SVB Financial Group (SIVB) CEO Greg Becker on Q2 2022 Results - Earnings Call Transcript

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SVB Financial Group (NASDAQ:SIVB) Q2 2022 Earnings Conference Call July 21, 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

Mike Descheneaux - President, Silicon Valley Bank

Marc Cadieux - Chief Credit Officer

Conference Call Participants

Steve Alexopoulos - JPMorgan

Ebrahim Poonawala - Bank of America

Manan Gosalia - Morgan Stanley

Casey Haire - Jefferies

Jared Shaw - Wells Fargo Securities

John Pancari - Evercore ISI

Chris McGratty - KBW

Vilas Abraham - UBS

Andrew Liesch - Piper Sandler

David Smith - Autonomous

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the SVB Financial Group Q2 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

It is now my pleasure to turn today's call over to Meghan O'Leary, Head of Investor Relations. Please go ahead.

Meghan O'Leary

Thank you, Brent, and thank you everyone for joining us today. We're sorry to be a little bit delay we had some phone issues this afternoon. Our President and CEO, Greg Becker; and our CFO, Dan Beck are here to talk about our second quarter 2022 financial results, and they will be joined by other members of our management team for the Q&A.

Our current earnings release, highlight 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 maybe found in our SEC filings and in our earnings release.

And now I will turn the call over to our President and CEO, Greg Becker.

Greg Becker

Thanks, Meghan, and thanks everyone for joining us today. Before we jump into questions, I just want to share a few thoughts about the market and how we're positioned to navigate it before we again open it up to everyone. Obviously, we've seen a lot of changes in the markets and sentiment regarding the economy in the last few months and the innovation economy has been impacted even to a greater degree. We have unprecedented Fed tightening, record inflation, the persistence of COVID and geopolitical conflict that pressured public markets and increased economic uncertainty, we've all seen that.

This environment has nearly closed the IPO market, meaningfully slowed the pace of PE and VC investment and revalued private companies. Based on these facts, we've lowered our 2022 outlook to reflect these near-term challenges. The current environment though challenging is a normal and necessary part of the innovation cycle and we've talked a lot about that with many of you over the last several years.

And what we're experiencing certainly doesn't change our view of our markets or our opportunity in any way. For us, it's really just a question of when not if our markets will recover. And we all know innovation drives economic growth, it's happening more and more every day and digital adoption and activity in healthcare have all accelerated. Plus, PE and VC firms have record levels of dry powder to invest and we believe they'll do so once valuations normalize. Our markets have recovered quickly in the past and today our clients are better positioned than ever before to weather a down turn. Record VC investment over the last two years has strengthened clients' balance sheets in a way we've never seen. In the innovation economy today is significantly larger than before. Again, comments I've made before many times.

It’s also important to note that we're stronger and better positioned than in any time in our history to support our clients as well. We have a high quality balance sheet, with ample liquidity and strong capital. We have the right strategy and a powerful set of capabilities to meet our clients' needs at every stage. We have a great team, strongest in our history and one that has experienced managing through multiple cycles. And we've always stood apart from competitors for our commitment or partnership with our clients, our depth of knowledge and our effectiveness as advisors. These qualities are important differentiators in today's environment, especially in today's environment.

We've been here before and are better equipped to continue serving our clients and executing on our strategy. These are the times although maybe not the most enjoyable times when we develop the best relationships with our clients and really show who we are as an institution.

So looking forward to answering your questions and with that, operator, please open up the lines. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Steve Alexopoulos with JPMorgan. Your line is open.

Steve Alexopoulos

Hi, everyone.

Greg Becker

Hey, Steve.

Steve Alexopoulos

I’d like to start, so first on the deposit side. For the high 20% deposit guidance, which basically looks like period end balances remain pretty flat through the rest of the year. Do you think you can hold flat on an organic basis? Are you assuming at least for now that organically balances go down and you just move balances from the off balance sheet, on balance sheet to fill the gap?

Greg Becker

Yes, Steve, it’s Greg. I'll start and then I’m going to turn it over to Dan to add a little more granular detail. To put in context and some of this you know, but I'll just give you a little more detail. When you look at the last four or five quarters we've seen rapid growth in quarterly venture capital flows and that's the biggest catalyst of deposits for us. It peaked out in Q3, we saw kind of flattening in Q4, declining Q1 and then a bigger decline in Q2. So that's obviously one driver of deposits and flow.

But there's another factor and we don't spend as much -- haven't spent as much time talking about and that's cash burn. And what's interesting is when companies raise a lot of money, the expectation is they're going to invest that money. And so, we saw burn rates had accelerated for over the last 18-months, that was six quarters and it's actually continued to accelerate. And now the question is, well, with all the messaging out there from investors, why would that actually be happening?

