SVB Financial Group (NASDAQ:SIVB) Q1 2009 Earnings Call April 23, 2009 6:00 PM ET
Ken Wilcox - President and CEO
Michael Descheneaux - CFO
Dave Jones - Chief Credit Officer
Mark MacLennan - President, SVB Capital
Greg Becker - President, Silicon Valley Bank
Meghan O'Leary - Director of IR
Erika Penala - BAS-ML
James Abbott - FBR Capital Markets & Co.
Aaron Deer - Sandler O'Neill & Partners L.P.
Joe Morford - RBC Capital Markets
Ken Zerbe - Morgan Stanley
John Heck - Deutsche Bank Americas
At this time I would like to welcome everyone to SVB Financial Group first quarter 2009 Earnings Call. (Operator Instructions). Thank you. Ms. O'Leary, you may begin your conference.
Thank you. Today Ken Wilcox, our President and CEO; and Mike Descheneaux our Chief Financial Officer will discuss SVB's first quarter 2009 performance and financial results. Following this presentation, members of the management team will be available to take your questions.
I would like to start the meeting by reading the Safe Harbor disclosure. This presentation contains forward-looking statements within the meaning of the federal securities laws including without limitation financial guidance for the full year 2008.
Forward-looking statements are statements that are not historical facts, such statements are just predictions and actual events or results may differ materially. The information about factors that could cause actual results to different materially from those contained in our forward-looking statements is provided in our press release and our last filed forms 10-K and 10-Q.
The forward-looking statements are made as of the date of broadcast and the company undertakes no obligation to update such forward-looking statements. This presentation may also contain references to the non-GAAP financial measures. A presentation of and reconciliation to the most directly comparable GAAP financial measures could be found in our press release.
Now I would like to turn the call over to Ken Wilcox.
Good afternoon every body. Thanks for joining us today to discuss our first quarter financial results. This was no doubt a disappointing quarter for SVB Financial Group. Today we announced a $10.5 million loss for the first quarter of 2009. Certainly not the way we were hoping to start the year.
It continues to be apparent that the larger economy is spilling over into our space. More so than in the past recessions. This has impacted our clients, our partners in the venture capital industry, and of course, SVB itself. Mike will go into more detail on the specific drivers of the loss, but I will briefly share my observations on a few of the events of the past quarter.
First, on the subject of credit. Almost three quarters of our provision was attributable to two medium sized loans both of which were in our comfort zone from a size perspective. The remainder of our losses were comprised of a number of smaller loans to smaller companies, which is consistent with our previously disclosed expectations.
Second, on the subject of SVB capital, as long as the economy continues to weaken our venture investments will continue to be pressured. This is something we know to expect and while it is difficult in the near term it does not change our view that over the long-term SVB capital is an important part of our business.
Finally, our net interest margins suffered from the tremendous success of our deposit raising initiatives. Unfortunately, to gain margin we would have to immediately invest those excess funds almost two years out on the curve.
At this point we feel that would not be prudent. Hopefully over time and as things stabilize we will get more of a sense of how long these excess funds will be with us and we will get more comfortable going out on the curve to get a better margin. Mike will discuss this more in his comments.
I want to take a moment before I go on to my other thoughts about the quarter to talk about loans, specially "large loans" or "big credits." I want to talk about both why it makes sense for us to do them and how we handle them responsibly.
As you know, virtually all of our clients begin with us in their early stages when their credit needs are small. Over time and as we have expanded our products at, we have been able to accommodate their growth needs which has allowed us to keep these clients with us longer and many of them have stayed with us longer.
A byproduct of keeping our clients longer, as well as our focused efforts to go upstream is that we end up with some larger credit facilities as their credit needs expand. Another byproduct of keeping our clients longer is that as they grow they often buy more and more products than they did when they were smaller which of course for us is good.
When their credit needs get to be too big, we often bring in other banks to help us meet the client's needs. However, we seldom bring in more than one or two other banks in such scenarios. And if a credit ever gets larger than we are comfortable with, we sometimes even consider gracefully bowing out of the deal at some point.
Comfort levels depend on a number of factors beyond just size, including the sector a company is in and many other characteristic unique to the individual company in question. Large loans are and will continue to be part of our strategy and we will continue to apply our disciplined approach to these.
