thanks. So, just final question. So, on the fourth quarter deposit guide, the $168 billion to $172 billion, what VC investment level are you assuming to get into that range? And what’s the assumed mix of interest bearing non-interest bearing? Thanks.
Daniel Beck
Yes. So, Steve, again what 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 the continuation of higher levels of cash burn.
And continued success and bringing deposits from off our balance sheet to on the lower end of that range assumes a lower deploy — even lower deployment environment, take another 20% down from there, continuation of higher levels of cash burn, and less success of bringing this off-balance sheet funds the on the balance sheet. In terms of non-interest bearing to interest bearing, we’re probably exiting the year in that 45% to 50% range.
Steven Alexopoulos
Got you. Okay, thanks for taking my questions.
Greg Becker
Yes. Thanks Steve.
Operator
Thank you. We’ll go next now to Ebrahim Poonawala of Bank of America.
Ebrahim Poonawala
Good afternoon.
Greg Becker
Hey Ebrahim.
Ebrahim Poonawala
I guess, just following up on this cash burn dynamic. So, if we assume that we see investment pace doesn’t change from here, I think as you point out, Greg, this is still the best year ex-2021. So, let’s say this is the new normal for the next seven quarters or years, do you have any visibility when that cash burn actually meaningfully slows down where you stopped 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 shift will worsen in terms of non-interest bearing total? And we could see NII declined sequentially for the next few quarters? Thank you.
Greg Becker
Yes. Ebrahim, let me answer the first part of the question, then Dan can take the second one. The visibility into the cash burn is a function of kind of what we see on a day-to-day basis and then we extrapolate that out.
What we saw is a slight decline in the third quarter, roughly 7%, 8% and it’s — again, it’s not a precise math and what I would expect to see, it’d be logical to see I should say, is a similar decline over the next few quarters on a quarterly basis, so your question is, if you if you keep it steady, keep it flat a level of investment. When would we start to see kind of I’ll call it flattening, you’re probably looking at about three quarters out before you, kind of, get to that breakeven from a flow perspective.
I haven’t done the back of the envelope math, but I’d say it’s probably generally in that in that area. And so that’s what we track. But what are the other kind of communications and engagement that we have with clients and venture capitalist to kind of get a sense on that? Here what I would, here’s how we think about that.
If you go back six months ago, the sentiment was definitely of concern. Three months ago, it was a greater concern and now if you spent time, we talked to venture capitalists, and we just had a global CFO summit for VC and PE, the sentiment has gotten worse. And so the message that they’re communicating are, you know, 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 down. I just would say, we were a little bit surprised — and 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.
Daniel Beck
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 — much higher range, then what’s sitting on the balance sheet with the rest of, you know, with the rest of the deposits.
At the same time, to the extent that we continue to see good strong lending, that we’re picking up close to 90% on commercial bank lending of the data from higher rates. So, that could be some offset. But generally speaking, I’d continue to see some pressure on net interest margin and net interest income as we head into 2023 until the cash burn and overall deployment start to rebound.
Ebrahim Poonawala
And then just tied to the liquidity, so you have a ton of excess liquidity off-balance sheet and ability to borrow. Is there any scenario where you’ll see liquidating some part of the securities book to provide funding and just kind of restructuring the balance sheet to meet as opposed to bringing on higher cost deposit funding on?
Daniel Beck
Yes, I mean, I think the way to think about it, as you mentioned, the balance sheet’s really flexible. We have been using and talked about earlier off-balance sheet deposits and wholesale funding effectively supported by the securities book to bridge and I think this is really important this period of time that we’re 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 a burn in funding comes into balance, that’s going to open up opportunities. We’ve talked about this before, where we’re going to be able to drive more expensive funding off the balance sheet to reduce wholesale funding and that’ll 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.
Ebrahim Poonawala
Got it. Thanks. I’ll re-queue.
Operator
Thank you. We go next now to John Pancari at Evercore.
John Pancari
Good afternoon.
Greg Becker
Hey, John.
John Pancari
Just back to the cash flows coming off the bottom book, Dan I know you mentioned you just said that $3 billion per quarter in pay-downs, is that the total cash flow that’s coming off the bond book per quarter? or is there a maturity add to that?
Daniel Beck
Yes, that’s the regular maturity as we go on. In time, we’ll start to see some of the bolder [ph] 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 range. And again, as we get out into later duration with some of the Treasury portfolios, you’ll start to see those bolder maturities come through.