And the answer is we believe the following. It’s -- the burn rate is a little bit of a lag, so you got the investment came last year, the burn rate increases and now you start to slow down. But when you start to slow down burn rates, you have with the companies and you're hearing about this, severance, you've got real estate, getting out of real estate and those sort of things, the burn rate actually is a little bit of a lag. This quarter was the highest cash burn quarter that we had seen. So when you put those things together, that's what really created the decline and the softness in this quarter.

So now to give you more color, a little more granular detail, plus the assumptions that we've made in our outlook, I'll turn it over to Dan to give you a little more of that detail.

Daniel Beck

Yes, Steve. And as Greg was talking about public markets, but effectively shut for the quarter. So we had about $2 billion worth of inflow from the public market. Just putting that into perspective, Q3 of ’21 that was $16 billion. So we're off pretty significantly. If you look at the private markets, we're down roughly 20% on a quarterly basis and I think that's fairly consistent with what we're seeing with investments in venture. Those burn rates as Greg talked about are certainly accelerated in up on a quarter-over-quarter basis.

So when I look at those factors on a go forward basis, we're -- for the guidance effectively looking at anywhere between $3 billion to $5 billion on a sequential quarter basis of a deposit decline, assuming that public markets effectively stay shut, assuming that we see sequential decline of 20% in Q3 of public market investment and as well as in Q4 and that effectively burn rate slow slightly, but stay at elevated levels. So, we've tried to build a forecast that takes all of those elements into considerations.

Now if the public markets start to improve a bit, public market, investment improves, we can see upside relative to what we have. And to the extent public market investment is slow, that could put additional pressure on the numbers.

Greg Becker

Just to -- and just to add to that Steve, on the private side, again we’ve -- as Dan said, we build in a continuation of a decline over the next few quarters. So that's one aspect and we really haven't shown much of a change, maybe a little bit of a change in cash burn rate. So you got those three variables, kind of, given you our assumptions and so if you see improvement in any one of those three, you could see some upside from our forecast conversely, if they're actually on the downside to any one of those rate, you could see some softness as well.

Daniel Beck

And the last thing, I would say Steve is if I look at July deposit balances were effectively staying relatively flat to where we ended the second quarter, so seeing some consistency there on at least the early July results.

Steve Alexopoulos

Okay. That's good color on the deposit side. If I could ask now on the loan guidance, somewhat similar that it implies pretty flattish growth through the rest of the year, at least to where period end was. And that's pretty consistent with what Signature Bank guided earlier in the week, they really dialed down their expectations for capital call growth in the second half. And I'm curious if -- can you give more color on this? I get it why VCs would slow down capital call lending, but aren't VC or PE firms typically more active during periods of stress?

Greg Becker

Yes, Steve, I'll start and then Mike will add. The drivers of loan growth, we expect to see actually the tech and life sciences that actually is going to be better than what we originally were forecasting. You're going to see more slowness in the mortgages for the obvious reasons around rates. And then you really think about on the capital call, it's really about utilization rates. And so we do have growth built into it, but it's clearly we pulled that growth down.

You're right on Venture Capital to calls that has slowed, but PE is somewhat, I'll call cyclical. They still need to find companies that have recalibrated to lower valuations. And that doesn't have -- even though public markets are mark-to-market, private markets are not mark-to-market. It takes a little while for opportunities to kind of come to the conclusion or companies to come to the conclusion that valuations have reset and it may not come back. So we're seeing a little bit of that softness.

Now again, if that changes and the stability of valuations start to balance out, you could see that pick up. There's one of those factor in here that I would say that creates upside. We've had incredibly strong term sheets and new business sign ups in the Global Funds Banking, I think, and Mike, correct me if I'm wrong, but last quarter was either the highest or second highest of new deals signed up or term sheets signed. So that also creates opportunities.

And the final piece I would say when you think of capital calls, it's this not only is it about new relationships, but I would also say, as our balance sheet has grown, our ability to take larger sizes of loans has also increased. That creates additional loan growth capacity. So the uncertainty, the market is kind of causing us to give the outlook that we have. But I would say certainly as the market plays out, there's definitely some upside that could be built in.

Steve Alexopoulos

Okay. Thank you, and then the final question. So if we look at the $137 million of investment losses, which are detailed on Page seven, that declines a bit more than we've seen in other periods, right, is over 8%, typically you're like 2% to 3%. Can you walk us through the three buckets, so we can understand that a bit better, which is really fund-to-fund strategic and other investments in SVB Securities? And which of those held the public equities you're calling out? Thanks.