Now, the quarter had its bright spots as well and I would like to highlight a few of them. First, we continued to have success attracting deposits to the balance sheet. Average deposits grew by $2.5 billion all the way up to $7.93 billion.
I'd also like to highlight our expenses from Q1 of '08 to Q1 of '09 expenses are actually 1% lower excluding minority interest and goodwill. In addition, today we are decreasing our outlook for expense growth for the whole year. And in addition to that we are continuing to grow market share. At the end of 2008 our market share had grown in every industry we serve and we anticipate that trend continuing throughout 2009.
Also, we are well capitalized. We have ample liquidity. Our balance sheet is strong and we are lending. And we feel good about the new loans we are making. We acquired 157 new active borrowers in the first quarter which contributed $219 million to our loans outstanding. And because we are actively lending we are helping businesses grow and thus keeping people in jobs. Only when those three things across the United States will the economy stabilize.
Now, there could be no doubts we are in a period of market dislocation and while that is certainly presenting us with a chair of challenges, we also see numerous opportunities in this chaos. Because of the strength I've just highlighted I believe that relative to our competitors we are in a stronger position to grow our business. There is opportunity in the market and we are looking to seize on it.
I want to close by sharing my views on the venture industry. And I know that it is a topic that's on the minds of many of you. As many of you know I have been doing this now for 27 straight years and I have been through my share of booms and busts in the venture industry. Of the many things I've learned one thing I know to be true and that is that the venture capital industry is continually evolving. This is especially apparent during times like this.
A few things we are seeing today. First, the limited partner base of the venture model itself is evolving. We are seeing some of the more traditional sources of funds such as endowments losing steam, but in their place are coming new sources of capital such as pension funds and sovereign wealth funds which have ample dry powder and are looking to invest.
Second, the venture market is becoming increasingly global, whereas the VC market in the US may be in a down cycle its forging ahead in other areas of the world. China would be a noticeable example.
Third, the sectors receiving VC attention are evolving as well while electronics may be on the decline, clean tech and life sciences are definitely growing. We have specific strategies and dedicated teams focused on these specific industries.
Finally, while we are seeing some changes in the venture model and in the venture industry, I believe the fundamentals remain strong. Those fundamentals are smart people, good ideas and money to support them. So, I'd like to close my portion today by again thanking the men and women of SVB Financial Group. I know you are out there and I want you to know, your hard work and dedication in these challenging times makes me incredibly proud to be a part of this fine team.
And with that I'd like to pass it to our CFO, Michael Descheneaux.
Thank you, Ken. And thank you everyone for joining us today. As Ken noted, in the first quarter of 2009 we reported a net loss of $10.5 million or $0.32 per share compared to net income of $1.4 million and $0.04 per share in the fourth quarter of 2008.
There are six key highlights from the quarter. One credit quality. Two, venture capital and private equity investments. Three, deposit growth and net interest margin. Four, loans. Five, non-interest expense. And finally Number six, capital.
I will comment on each highlight and provide you with our updated 2009 outlook. Let's start with credit quality. We recorded an elevated provision for loan losses of $43.5 million in the first quarter, primarily because of charge-offs and reserves related to two loans to hardware clients, which felt the impact of the deteriorating economy as well as certain loans in our early stage portfolio.
This elevated provision drove our allowance for loan losses from 1.93% to 2.18% of total gross loans. Clearly, the economic environment is affecting our clients and for some it has impacted their ability to meet their loan obligations.
We are reviewing our loan portfolio and meeting with our clients regularly to assess the impact of economic conditions and in light of the current economic down turn and we have enhanced our already rigorous credit monitoring processes. Nevertheless, we believe we have the right underwriting and credit monitoring controls in place and they have served us very well as our past credit quality has demonstrated.
One driver of our first quarter results was a loss related to a decline in valuations of our venture capital and private-equity related investment securities. This decline resulted in a net loss of $4.6 million to us, net of non-controlling interests or minority interests as it was formerly known.
This loss was primarily in certain investments in our managed funds of funds also known as our strategic investor’s funds, a smaller portion related to our managed co-investment funds. The continued pull back in investing and fund-raising in the VC and private equities communities, particularly in Q4, as well as a lack of IPO and M&A activity and declines in the public equity markets have adversely affected valuations. As Ken-pointed out recovery in these funds will be tied to a recovery in the broader market.