John Pancari
Okay. And that $3 billion, that is hopefully extended basis?
Daniel Beck
Yes, that’s — I mean, considering where rates are now and the mortgage portfolios, we think we have most — the vast majority of the extension in there.
John Pancari
Okay. And if you could just remind us again kind of market [Indiscernible] would be more specific at what rates you’re bringing on the off-balance sheet composites, like, for example, this quarter what were they brought on?
Daniel Beck
Yes, so as a reminder, that was off-balance sheet deposits that we’re bringing on, they generally sit in money fund accounts. So, they’re getting effectively 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, let’s call it, high twos range associated with that and they do have higher beta, obviously, than the rest of the organic, you know, deposits that are sitting naturally on the balance sheet.
John Pancari
Okay, got it. And again, of the $91 billion to the off-balance sheet funds. Again, how much of that is eligible to be brought back on?
Daniel Beck
Yes, we’d say it’s roughly half, a lot of it is obviously, client appetite. And we always obviously do the right thing from a client perspective, and how we’re paying from a raid perspective. But we’d say it’s roughly half from an availability perspective.
John Pancari
Okay. And then the last thing for me, just in terms of the — you mentioned, the optionality and development for sale portfolio, the health and maturity portfolio just — there, you still have the taking, that there’s no intent to restructure that portfolio in any way.
Daniel Beck
There is no intent to restructure that held to majority portfolio.
John Pancari
Okay. Okay, all right. That’s it for me. Thanks.
Operator
Thank you. We’ll go next now to Casey Haire at Jefferies.
Casey Haire
Thanks. Good evening, guys. I wanted to touch on the on the borrowings $10 billion last quarter and another $10 billion early in this quarter. Just what is the — what kind of term and what kind of rate are you guys paying on the borrowings? Yes.
Daniel Beck
Yes. So, Casey, it’s Dan. So, we’ve got a mix on right now, of short-term borrowings in the 3% range. We’ve turned some of that out to less than a year maturity, some of that’s in the high 3%s, low 4% range.
Casey Haire
Okay. That all — all that $20 billion, the $10 billion in 3Q and — $10 billion in October and $10 billion in the second quarter?
Daniel Beck
So, in terms of balances at the end of the quarter, I believe we’re sitting at 13 billion, something along those lines. And so of that we’re sitting with, I’d say 60%, less about close to a year and the rest of the short-term.
Casey Haire
Okay, got you. All right. And then just on the — so slide 11, you — the NIB — the deposit beta assumption and the DDA, it sounds like this VC — the cash burn is going to take a couple of quarters to normalize. So, I mean, what’s the, I’m assuming that in 2023, the DDA mix is, is moving consistently lower and then the deposit beta is obviously marching higher.
Daniel Beck
Yes, again, as we were mentioning earlier, the visibility on exactly how that’s going to play out is harder to come by right now. I think there will continue to be downward pressure on the non-interest bearing to interest bearing proportion as we continue to see higher rates.
That being said, at some point, I think you’ll get to some stability at — of 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 in shift from non-interest bearing to interest bearing in 2023 Just how much and exactly where it bottoms out, that’s a question mark. But I think we’re going to see that slow here as the fast pace and rain and rain, I think for those that are activated, that’s already happening.
Casey Haire
Okay understood. And just last one for me that the fee guide for fourth quarter ex-SIVB Securities 3.45% and 3.60%, that’s a pretty healthy step up from the third quarter run rate, which is at 3,16%. What’s driving that?
Daniel Beck
Yes, we continue to see the benefits of higher interest rates come through on the spread on the off-balance sheet accounts. And we’ll continue to see your spreads improve spreads improved there. So, 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 cards, you look at FX, and the rest of our activity.
So, as 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.
Casey Haire
Okay, thank you.
Daniel Beck
Thanks Casey.
Operator
Thank you. We go next now to Jared Shaw at Wells Fargo.
Jared Shaw
Hey, good afternoon.
Greg Becker
Hey Jared.
Jared Shaw
I guess when you when you look at the companies that have taken that down around VC financing, are there any characteristics that stick out? And I guess for those that haven’t, how long can they hold out before they sort of need to take a lower pricing? Are we closer to a point of capitulation for that?