Daniel Beck

Yes, Steve. So just breaking those losses into the three buckets so we've got the public fund exposures, we've got valuation adjustments against the liquid private exposures. And then we've got a hedged equity investment that's included within those numbers. So while the majority of the portfolio is made up of this private investment, there's a small portion of our warrant and investment portfolio that's made up of public exposures. During the quarter we saw valuation declines in that book of close to $45 million and that's effectively marked mark-to-market. So that makes of about 20% of the losses.

Probably more importantly given our fund portfolios over time or somewhat correlated to the public markets, these are the illiquid privates. We took a downward valuation adjustment for the illiquid investments held in that investment and warrant portfolio, so that reserve was close to $40 million, so the losses on investments and warrants are effectively mark-to-market through the quarter. And if we see the updates or valuations, we've effectively captured that with those adjustments in the quarter.

Last but not least that hedged equity investment, there is about $35 million worth of the law included there. There is an offset to that in other income, so that's effectively flat. If you back out that $35 million you’re really looking at the losses on private illiquid and the public securities.

Steve Alexopoulos

Okay, got it. So because Greg you said there aren't that many down rounds yet. But what you're saying Dan is you guys marked them down, not to public your privates anticipating that it will come down, is that right?

Daniel Beck

Yes. Based on what was happening in the public market, we took evaluation adjustment. Now to the extent that public markets continue to decline, you could see further adjustments, but we believe that we've effectively marked through those down rounds that could really trickle through in the next one or two quarters.

Greg Becker

And maybe just to pile into that last part, Steve, is the one advantage of seeing the rapid decline in valuations in public tech stocks is you’ve kind of hopefully get to that floor more quickly as opposed to kind of a bunch of quarters in a row. And I think you've seen over the last week, couple of weeks, there is more stability with the public tech stocks. And at least from my standpoint, I believe and I certainly hope we've kind of gotten down to the floor. No guarantees, but this is just a flavor for how we've approached the securities portfolio.

Steve Alexopoulos

Got it. Okay, thanks for all the color.

Greg Becker

Yes. Thanks, Steve.

Operator

Your next question is from the line of Ebrahim Poonawala with Bank of America. Your line is open.

Ebrahim Poonawala

Hey, good afternoon.

Greg Becker

Hey, Ebrahim.

Ebrahim Poonawala

Hey, Greg. Just I guess taking a step back, I want to follow-up on your comments on deposits and loan growth. One, like what's the degree of visibility that you have means, I appreciate the macro environments really tough. Stocks could have had a bounce over the last two weeks, but as you pointed out, means we could see a sell off. I'm just wondering the comment you made about deposits being flat month-over-month. Should we take it as the likelihood of another downward revision on loan deposit growth, is a low probability event given how much you factored in, in terms of downside risk? Would love to get a sense based on previous cycles what you've seen and just how confident you feel about this guidance?

Greg Becker

Yes. I mean, Ebrahim, I think as I described it and I'm going to ask again Dan to reinforce what he said. What we have built in is a few different factors and then you have to kind of have your own point of view. Does that assumption make sense from your standpoint, what we built in, in the Venture Capital flows is that we believe that there is likely two additional quarters of decline that you're going to see in Venture Capital dollars going in, right? That's what we build into it and we think that is a reasonable assumption.

The second part is on the cash burn. Again, this quarter was the highest quarter that we've seen and almost 50% or actually more than 50% higher from an average quarterly cash burn, compared to 18-months ago. We believe that, that was going to kind of temper off, right and kind of flat now. And so we also believe that is a very realistic and reasonable assumption given everything we've heard talk to our clients. You've read, we've all read about the views that Venture Capital’s have had about the market. When you put those two factors in together, that really creates the outlook.

Now confidence level. The confidence level that is -- that you have that we're going to hit that mark perfectly is I would say, a little bit cloudy. So could you see it being higher or could you see it being lower? The answer is yes, it's possible. We're giving you the, kind of, the -- all the factors that build our outcome or build our forecast and kind of what are the drivers that could drive it up and what are the drivers that could drive it down, but you certainly feel good about the assumptions that we put into our forecast.

Daniel Beck

The only thing I'll add, Greg, is as we talk to others in the market and in our channel checks it's not that this market is completely stopped. Good companies are certainly getting fundraising grounds, so we're seeing that play through. So this is not a zero funding environment so we're showing another 20% of sequential decline in private venture investing in Q3 and Q4. That assumes that we're still seeing at least some deal flow albeit at lower levels and that seems pretty consistent with what we're hearing from others in the market. And again, a lot of it really just depends on cash burn. And will we see the burn rate slow down relative to all the conversations coming from our clients that they're trying to slow it down. So that's where those confidence factors are going to come in.