A third driver of our quarterly results was our exceptionally strong growth in average deposits of nearly 40% or $2.25 billion. As many of you may know, we have been focused for the last two years on offering the right mix of, on and off balance sheet deposit products to meet client's needs, while allowing us to attract enough deposits to keep pace with loan growth. We have been very successful in those efforts and first quarter deposit growth drove our average loan to deposit ratio to 64.5%.
We had strong deposit growth as a result of our deposit initiatives, and because in this uncertain market environment many of our clients are opting for the safety of FDIC insured deposits instead of off-balance client investment funds.
Given this significant increase in interest earning assets resulting from the increase in deposits and the low rate environment, our net interest margin declined to 3.97% in the first quarter.
Other factors included a full quarter effect of a 100-basis point decrease in our prime lending rate in the fourth quarter and a decrease in average loan balances of $110 million in the first quarter.
I would like to point out that although our net interest margin is down, our net interest income in Q1 '09 is up, in comparison to Q1 '08, even after a decline of 500 basis points in the Fed funds rate. While liquidity will remain a priority, we expect to invest approximately $1 billion to $2 billion of our excess cash over the course of the year at higher yields. And that process has already begun.
During the first quarter a significant amount of our excess cash was held in highly liquid assets, namely fed deposits, where it earned 25 basis points. Given the lack of steepness in the yield curve we opted to maintain high liquidity, while we assessed the behaviors of these newly acquired deposits and the potential impact of an expiration of an unlimited FDIC insurance on demand deposit accounts.
Our ability to bring on $3 billion in new deposits to our balance sheet in the past two quarters speaks to the strength of our deposit franchise. In addition, such strong liquidity is a powerful advantage in these economic times.
Moving on to capital management; our capital ratios remain extremely strong. Our ratio of total common equity to total assets stood at 6.94%. Our ratio of total common equity to risk-weighted assets increased to 10.10% in the first quarter, primarily due to a decline in loan balances.
Like many banks we have considered possible repayment of the preferred equity issued under the treasury's capital purchase program. While this is something we will continue evaluating, for the time being the additional equity enhances our flexibility and ability to lend comfortably in this challenging economic environment.
Moving on to loans; as a result of decreases in our venture capital call lines of credit and general de-leveraging by our clients, average loans were lower by 2% in the first quarter by $5.51 billion. As you may recall, in January we said we expected balances and demand for capital call lines of credits to be lower, owing to limited VC fund racing and investment.
Preliminary numbers indicate VC investment in the first quarter approached a 12-year low of between $3 billion and $4 billion, down significantly from Q4 when VC investments were $5.5 billion. Clearly, if inter-capital and private equity firms are funding fewer companies they will rely less on their capital call facilities.
Overall the head winds for loan growth continue. Nevertheless, we continue to make new loans. If you consider that our loan portfolio has an average turnover of about 30%, just maintaining our current loan balances requires significant levels of new loan generation.
As Ken said we brought on 157 new borrowers in the first quarter who were responsible for $219 million in new borrowings. In the fourth quarter, those numbers were 270 new borrowers and $582 million in new borrowings. So while the size of our portfolio was somewhat smaller in dollars in the first quarter, we are adding new borrowers every day and targeting gains in market share.
Although we expect much lower loan growth for 2009 relative to 2008 in this current environment, we are also seeing some additional loan pricing power, which we expect to help our net interest margin somewhat in the future quarters.
The final item I'd like to address before moving on to the outlook is non-interest expense, which was high in the first quarter at $87.1 million as expected. There were three factors that contributed to the increase. The first was higher FDIC assessments owing to our higher average deposit balances and an increase in assessment fee rates.
Going forward if we continue to maintain our current deposit levels, we expect these assessments will continue to impact our expenses. The second factor was a non-tax deductible goodwill impairment charge of $4.1 million related to our investment in eProsper, our data management firm. This charge reflects a lower revenue forecast. Nevertheless, we remain committed to developing eProsper and its client base.