Greg Becker
Yes, Jared, the biggest challenge with — I guess, the private market repricing at a fast pace is the fact that many of them raised so much money last year. So, you don’t — if you’ve got three years’ worth of cash, you’re 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’s 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, there we could see, and probably we’ll see, you know more of a capitulation on valuations back to whatever the market is, at the end of this year, which will filter through and kind of, Q1-ish into 2Q because sometimes there’s a little bit of a lag.
So, right now, we’re not seeing a lot of down rounds, we’re simply more structured rounds, which means you keep the same price, but maybe you do a 2x 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’s always a debate, when you sit down with venture capitalists, some would say, never do a structure round, take your pain, your medicine and lower the valuation to the market, raise money when you can, et cetera.
And others would say, protect your valuation, if you can keep it and do a structured round. It’s not the end of the world. So, we’re just seeing that all play out. But that’s, that’s the main reason they ended up with a fair amount of cash right now, so they don’t have to come to that conclusion yet, but more of its coming.
Jared Shaw
Okay. Okay. That’s, that’s helpful. Thanks. And then guess for the investments that you’re all holding on — in your own investments, how are you treating valuations if there haven’t been recent rounds to give that market check? Are you having to wait and take your lead from the company? Or are you proactively making any marks on your own?
Daniel Beck
Yes, Jared its Dan. On the warrant positions, we get pretty regular updates and really current with those valuations where we have at least some gap is in the liquid position. So, we took a reserve last quarter associated with those and still had additional losses come through on some older funds where we had an ownership position this quarter.
So, and as we think about it on a go-forward basis, we would expect valuations on those illiquid positions. They’re going to be updated as a part of fund audits through Q4 and probably all the way through Q2. And that’s where we may see additional losses.
So, think of that is 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 couple of quarters.
Now, those losses may be offset by the occasional warrant gain which we continue to see, but that I think is going to be more limited quantities at this point in the cycle.
Jared Shaw
Okay. Thank you.
Greg Becker
Yes.
Operator
We’ll go next now to Bill Carcache at Wolfe Research.
Bill Carcache
Thank you. I had a question on credit, you maintain the ACL ratio at 77 basis points, looks like but lowered the downside weighting from 65% from 40%. Can you discuss what’s behind the lower downside scenario waiting? Any color on that?
Marc Cadieux
Yes, this is Marc Cadieux. 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. We saw 75 and so our conclusion in so many words, was that closer but not quite. And so we took our weighting of the S3 scenario down, but not all the way back to standard weights, kept it at 40% for this quarter.
Bill Carcache
Understood. And separately, how would you characterize the demand that you’re 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 that lending environment is?
Greg Becker
This is Greg. Maybe I’ll start and then Mike Descheneaux may want to add. So, there’s no question we’ve seen an uptick in demand and that should be expected, right? 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 equity.
This year, clearly, it’s harder to raise money. And so — or if people want insurance policies, so debt is now back in vogue. So, the level of activity, new clients coming on board and delivering term sheets are the pipeline. 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 least I’ll interpret it. Do 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 in a lot of different ways to bring those loans onto the balance sheet. Assuming that qualifying Of course, that’s a given. And when they do, we’re able to fill those orders. So, we see no slowdown in that. And it’s actually one of this many areas that excites us about what we’re seeing — what we saw so far, especially in third quarter. So, take a look at the growth in the third quarter. And what we look at as we roll into — get ready to roll into 2023. Mike, would you add anything to that?
Mike Descheneaux
I think I would just go down the questions around are we — essentially interpreted, are we doing anything different or being more cautious about who we’re lending to and be a little bit more particular? And the answer is, of course, yes. Right. I mean, we’ve been through economic downturns. Our teams are very well versed in to 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 area that we got to keep an eye on because given this macroeconomic backdrop and inflation, certainly that’s an industry or sector that’s going to take some sort of hit or impact. So those are just one example of kind of how we’re thinking through and looking at the different sectors where we need to be a little bit more thoughtful than had if the economic environment was stronger.
Bill Carcache
Thanks. And maybe I could follow-up with one last one along those lines, to the extent that you’re putting up that growth, if you think about the yields that you’re generating on those kinds of loans. And if we think about the sort of funding environment persisting and perhaps the money market type rates as sort of being your cost of funds, maybe, is the spread and sort of the NII accretion.
Is it reasonable, that you’d expect that essentially — that you would be asset-sensitive? I think there’s certainly concern that some liability sensitivity could shine through given some of the dynamics that we’re seeing. I know you’re not giving guidance, but if you could just speak to that broader dynamic and your overall thoughts would be helpful.