On lending, we expect to see order of magnitude $1.5 billion, $2 billion worth of lending growth, a quarter in the loan guidance going forward. So that doesn't mean that we're stopped in any way, shape or form. Without question, we continue to, as Mike said, to see substantial amounts of commitments and term sheets. And we're really waiting for that moment, where middle market private equity feels like it's time to put that money back to work. So that's at least the color that we have around the assumptions and how we're feeling about it.

Ebrahim Poonawala

And on that, Dan the $1.5 billion to $2 billion, how much of that is dependent on fund banking, private equity. And I asked because you had Blackstone on their earnings call talk about deal volume slowing down. So I'm just wondering how much of that is fund banking-driven growth that you expect versus everything else?

Daniel Beck

Yes. The majority of that growth is still coming out of the fund's banking portfolio. But there is more contribution coming from technology and healthcare, because we're in the past we were crowded out from an equity perspective in those deals. And we're seeing that at least pick up. But still just, because of the size of that portfolio, the majority of that growth is in fund banking.

Greg Becker

Yes. And just -- well, go ahead, you’re going --

Mike Descheneaux

Just -- Ebrahim, this is Mike Descheneaux. Just one thing to add and pile on to what Dan is saying. When we look at the pipelines for tech and healthcare they are at the strongest levels that in history. And Greg already mentioned and similarly on the Global Funds Banking, both in terms of term sheets issued and term sheets signed in the quarter was right up there with the first or second highest all time. Now it does take some time to come to deliver for them to draw down, this gets back to the macroeconomic backdrop that Greg was talking about. But we certainly have been increasing the volumes and feel pretty good about where we are positioned.

Ebrahim Poonawala

Got it. And just one last piece tied to visibility. You took a $20 million charge off tied to one reserved losses, I guess, this quarter, just give us a perspective on credit in terms of visibility on losses as we look into the back half of the year? And is it still the early stage and growth portfolios where we should expect the losses?

Marc Cadieux

Hi Ebrahim, it's Marc Cadieux. And in a word, yes. So what we saw -- what's the unreserved charge offs effectively reflect is sort of speedier deterioration that I think was a function of the abrupt change in investor dependent clients access to capital or failing that M&A. And so if you were a company low on liquidity or trying to get sold in the second quarter and perhaps had already availed yourself of investor support previously. Relative to a year ago, that same company still would have had more options to get out for enough to repay us. That was different in the second quarter.

The second answer to your question, I think goes to the back half of this year. I think as we've already touched on, there's a high level of uncertainty. As mentioned already, right, the unreserved charge offs are assigned, but the very beginning of assigned and still at $20 million, I think you would acknowledge charge offs still remain pretty low. The number of individual charge offs pretty low. And so thinking about the back half of the year, it really depends on whether this environment where in the second quarter persists or doesn't, and I think playing into that as well will be the higher average liquidity that a lot of these companies have. And so we'll see what happens, again it’s hard to predict, but I think it will largely be a function of again access to capital M&A and if those remain diminished, then we could see some degree of higher investor dependent charge offs in the back half of the year.

Ebrahim Poonawala

Got it. Thanks for taking my questions.

Greg Becker

Yes.

Operator

Your next question is from the line of Manan Gosalia with Morgan Stanley. Your line is open.

Manan Gosalia

Hi, good afternoon. Appreciate all the comments on the environment and the burn rate portfolio companies and that they've accelerated. But I guess how much runway do you think they have before they have to raise money or they have to look at M&A opportunities. I appreciate that would vary by company, but I just wanted to get a general sense of how much deposit balances could decline before they really have to go out there and raise money?

Greg Becker

So it's Greg, I'll start and Marc want to add. It’s -- you answered part of your question, which is it's so company dependent. The very good news and again we talked about this on previous earnings calls. Companies are more flushed with cash than they've ever been in history by a wide margin. And that from my standpoint protects two things, it protects the overall liquidity total client funds from the standpoint that can slow the burn and money is still going to flow in and it helps project credit quality as well. I think it's important, we go back and Dan and I spent a lot of time talking about the mix, the balance of new money coming in and burn rate. And I think it is just so important to understand what we talked about. Because my view is, yes, you could see what we have in our outlook, which is a 20% decline in Venture Capital in the next two quarters, but there is -- we talked about it a lot of dry powder. There is so much money out there with new funds being closed. And while they may wait a little bit and be patient, again, what I said, the good news is that valuations publicly and now we're starting to see it privately have corrected.

And when there is so many good companies out there that money will continue to be deployed from my standpoint at a healthy clip. So they have -- they're flushed with cash, not worried about my view, not worried about it from a credit perspective relative to what we've seen in the past when companies are a lot lower on cash balances on average.