Finally, we had higher compensation and benefits expense, which should not be a surprise, given the fact that we significantly cutback on incentive compensation costs in the fourth quarter as a result of not achieving our financial goals in 2008, notwithstanding the fact that we had a return on equity in 2008 of 11.03%.
In the end we reduced 2008 incentive compensation by $13.2 million resulting in extremely low compensation and benefits expense in the fourth quarter. The rest of the change is due to an increase in the average number of employees in the first quarter, as well as some seasonally higher items under other employ benefits, which are consistent with Q1 '08.
Now I would like to comment on our revised outlook for 2009. Our outlook reflects our expectations for the full year 2009 versus the full year 2008. Although we revisit and update our outlook each quarter it is an annual outlook.
Several aspects of our 2009 outlook have changed, primarily because of lower VC investment levels as well as the impact of the continued economic downturn. I would encourage you to refer to our press release for additional information on our outlook. However, I would like to specifically comment on two points related to our 2009 outlook.
My first point is that we expect credit quality to be under continued pressure in 2009 as a result of the continued economic downturn. We still expect that a majority of losses will likely come from our early stage portfolio. Additionally the expected increase in our allowance for loan losses for 2009 is largely driven by the impact of two loans in Q1.
We do not expect the Q1 levels of net charge-offs to continue during the remainder of the year. Again, specific details related to the outlook for our allowance for loan losses and net charge-offs are provided in today's press release.
My second point is that we have lowered our expectations for non-interest expense growth to a percentage rate in the high teens rather than the low 20s. Primarily owing to lower compensation and benefits expense resulting from lower than target financial performance.
We expect this decrease to be offset partially by continued investment in our business that will allow us to continue to help our clients succeed and additionally significantly higher FDIC assessment fees. Particularly from the anticipated one-time fee assessment being opposed on all banks across the board. To put this in perspective, we expect FDIC assessment fees to increase more than $21 million or almost six times in 2009 in comparison to 2008.
While we have taken the right steps in strengthening our capital and liquidity to withstand significant changes it goes without saying the economy is fragile. If the economy were to significantly deteriorate this year they could dramatically change our exceptions for our financial performance during the remainder of the year.
As you can see, we expect 2009 to be challenging in terms of suppressed VC and private equity valuations, a lack of exit opportunities, loan growth, credit quality and continued pressure on our net interest margin. However, we believe net interest income will benefit from higher levels of excess deposits.
We believe we are making sound decisions to continue to operate successfully and effectively in this environment and we are focused on ensuring continued prudent credit marketing as well as a strong balance sheet. While we and our clients are not immune to the problems plaguing the broader economy we remain confident in the effectiveness of our underwriting and will continue to be vigilant in monitoring our loan portfolio.
We are taking advantage of our strong capital and liquidity to build our business and gain market share and we believe we are well positioned to weather the current market conditions. We will continue to focus on supporting our clients and on executing our long-term strategy regardless of market cycles.
This concludes the review of our 2009 first quarter results. With that I would like to ask the operator to open the call for questions. Thank you.
(Operator Instructions) Our first question comes from Erika Penala. Your line is now open.
Erika Penala - BAS-ML
My question is, given your commentary on your industry, what is the dollar amount of commitment that SVB Capital is obligated to fund if called and of that amount how much has an LP committed to it versus if the commitment was made under a warehouse strategy?
Erika, this is Ken. We can answer part of your question but we can't answer all of your question. You know, that the SEC rules don't let us talk about SVB Capital's fund-raising activities. That's really all there is to it. But I can tell you, however, is some of the information related to your question. So why don't we do our best with that. Mark, has the information right in front of him here. Mark?
Erika, probably the best way is actually if you really look back at the 10-K at the end of the year and look at some of the contractual obligations for remaining unfunded commitments to wholly owned funds investment to that. And the numbers are approximately still the same of about 348 million fit into that category. And then I think on the following page we just give it our best expectation, which is still pretty accurate from where it is today of what we expect any capital calls under those facilities to be. And that was about 62 million for the remainder of 2009.
Your next question comes from James Abbott.
James Abbott - FBR Capital Markets & Co.
I guess one of my first questions and then I will jump back in to the queue. The first question here is on the capital levels, obviously the industry is highly focused on tangible common equity and you have say little over $17 billion of deposits off balance sheet a lot of that coming back on balance sheet I suppose.