Daniel Beck
Yes. Bill I’ll start and Mike want to add. If we just kind of look at the dynamics of the loan portfolio, again, we talked about it, over 90% of that is variable rate and we’re seeing on the commercial lending side, in particular, close to 90%, beta coming through on that lending.
So, I feel good as our entire funding base is 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 good about that on the lending side. Mike, anything that?
Mike Descheneaux
Yes, I think maybe we’re getting to is the level of impact of competition on the spreads. And then there’s the pricings that we the payment we can actually have. And so for longest 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 down where spreads were getting tighter. I would say in this environment, particularly certain segments of the loan portfolio, the downward pressure is not as significant as banks and other — non-banks are being very conscientious of their cost of funds. And so I think that is — I wouldn’t say it’s a baited, but nonetheless, it’s there’s 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 build a spreads expanding a bit.
Bill Carcache
That’s very helpful. Thanks for taking my questions.
Greg Becker
Yes.
Operator
Thank you. We go next now to Andrew Liesch – Piper Sandler.
Andrew Liesch
Hey, good afternoon. Thanks for taking the questions. Just on the increase in criticized loans here, I was still relatively small as a percentage of the overall but is that concerning to you? And I guess what drove that?
Marc Cadieux
Hi, it’s Marc, I’ll start. Concerning insofar as any increase in criticized loans would be concerning. And I think reflective of the environment and worsening projected economic conditions that we were talking about. At the same time, as mentioned earlier in the call, our clients continue relative to past cycles continue to have more robust liquidity. And so while we are seeing that uptick in criticize, as you can see, in the third quarter, we did not see a translate to an increase in non-performing loans or loan losses.
Andrew Liesch
Got you. Is it issues with any individual credits or just a general downgrade of target from the portfolio that drove this?
Marc Cadieux
Yes, I’d say it is concentrated in our tech and healthcare portfolio as you would imagine. And generally speaking, there probably falls more heavily on our investor-dependent segments.
Andrew Liesch
Got it. All right. And then just kind of a housekeeping item on the client investment fees. Are those capped at all or you continue to benefit, no matter how fast or how high the Fed raises rates?
Marc Cadieux
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 like one and a half to two that we got at the beginning of the rate cycle, but that it is not kept and expect about a basis point for every 25 basis points.
Andrew Liesch
Got it. All right, that covers my questions. Thanks so much.
Greg Becker
Yes.
Operator
And next, we go to Manan Gosalia at Morgan Stanley.
Manan Gosalia
Hi, good afternoon. Most have been answered at this stage, but just — I sort of recognize there’s not enough visibility for 2023. But I was wondering if you can just talk about the NII guide for next quarter as a jumping off point for 2023. Maybe there will be some more weakness if 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 year in terms of funding and NIM and cash burn? how quickly do you think the NIM and NII can pick up in that environment?
Daniel Beck
Yes. As we talked — this is 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 jump off for 2023.
I do think as long as we’re in this environment where we’re unbalanced between venture funding, and we’re in 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 and the beta that we’re seeing come through on the lending side of the book.
That remixing and the use of those off balance sheet funds, again, where we’ve got flexibility to drive them off the balance sheet now could continue to deteriorate margin and net interest income. Just how much I think that’s — the degree of certainty, you know, as we get into the first quarter, I think is going to obviously be a lot more clear.
Now, how quickly can it rebound? If we can, if we start to see cash burn slow appreciatively and not just the stabilization of deployment, some effective increase, and do some public market activities coming 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 really start to move the balance sheet. Quickly. So probably not a super satisfying answer, just because there’s a little bit more uncertainty. But hopefully, you understand all the pieces.
Manan Gosalia
Yes, that’s helpful. And then typically, a 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? I was curious, what are you hearing from the private companies?
Greg Becker
Yes, this is Greg. It’s all factored into that one chart that we show. So, it’s part of the equation that is built in there.
Manan Gosalia
Okay, great. And then apologies if I missed this, but how much of this sweep accounts were brought on in 3Q? And what does the deposit guide for 4Q assume?
Daniel Beck
So, in total dollars, we brought in in the quarter, roughly, let’s call it $5 billion, $6 billion, something along those lines. And in terms of the fourth quarter guide, like 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 the on balance sheet.
To the extent that slower, and you see slower deployment and faster cash burn that could get us to the lower end of that guidance range for the fourth quarter.