Marc Cadieux

It’s Marc Cadieux, I'll just add to that, a historical point of reference. And so thinking about 2015, 2016, right? We started to see some pressure build in the back half ’15 and the front part of ’16 first two quarters, is where we had that elevated level of early stage investor dependent charge offs. But then, yes, back half of the year spring strong and it was all off to the races again. If we saw that same experience today, I think the higher average liquidity these companies have might get them more of them through a patch that short. And so if it's longer, then yes, more companies will be under pressure. But all of the things being equal, I think that higher average level of liquidity is a really good potential mitigating factor to what we're seeing now, particularly if it is not terribly long lived.

Manan Gosalia

That's great color. Thanks. And then just separately, you talk about proactive interest rate risk management in the deck. You're now focused on protecting against rates moving lower. Any more detail on that? And how much more you want to do in the coming quarters? Because clearly that's going to reduce some of the upside from the additional 200 basis points or so of rate hikes that we have in the solid curve?

Daniel Beck

Yes. This is Dan, I think we're still well positioned to the upside for higher rates. But at the same time, what we can start to do is look at dampening the asset sensitivity and we've done this before back in ’17 to '18 time frame to below 10% for 100 basis point parallel shop. So we'll view that progressively paying attention to what's in the forward curve. So that we can manage that further. Right now, we're sitting at 6.8% asset sensitivity to down rates and we think we still have a couple percentage points to go. We'll do that through some receive fixed swaps and continuing to embed floors in our lending agreement. And that should help protect to the downside.

Manan Gosalia

Great. Thank you.

Greg Becker

Yes.

Operator

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

Casey Haire

Yes, thanks. Good evening everyone. So a question on the NII guide and what you guys are assuming for funding going forward? Because if I'm understanding you correctly, you do expect some loan growth, you expect deposits down. I know you have the bond book cash flowing through $3 billion a quarter, but is that enough to match to fund the loan growth? And the deposit outflows?

Daniel Beck

Yes. Casey, it's Dan. We talked about it the investor presentation, there's roughly $3 billion worth of cash flow coming off of the investment securities portfolio quarters. So that provides the solid foundation just to start. On top of that, we have and we've had some short-term wholesale borrowings at least outstanding and that helps us at least manage periodic cash flow.

And then as we've talked about in the past, we have opportunities to drive deposits from off the balance sheet to on the balance sheet to effectively shore up liquidity flows. So those are some of the options that we have to continue to manage the cash flow. And those options are all considered in the NII guide that we have.

Casey Haire

Okay. Very good. And then my question for you, Slide 28 gives pretty good color as to what the downside scenario that Moody's lays out that you guys have waited 65%. But it speaks to like broader macro, like peak unemployment of 7.9% and GDP shrinkage of 2.2%, like that's great for a garden variety. Regionally, you guys obviously are a little bit different, so is there a way to -- what does that mean for the tech and innovation markets? So are there any indicators that you could point to? That way we have a better understanding of how things change, how conservative or aggressive your reserve policy has been thus far?

Marc Cadieux

Yes. So it's Marc. And what I would say here is that the broadly speaking, our portfolio putting aside the investor dependent and particularly companies that aren't going to have to sell a product or service to customers for some number of years. The rest of the portfolio, generally speaking, would be impacted to varying degrees in differing segments by a recession. And so I think that's the first thing. And I think by extension, there is some sensitivity in unemployment. There are some of our segments of the portfolio that are consumer facing, depend on consumer spending, could see stress there. So I'm going to stop and make sure I'm answering the question you're asking.

Casey Haire

Yes. No, that's great. That's great. I know, it’s not easy to address.

Marc Cadieux

You want to add something?

Daniel Beck

Casey, it's Dan. I think another way to look at it is, you know, in the more risky segments, what do we have reserved relative to kind of the highest stress life cycle losses. And we talked about this at the onset of COVID, our highest loss rates in the early stage investor dependent portfolio through the cycle are around 6%. Well, you've seen us with this change in the Moody's economic scenario get very close to a reserve rate on that book of 5%. So kind of seeing where that's heading from a reserve on our riskiest segment. So hopefully that helps a little bit in trying to point out how covered we are for a more negative scenario.

Casey Haire

Got you. Last one from me just on the capital front. Obviously, not a lot of balance sheet growth upcoming. Wondering if share buybacks are being considered with capital ratios climbing with the balance sheet, kind of, running in place in the next little bit?

Daniel Beck

Yes. Casey, we're always open obviously to capital actions. We'll see how the next couple of quarters play out. You've folks have seen this in our business we've been here before. Once we get to a spot where valuation folks are comfortable with that and that amount of dry powder that’s out there comes off the sidelines, growth returns pretty rapidly. So we got to be ready for that, but obviously, if this plays out over the next couple of quarters, we'll consider all of our options from a capital perspective.

Casey Haire

Great. Thank you.