So a little color around -- and I understand it is going into something that is risk weighted at zero. Just trying to understand the tangible common equity outlook here. What that ratio might do, what your expectations for those deposits, do you decide to shut it off, because you're getting so much on the balance sheet in such a rapid fashion. Just a little guidance on that, please.
Yes, James, this is Greg Becker. Let me answer the first part of your question then Mike can answer the second part.
Just regarding the deposits and overall client funds, really, the big jump is in deposits under the balance sheet was mainly driven by us eliminating the off balance sheet suite product in the fourth quarter, mainly in the fourth quarter and little bit in the first quarter. That was about $2.5 billion. And most of that money stuck on the balance sheet either in interest-bearing accounts or in DDA balances.
So if you take that out, yes, we have seen some growth related to the FDIC insurance, but it is relatively small. That was the biggest change from he off balance sheet to the on balance sheet. And we don't expect any significant change other than that big what I would call almost a one-time event.
Mike, you want to take the second part?
James, with respect to your second part of your question about, as far as the outlook for the tangible common equity. We don't have a specific target number that we have announced to the street, but when I think about it, you look at the numerator and the denominator.
So as Greg pointed out, we are not really anticipating a whole lot of asset growth given the fact that the bulk of it has already occurred. So then you're left with the numerator the equity piece and I can assure you that we certainly are not expecting to get in the habits of reporting losses and equities.
So if that number remains positive then you certainly should not really see any significant decrease in that TCE ratio as far as what we know today.
Your next question comes from Aaron Deer.
Aaron Deer - Sandler O'Neill & Partners L.P.
Mike, I was hoping to maybe just give us a sense. With the excess liquidity, just how quickly and how much do you expect to deploy over the next couple of quarters? I'm trying to gauge what kind of yields you're expecting to get on this, that sort of thing.
We are expecting to have put to work anywhere say that’s $1 billion to $2 billion over the next several quarters. As you can appreciate the fact that you don't want to dump it all at one point for obvious risk reasons. As far as the yield that certainly is a direct function of how long you go out and what kind of duration risk you want to take.
Given the fact that we do have that overhang to a certain degree on certain deposits of the FDIC insurance you've got to be a bit cautious not to go to too far out again for obvious reasons. But when you think about average durations that we typically have targeted in the past the duration of our securities tended to range between say two and three years.
Right now if you look at that yield curve, I mean, you're looking at anywhere from say 2% to 3, 3.5% at least on some securities and you are possibly higher on some if you go out a little bit longer on the curve.
Your next question comes from Joe Morford.
Joe Morford - RBC Capital Markets
Maybe its more of a clarification than anything, but your loan loss reserve ended the period at 2.18% of loans and looks like the guidance for the full year is 1.9% of loans. So does that suggest that charge-offs are going to -- you're going to bleed that down then through the balance of the year? And I guess related to this question, can you provide an update on the status of the HRJ sale and what the loss potential may be there?
Joe, this is Dave. And let me answer the first part and Greg is in a great position to speak to the second part. So the answer to the question about the forecast, guidance for loan loss reserve is that the reserve that we have today, the 2.18% is comprised of reserves that we need for the last five component of the portfolio, the performing book of business and the analysis, the history we have had on those loan losses. And then there is the part of the reserve that is there for the impaired portfolio.
So our expectation for the year is that we will address the issues that we have with the impaired portfolio. We will work that portfolio down. And as we do so the reserves required for the impaired portfolio will decline and that the overall allowance will decline.
Joe to answer your second question, just an update on HRJ. As we have commented before, we have signed the letter of intent along with Capital Dynamics and then HRJ where Capital Dynamics would effectively take over HRJ. And as we commented before we don't expect, don't anticipate to take any additional reserves on the relationship, on the lending relationship than what we have taken to date and as we said, really nothing is really going to change until the deal closes with Capital Dynamics. Still we are on track and so no real change from that course that we mentioned before.
Our next question comes from Ken Zerbe.
Ken Zerbe - Morgan Stanley
Thanks. My main question is if you are investing in higher yielding securities, why do you expect the net interest margin to actually fall from current levels? I think your guidance is 3.7 to 4.0 and you were 3.97 in first quarter. And hen sort of my second sneaky question here is just why can't you just lower deposit rates on the excess cash?