Manan Gosalia
All right. Great. Thank you.
Operator
We go next now to Gary Tenner at D.A. Davidson.
Gary Tenner
Thanks. Afternoon. On slide 24, the client investment for the client funds slide, one of the considerations you pointed out was China policy changes and investment in Chinese companies. I just wonder if you could maybe talk to China policy changes and any considerations as it relates to your strategy over there?
Greg Becker
So, this is Greg, I’ll start and I know 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 monthly, weekly, 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 or the weakening of the relationship. So, that’s at a high policy level, might 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 going at the macro level. Mike, what would you add to it? Mike, I think you’re still on mute.
Mike Descheneaux
Thank you, Greg. I think certainly 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 — the bigger question is just on the impact of COVID and the supply chain on how that’s going to impact different businesses and level of activities 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, this 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.
Gary Tenner
Okay, appreciate that. I wasn’t sure if it was referencing President Xi’s more recent comments, or not. And then just lastly from a — just — there’s 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 lending was free or close to it. How much has the — I guess the founders or the startup CEOs of some of these companies? How has that population change, maybe over the last decade to potentially slowing the ability, or desire to kind of really focus on that has not sunk in yet on that side?
Greg Becker
Yes. I mean, there’s — some of that does exist. So, I will acknowledge that, but I — how I think about it is — how I answered an earlier question about this, which is, if you raise 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’re 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 you’re going to be needed to add value, grow revenue, and maybe grow back into your evaluation over time, right? It’s the old saying, you can’t cut your way to growth, or you can’t work your way to success and so some of that exists, and it’s a function of, again, a lot of its how much money has been raised.
So — but if you fast forward, six more months, nine more months, these are the companies that have raised a long runway, they’re going to have to look at either cutting, cutting, burn, or raising more money at that time and there’s a lot of companies out there that are still performing well, right. Sometimes it feels like the — that — oh my gosh, all these companies must be really having a hard time. That’s not the case. There’s a lot of them 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, it’s going to be a horrible situation. They did that and then literally 90 days later, 120 days later, people said, no, we were just kidding, let’s go back and raise more money and increase the burn.
So, the COVID 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 in across the Board? The answer’s no. That’s just a little bit of — there’s a complex answer, because it’s 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.
Gary Tenner
Thanks. I appreciate the answers.
Greg Becker
Yes.
Operator
We go next now to Chris McGratty at KBW.
Chris McGratty
Great. Thanks. Dan, just on the average balance sheet, the bond yields, can you just speak to me a little bit about the yield at which that’s thrown off? I know you gave the dollars, but the yield kind of stuck around 2% on HCM and around 170 on the AFS, just wondering what the outlook is for those?
Daniel Beck
Yes, at all then yields exiting the quarter 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.
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 get a bump around this 2% range here for at least the next couple quarters.
Chris McGratty
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 a little bit of color on when you think the cadence would be? You built the reserve last quarter and a little bit less this quarter, but when you when do you think the losses will come?
Greg Becker
Hey, Chris. Well, I can help answer that question, Marc is probably better.
Marc Cadieux
Yes. So, I think consistent with all of the uncertainty we’ve talked about, and the challenges we’re guiding for 2023, I think that’s a really very difficult question to answer. I think it really comes back to — again, that robust average client liquidity, the ability to last longer and wait for that reopening, so to speak for capital start flowing again. And I think generally speaking, when I think about the portfolio where bars are positioned, going into whatever is next relative to past downturns.
More of these companies will probably outlast right, they’ll live long enough to make it to that other side than might otherwise have been the case. But exactly when the losses come if they come is just too difficult to predict at this point.
Greg Becker
And to add to what Marc is 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 being the investor dependent early stage. And if you think about that 2008 cycle, and we’re not saying that we would see something to that magnitude, that was about a 6% through the cycle loss. So, we’re at that 4.3% range right now. So, feeling 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.
The last thing to say is just again, remember, the overall lending portfolio and the concentration of capital call lending and loss experience there, kind of, when thinking about to the extent that we have a slower period, what that might look like in terms of credit losses.
Chris McGratty
Great. Thanks.
Greg Becker
Yes.
Operator
And we’ll go next now to Ebrahim Poonawala at Bank of America.
Ebrahim Poonawala
Hey, thanks for taking my question again. This one question than the big picture, Greg. So, a lot of what’s happened in terms of the earnings outlook for the company is market-driven. Is there anything for 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, capital-wise, that you could do to alleviate some of this market-driven pressure on the earnings and ROE?