Operator

Your next question is from the line of Jared Shaw with Wells Fargo Securities. Your line is open.

Jared Shaw

Hey, good afternoon.

Greg Becker

Hey, Jared.

Jared Shaw

Just looking at deposit betas, I see you are clearly calling out the 55% to 60 % beta through the cycle. I mean, this quarter, we got up pretty quickly to 46% it looks like. How should we be thinking about additional beta growth from here? Is it -- are we going to get there basically next quarter or this was the initial jump up and now you think you can moderate that growth?

Daniel Beck

Yes. Jared, I think if you look at it this quarter, through June 30 beta is right around 41 basis points. We're still really projecting that 60 basis points throughout the cycle. And we think that off to on balance sheet flow that we did see this quarter is going to moderate a bit in our forecast for the remainder of the year. So those are some higher priced deposits that increase the beta more significantly within the quarter. So we think that we're still within that 60 basis points beta through the cycle range. But obviously, market conditions we'll dictate that and most importantly retaining our clients' deposits and paying a market rate to them for their deposits is important to us.

Jared Shaw

Okay. Thanks. And then looking at the loan growth outlook, how should we be thinking about spread compression from here? And obviously, it's a competitive market? Should that continue to be accelerating?

Greg Becker

If you're talking in terms of loan yield beta, I think right now we're around 70%, and as we get through some of the floors, you could start to see it be around 80% or 90% there as we go forward. So still pretty good here right now. And again, as we go back to the pipelines are full and it is still competitive out there. But again, I think we're in a pretty good position on loan data.

Jared Shaw

Yes. I guess something about additional -- future loan growth with the new pricing and the spreads on new pricing. Is that continuing to see compression?

Greg Becker

Yes, go ahead.

Daniel Beck

Jared, it's Dan. I think as we look at loan growth for the rest of the year, we've factored in and where there's new origination spreads are. There's a little bit of compression on it, but that's all factored into our net interest income got. And I think you're still in that 80% beta range just based on what we're seeing in the market.

Jared Shaw

Okay, great. Thank you.

Greg Becker

Yes.

Operator

Your next question is from the line of John Pancari with Evercore ISI. Your line is open.

John Pancari

Good afternoon.

Greg Becker

Hey John.

John Pancari

On charge off expectation and your expectation you could see rising charge offs in the -- in coming quarters. And also I guess the decrease we saw for the second quarter. I guess as you look at it by portfolio, can you maybe help clarify where you see that pressure perhaps for the second quarter and then for the outlook? I know you had mentioned a little bit in Ebrahim's question, but specifically the innovation portfolio versus the growth stage and early stage. Can you just -- where do you -- would you say the loss concentration would be greatest from what your expectations considering? Thanks.

Marc Cadieux

Yes, it's Marc. And generally speaking, I would say history is most instructive here. In -- to the extent we were to have a prolonged downturn of any severity, generally early stage investor dependent charge offs is where we have historically seen the highest losses and would just make the related point here. That particular portfolio segment has come down quite dramatically as a percentage of total loans to roughly 2% now. And then we would expect to see probably fewer, but potentially larger charge offs in mid and later stage investor dependent. And then after that, it's really a function, I wouldn't expect to see higher losses. But again, I'm going to stop there, because the uncertainty is high and want to resist the urge to try to predict the future here.

John Pancari

Got it. So the areas of the higher flows content would amount to about 8% of your portfolio, if you look at the growth in the early stage piece, correct?

Marc Cadieux

Correct. And if you were to go back to slide referenced earlier 28, you see the breakdown of the allowance for credit loss by that segment and as Dan alluded to earlier, early stage investor dependent, almost up to the 2008, 2010 levels at 4.93% for that segment.

Mike Descheneaux

But John, as you think about, I mean, the early stage investor dependent is only about 2% of the total loan portfolio. And that's what we're referring to as the highest loss rates historically.

John Pancari

Right. Yes, I got it. Got it. Thanks, Mike. And then on -- within the private bank portfolio, getting some questions just regarding credit exposure there given stock-based compensation and everything, so maybe could you just talk about how you're viewing potential frequency and severity out of that book?

Marc Cadieux

I'd say, it's Marc again and reflective of the reserve we have on Private Bank. We continue to expect pretty strong credit quality there. It is by and large a mortgage portfolio to your point, there may be some diminished income, but at the same time, these tend to be fairly wealthy clients, gainfully employed. And most importantly, very well margined mortgages from a loan to value standpoint. And so that being the bulk of our portfolio feel pretty confident about that. There are certainly other segments there too, but not seeing anything in the second quarter that's giving us cause for concern at this time.

John Pancari

Got it. Okay, thanks, Marc. And then on the core fee income, the guidance increasing that to the mid-50s. Maybe -- could you unpack that for us in terms of the drivers? How does that break out by your core fee businesses in terms of your growth expectation?