So, Ken, when you think about the excess cash that's being invested, given where the yield curve is today if I had previously, say, a 4.7 to 5% net interest margin and I'm taking a significant portion of our balance sheet and investing in assets that are only yielding 2% to 3% because that is what the yield –its often given the [duration] of securities, by default that weighted average is going to lower your overall net interest margin.
Thank you. And your next question comes from….
Sorry, Operator. Let's try to finish the second part of Ken's sneaky question there.
I do apologize.
This is Greg, and I guess my response to that would be is, that we had higher interest bearing deposit rates in the fourth quarter. We had kept them in the first part of Q1 and we did drop them again towards the end of Q1. So you should see a lower average cost per interest bearing deposits in Q2 and going forward.
And at the levels we are at right now we feel comfortable at those levels and I don't think we will be taking them down any more at least at this point.
Your next question comes from John Heck.
John Heck - Deutsche Bank Americas
Good afternoon. Thank you for taking my question. I wonder if you guys can provide any details with respect to trends in early stages delinquencies during the quarter and then the roll rate trends as well on that?
This is Dave Jones , and in terms of delinquencies for early stage clients, we really don't have a history of seeing delinquencies. These companies receive their funding from the venture capitalists several months at a time and then at the end of that specific round they have to raise another round.
So our experience is that delinquencies are not an issue. What will happen is, the company either gets the round of funding or doesn't. If the company doesn't get the round of funding then for us it pretty quickly turns into a nonperforming loan or a charge-off. And then the second part was about the role rate. Did I understand that?
We can't answer that.
Okay. We can’t that. I'm not sure I understand the role rate.
Operator, can you unmute his line so we can clarify the question?
Yes, ma'am, one moment.
John, are you there?
His line has disconnected.
Okay, perhaps he will get back in the queue and we will move on to the next question.
Your next question comes from Fred Cannon.
Fred Cannon - Keefe, Bruyette & Woods
Thanks. And good afternoon.
Fred Cannon - Keefe, Bruyette & Woods
I wanted to ask about your loan growth and your guidance on that. Usually you pointed to the average loan levels during the quarter but I do note that the end of period level was down from the average and down 10% from the end of the year. Was there something that particularly depressed the end of period loan levels this quarter?
This is Dave. Thanks, Fred. And no, there wasn't anything that particularly depressed the end of period. The last couple of days had more or less the same behavior that we see in most quarters. What we had seen in the quarter was a reduced utilization under the venture capital of the private equity venture capital call lines.
So two things were going on there. One is, there were fewer companies that they were funding and then when they did fund a company they were funding in smaller amounts, given that they had led management to reduce their expenses and their cash requirement. So that was a significant part of the reduced loans and we saw that pretty much throughout the quarter.
Fred, just to add-on, this is Greg. We definitely saw companies in addition to what Dave described just generally de-leveraging their own balance sheet, so if they had ample cash, ample liquidity, they were reducing loans outstanding in some case. And the other part to point out, I would say, is for us much like I would say, that the venture capitalists in the end of Q4 and the beginning of Q3 kind of hit the pause button on investments.
We I would say put the pause button as well and had our teams really spend a lot of time on portfolio management as you would expect and so as you're doing that it's hard to do all things at the same time. So as you intensely review the portfolio it is not as easy going out and looking for new business.
So as we have gotten our arms around the portfolio more and our teams have, we expect to build that pipeline back up and feel it is a good time to be out in the market, looking to add new clients as our competitors have gotten a little weaker. So I think that's the reason we expect that although it was down in Q1 we expect some nominal growth for the balance of the year.
We have John Heck to further elaborate on his question.
John Heck - Deutsche Bank Americas
Thank you, guys, for allowing me to do this. The elaboration would be, you suggested that in the early stage technology, just by the nature of the loans you might not have an early stage delinquency, but what about in the category that you might classify as business risk or things like the premium wineries? Do you see any early stage delinquency trends as well or would that offset be similar to the early stage technology companies?
Thank you very much for the clarification. And this is Dave. So, the answer is no, we are not seeing an escalation in delinquency. It is the nature of the bank's history being balance sheet lenders that we haven't seen a lot in the form of delinquency. We had $3 million of over 90 days that was well secured in the process of collection, but the overall level really 1 to 89 days was in a very normal range, even in much healthier economic environments.