Greg Becker
Yes, let me talk about it from an expense perspective, and then Dan, or Mike, may want to talk about the balance sheet, anything else and Mike. When I think about the expenses, Ebrahim and as you know, I’ve been here a long time. And from that standpoint, the long-term belief in the potential opportunity we have in front of us hasn’t changed. And in so doing anything that is going to truly diminish the growth potential, the outlook in a year, two years, or three years, just doesn’t make sense.
It may it may feel good or feel better in a short run, but it won’t be helpful in the long run. And as you know, we’re playing the long game. But what are we doing? One area that we’re taking a look at, over the last two years, we’ve had a lot of growth, as we’ve done, build out our LFI, or risk-based function, large financial institution functions. And a lot of that actually came with the backs of professional services, because we needed 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 then even maybe was planned. We’re going to be reducing professional services in a very aggressive way. We’ve got the incredibly talented team that we brought on board to help us manage through this. I feel really good about it.
And so what do you what are we going to do, we’re going to — again, the biggest thing is reducing professional services 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 than 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 eliminate it. Not say never, but it’ll definitely be put on the backburner as we concentrate our efforts and focus on the highest priority must do initiatives, which includes things like the digitalization of the of the platform.
As I mentioned in my opening comments, we’ve been rolling out our digital banking solution and gotten some incredibly positive feedback. And we’re going to continue to invest in that and rollout more of that over the course of 2022 and 2023. So, we have to continue to make those investments.
So, while the expense growth will be lower than it would have been, it’s still going to be healthy as we roll into 2023. I don’t know Dan, or Mike would anything.
Daniel Beck
I’ll start and Mike might have something to add. I think we just — one, I have to add on expenses, continue to go back to 1,800 new clients added to the platform in the quarter. Five — $0.5 trillion worth of dry powder 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 cut into that opportunity here over the longer term. So, we’re still really bullish on that. At some point, we anticipate to play through the franchise. So, that’s number one.
Number two, Ebrahim talk about capital in the balance sheet. Yes, in this environment, we clearly see some reduction in the overall size of the balance sheet, growth in the Tier 1 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, you 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’s the way we’re thinking about it is that we’ve got that pent up amount of venture flows waiting to be deployed. And at some point, it’d 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 time. We’re always evaluating options and that’s the thing about this balance sheet is that it’s highly flexible and we’ve got a lot of options associated with it.
Ebrahim Poonawala
That helpful. Thank you.
Greg Becker
Yes.
Operator
We’ll go next now to David Smith at Autonomous.
David Smith
Great, thanks for taking my questions. With SVB Securities, does the current environment change about how you’re thinking about the build out there in terms of when or if to bring on new products or hire new teams?
Greg Becker
Yes, this is this is Greg. So, the answer’s no. It’s an interesting — I guess, a couple points. So, when we look at the league tables, which is obviously one of the ways you kind of look at how your investment bank is doing, the team is doing an exceptionally good job, right.
So, put the market aside and you just say, how are they competing in the market, but again everybody else, and they’re moving up the league tables, or they’re definitely hanging in where they have been getting in getting their fair share, in some cases more than their fair share.
The team is truly exceptional and I see it when I go out in the market and spend time with them meeting with clients. And this number one.
Number two, what we had set out for the beginning of the year for a goal for the tech and life science team, that we team is all 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 MoffettNathanson, again, what an amazing group of people and research analysts, and they have exceeded their expectations. The people we’ve added on the research side to that from a tech perspective are also leaders in the market.
And the final piece is this. One of the benefits of a slowdown in the ECM market is that it actually gives that team — that really strong team time to spend time with the high 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 you know if anything, to be honest, I’ve gotten more bullish on not only that team of people, the whole platform, but how well it’s collaborating with our commercial bank. That collaboration is actually going exceptionally well. So, I’m — I feel good about it. Would I’d like the market to be more cooperative? The answer is, of course. But while we’re waiting for it to cooperate more, these guys are awful — working awfully hard to get it set up for future success.
David Smith
Right. And just to begin, on the securities a little bit more, I appreciate the guide for $170 million to $175 million in the fourth quarter, when we talk about bumping around the 2% range for the next couple of quarters, is there going to be like — are you seeing any kind of meaningful uptick going into 2023? Or are kind of the lower side of 2% more likely for the next couple of quarters given that fourth quarter starting point?