Daniel Beck

Yes. John, it's Dan. I'll start. First and foremost, when we look at new client activity, we continue to see really strong new client acquisition. So that's kind of the foundation for continued transaction activity. When we look at the drivers for the increase in guidance, the vast majority of that is coming from client fund fee income. So very quickly, we've gone from 8 basis points to very close to 17 basis points on the off balance sheet client funds. Now with every additional 25 basis points, we'll see another 1 basis points to 2 basis points worth of spread. That is not incorporated in the guidance forecast, you're just seeing what has already transpired with Fed funds at $175 and the balances in the portfolio as it is. So there is upside from there. Could we get additional rate hikes.

John Pancari

Okay, great. All right. Thanks for taking my question.

Greg Becker

Yes. Thanks, John.

Operator

Your next question comes from the line of Chris McGratty with KBW. Your line is open.

Chris McGratty

Great. Thanks. Dan or Greg, on the off balance sheet trends, can you remind me what you moved on this quarter? And then within your forecast for the updated deposit growth. What are your assumptions, I guess, for total client funds like I'm trying to gauge it size the off balance sheet?

Daniel Beck

Chris, it's Dan. When we look at total funds from off to on the balance sheet, it gets a little bit complicated, because we also had funds flowing generally from our global funds banking clients off the balance sheet for higher rates. But when we look at it, order of magnitude, we saw something close to $10 billion of funds move from off the balance sheet to on the balance sheet within the quarter. Now we have tempered that expectation in the third and the fourth quarter, but that effectively is there and stands ready to the extent that from a pricing perspective it makes sense for us to bring more of those funds onto the balance sheet.

Chris McGratty

Okay, great. And then maybe my follow-up would be you guys moved your bond portfolio to held the maturities a lot sooner than others in protected book. Can you walk me through a scenario where you would have to or be allowed to reverse that? And if so, I assume there'd be a mark on that?

Daniel Beck

Yes, Chris, we have no expectation or intention of doing that. If we take a look just as the overall liquidity of the balance sheet, we're in a really solid position, so no intention to do it.

Chris McGratty

Okay. Thank you.

Operator

Your next question comes from the line of Vilas Abraham with UBS. Your line is open.

Vilas Abraham

Hey everyone. Thanks for all the market color on the call today is very helpful. So I hear you on the abundance of dry powder that's out there. But can you discuss what you're hearing from LP that have committed this capital, but much of it is presumably still in their bank accounts. Are they getting uncomfortable at all, particularly as private market exposures in their portfolio may actually be moving up as the public side gets marked down? Just how they’re thinking about things right now?

Greg Becker

Yes. This is Greg, I'll start, and I know Mike has spent even more time with limited partners recently and will give you even more real time color about what he's hearing. From my standpoint I'm not hearing or seeing any concern about the -- where they're at their balances. Clearly, they're getting -- they're having write downs for the position to markets that they -- the dollars they have right now, but they still look at the returns they have made over time in private equity and Venture Capital. And it's at the top of the return food chain over time. So that's number one.

Number two, a lot of firms looked at who didn't have money in the market back in ‘08, ‘09, 2010, because they were concerned that the market turned down and it was a bad investment and they missed out on that incredibly trajectory over the last decade. And so we're seeing an interest for people that haven't been in the market to say, wow, what a great time to come back in right now. Now what they are saying, so that's part of it. Second part of it is, if there's -- if your underlying question has any part around worried about defaults from limited partners. The answer is there is zero, we haven’t seen any, we don't expect any, we didn't see any in the last cycle and so not worried about that.

What they are saying is, well, you raised a lot of funds very quickly and can you slow down the pace somewhat for new formations? And the answer is, yes, firms are doing that not surprisingly. But as far as limited partners go, my view is they're very optimistic about the innovation economy much as we are. Mike, what would you [Multiple Speakers]

Mike Descheneaux

Just, if you think that, I mean, what you saw here coming out recently, the data shows $3.62 trillion of dry powder at the end of June 30. So, there's a significant amount of lot of interest and certainly deploying in the areas. The one thing to keep in mind though in terms of public valuations and the so called denominator effect, so you do have some endowments and pensions that are saying, look, I'm a little bit more overweighted in the private sector, because of public market valuations have come down.

And so, there is some anecdotal commentary about, hey, let's maybe slow down a little bit, but my interest has not waned. And so, it's just a little bit of buying time and clearly with the economic drop some of the states in terms of tax dollars could be coming down, so they may be saving dollars for the other areas. But again, strong demand, strong interest and during these cycles, they tend to create great companies. So I don't see that slowing down, it’s just maybe as Greg said, a little bit slow down the pace just a bit. But again, still tremendous opportunities for them going forward.