Your next question comes from Erika Penala for a follow-up.
Erika Penala – BAS-ML
Thank you. I just wanted to follow up on my first question. When you say that $348 million of SVB Capital's obligations are unfunded, is that the same as not having an LP committed to fund those obligations?
Erika this is Mark MacLennan again. No, it doesn’t. That just relates to our total unfunded commitments of all commitments that we have made under our various funding program.
Our next question is a follow-up from James Abbott.
James Abbott - FBR Capital Markets & Co
Hi. This is a credit question on early stage loans. Just wondering if obviously you're tracking the cash balance sheets and the cash burn rates of your early stage companies and I'm wondering how they are looking in terms of some of the companies that are on the bubble, if you will, that are perhaps a little closer to defaults or three months away perhaps from needing that next round of financing and how things are looking there? Akin to a watch list, if you will, of those types of loans.
James, this is Dave. And the answer to that is that we continue to see a roughly equal number of early stage companies that are coming due for their next round of venture funding. As we saw in the fourth quarter, as we saw in the first quarter. So a couple of things that we are seeing that are different.
In the fourth quarter action was nonexistent. So everybody froze seemingly in the fourth quarter very few companies received money, a little bit or a lot. In the first quarter we saw the activity of companies receiving their rounds of funding pick up. In the first few weeks of the second quarter we are seeing roughly the same volume of grounds closing as we did in the first quarter.
The information that we are getting in our conversations both with the venture capitalists and with client management teams would indicate that many other rounds are imminent and by imminent I mean over the balance of this quarter.
We will continue to see this quarter, and third quarter, fourth quarter, an attrition within the early stage portfolio. So there will be continuing distress in that segment of the portfolio and that I think is consistent with the guidance that we have given that that would say that a significant part of the loan loss forecast for the balance of the year is expected to be consumed by the early stage client portfolio.
Your next question comes from Al Savastano.
Al Savastano - Fox-Pitt Kelton
Just a silly question here. Could you give us the amount of specific reserves. How much reserves are left on HRJ?
This is Dave. I don't think that we want to get into exactly that much information. What we had reserved for the fourth quarter is really the same amount that we have as of the March 31 period. And as Greg has indicated the transaction that is working presently if closed as discussed would not require the further provisioning consumption of the allowance for the loss reserve.
Your last question comes from Joe Morford.
Joe Morford - RBC Capital Markets
Thanks. Maybe just to follow up on Erika's question more directly. There is a story going around today from private equity insiders saying that you have made $200 million of private equity fund commitments you have not been able to raise the funds to support and that you are looking at maybe selling them in a secondary, $0.20, $0.30 on the dollar is kind of the bids. Now can you confirm this story and what is the actual exposure and potential loss here?
So, Joe, this is Ken again. I want to go back at least in part to what I was saying before and remind you that, as all of you know the SEC rules don't really let us talk about SVB capital fund-raising activities and that’s the way it is. What I can tell you is that that article that you're referring to is misleading and it also contains a number of inaccuracies.
And I would also like to point out that we describe these investments in our 10-K both in the MD&A and in the risk factors and I might encourage everybody to take a look at that document and not to an article like the one that you're referencing, Joe.
Do you want to use this forum to clarify any of these inaccuracies at all or...?
If I do that I think I'm doing exactly what I'm not supposed to do.
You also know that we just are not supposed to be publishing or talking about fund-raising of this sort publicly and you also know that our balance sheet puts us in a very strong position and I can assure you that if the rumors in that article were correct, we would already have disclosed what the article said.
Okay. Thanks, Ken.
There are no further questions in queue. I would like to turn it over to Mr. Wilcox for closing remarks.
Well, thank you very much. Thank you all of you for joining us with today. I just really wanted to close by saying that while we expect the year to continue to be challenging and I think you do too, we also expect to emerge from this very difficult market cycle with greater market share and we are certainly ready to take advantage of the upside potential that will present itself as the economy recovers.
So we continue to be bullish about our long-term future and I thank you very much for being with us today.
This concludes today's conference call. You may now disconnect.
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