Daniel Beck
Yes, I think, where we’re exiting 2023 absent, you know, additional hedging, no opportunities, as we think there’s still room for us to effectively put on some received float swaps to open up additional asset-sensitivity and the rate environment that we’re in that that could provide some additional upside, should rate 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 of — even lower yielding securities, but to see a material bump up off of those levels, I don’t see that in the actual cash flow coming off of the portfolio.
David Smith
Thank you. And lastly as 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 the asset yields in some way?
Daniel Beck
Yes, I think — well, first and foremost, I think the positioning right now for us is to continue to look to open up the position for asset sensitivity, at the same time, we are contractually as we’ve done in the past, continuing to embed loan for just as a matter of practice associated with that portfolio that benefited us quite significantly and one-way protection here during the 20 — post-2018 move down, and I’m expected to do the same thing. So, that that that’s the vast majority of the protection that we’re putting on right now.
If we see Fed funds, and short term rates move even further, you’ll see us find ways to continue to manage down rate sensitivity. But as folks know, 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 to downside rates for us.
David Smith
Great. Thank you.
Daniel Beck
Thank you.
Operator
And we’ll take our last question from Jon Arfstrom at RBC Capital Markets.
Jon Arfstrom
Hey, thanks for hanging on to the end. Just a follow-up on that last question. Would have Fed pause, help-hurt or no difference in terms of your outlook? How would you answer that?
Daniel Beck
I’ll start, Greg might want to add. I think if you take a big step back and look at venture deployments, there’s a — like we talked about $0.5 trillion worth of funding that’s been raised. What’s really stopping that from being deployed is this disconnect in valuations between public equity markets that are bouncing around and the expectation of all these amazing founders that are — and management teams that are working on these ideas.
To the extent that we see Fed pause or slowdown, I think that’s 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 that would be helpful.
Second rate — 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 won’t really help it that at this point.
Greg Becker
Yes. The only thing I would add is just — and Dan said, but it’s just the markets looking for certainty. They’re looking for clarity, and there isn’t any right now. So, a clear pause and the data that backs up a clear pause, I think would be well received 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 and that clearly isn’t helpful right now.
Jon Arfstrom
Okay, I appreciate that. And then just speaking of uncertainty, but when I do the crude calculations on your fourth quarter guidance, I get in the midpoint excluding gains or losses, somewhere between $5.15 and $6 for EPS, and correct me if I’m wrong, but do you feel like that represents a trough for you for EPS or is that just too difficult to predict from here?
Daniel Beck
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.
Those are going to be big drivers of what happens from here from a net interest income perspective. So, that could be pressured down and — or we could see stability of cash burn, materially reduces from here. So, to go any further than that, I think would go against us not giving the guidance.
Jon Arfstrom
Okay. All right. Thank you very much.
Greg Becker
Yes.
Operator
Thank you, Mr. Becker, I’ll turn things back to you sir for any closing comments.
Greg Becker
Great. Thank you. Thanks, again, everyone, for joining us. I know for people on the East Coast and so you’re into the evening, so I appreciate it. I’m going to close where I started the conversation by really highlighting this. I know most of the discussion was about the balance sheet inflows. And clearly that’s a very important part of the equation.
I just want to make sure that it’s not lost on everyone and that’s both investors, but also our employees who are listening. All the great things that are going on inside the platform. Again, I talked about it, you can look at record term sheets and all-time high and client funds and strong credit quality, and there’s so many really positive things that are going on, we just can’t lose sight of that.
There’s 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 2023, that uncertainty, clearly is difficult to predict exactly what will happen, although clearly we’ve given you some frameworks to think about for 2023, and what the what the drivers will be, and how that could change.
First off, as always, I want to thank all our clients. I mean, it’s — there’s stress 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 to ask and, and how to be there for them in difficult times.
And so honestly, from my standpoint, it’s challenging it is to be in an environment like this. It is actually enjoyable to sit down and really add value to clients. So, that’s the first. Thanks.
The second one, the bigger one maybe even is, thanks to the employees, 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 you’re 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 want to say a huge thanks to the team for doing such a great job, supporting our clients, weathering this difficulty and 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.
Operator
Thank you, Mr. Becker. Again, ladies and gentlemen that will conclude the SVB Financial Group’s Q3 2022 earnings conference call. We’d like to thank you for joining us and again wish you a great evening. Good bye.
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