Vilas Abraham

Okay. Got it. That’s very helpful. Just back to the second life sciences portfolio, it sounds like you guys are looking at that as an opportunity here as equity, capital access gets a little bit more challenging for some of these companies. Can you talk though about just the underwriting box from here on out? Has that changed at all from a couple of quarters ago as the environment changes as you put out those term sheets?

Marc Cadieux

It's Marc. I'll start, Mike may wish to add. And so historically speaking, we try very, very hard to be the consistent predictable, dependable provider of services to our clients at every point in the cycle no matter where we are. And so we are very much interested in the loan demand we're seeing. And at the same time, as you might expect, we are being thoughtful about which new clients we take on or new deals we originate. And obviously that would differ from sector to sector, segment to segment. And so -- but that's again nothing new. We strive to be consistent. But we will of course be thoughtful when the environment changes around us as to how far and to what degree to lean in to given opportunities and that is a practice that has served as well for a long, long time.

Mike, what would you add?

Mike Descheneaux

Yes, there's a few different things we're watching. I mean, when you think of the backdrop, what are some of the things that are going on inflation? So how does the company handle increases in pricing? Do they have pricing power, some things we're watching for increase in interest rates. Can they at least absorb some of the interest rate increases? So those are things that we're looking on. But to Marc’s point, I think it's a great opportunity for us to lean in and help our clients particularly some of the good clients having those discussions with the VCs about, which ones they're going to lean on and making sure there -- were there to continue for the support.

Vilas Abraham

Great. That's all I had. Thank you guys.

Mike Descheneaux

Thanks.

Operator

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

Andrew Liesch

Thanks for taking the questions. Just a question on the expense guide from here, backing up the merger chart, it looks like it's a pretty big ramp and expenses in the second half of the year? I'm just curious where are these investments going? And how do we get to that expense guide?

Greg Becker

Yes, it's Greg. You know, we still obviously have a lot of initiatives that we're investing in. You can look at it from the standpoint of digital investment. We're still adding headcount to support growth, infrastructure build. There's a lot of things, but in fact actually what's happening is we're -- excuse me, lowering your trajectory. And so from that standpoint, we're looking at professional services, we're looking at open racks and pulling back on that.

But I'll give Dan, to give you a little more color.

Daniel Beck

So if you look at the expense trajectory, first and foremost, in the quarter, considering the pullback of our expectations for the year, we did have some overall reductions in expenses around incentive compensation and the like. So when we really look at run rate for expenses, you're a little bit lower in this quarter just because of the reduction in that area. When I look at the expense run rate for Q3, we're probably in the [950 to 970] (ph) range, just to put a little bit of color around it. So we're clearly focused on investment management at expense management. We absolutely know that we need to invest to take advantage of the opportunity in front of us. But we -- when revenue and balance sheet was growing with rate opportunities at a much higher pace, we clearly hit the accelerator on investments. And now we have the opportunity to be able to dial some of that back through professional services consultants and the like.

So just really turning to dial on that are ways for us to be able to temper some of those investments in a slower period. Again, we must continue to invest though, because we see this opportunity in front of us.

Andrew Liesch

Understood. Thanks for taking the question. You've covered everything else.

Greg Becker

Thanks.

Operator

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

David Smith

Hi, you spoke earlier about how the balance sheet having grown means that you can take on larger sizes of loans. Does that mean you can go above the mid market in global fund banking? You could essentially go above the mid market fund space that you've historically focused on?

Greg Becker

This is Greg, I'll start. I think there's always interesting definitions of mid market. So I think if just start there, I would say when you look at -- when we've done our analysis, we can go up by compared to a year ago or two years ago, you're looking at more than 50% growth in capacity from where we were and selectively even higher than that for the highest quality firms. Then you combine that with our ability to syndicate, so you have to look at those two things together and our syndication capability gives us even more headroom we can support very large PE firms.

Now when you could do to a certain size, it becomes, I would argue, so large and the returns aren't there. So actually, I think we've got lots of headroom to grow and we're -- we can go again, two very, very large firms. Mike, what would you add to anything?

Mike Descheneaux

I think the benefit of the increase that we mentioned here is allows us continue to grow with certain funds as they become larger and they bring on more funds, even larger size funds and new strategies. So I think that's going to be very helpful for us going forward.

David Smith

Great. And then, broadly, it's been a tough period for the innovation economy. Are there any bright spots within that you would highlight? Or has it been pretty uniform in terms of the weakness from investment and valuation front in your view?

Greg Becker

I'm glad you asked a positive question. So there are a lot, there are a lot. I mean, there are so many bright spots when you go out and you spend time with clients. It has always been the best part of what we get to do. And what's so amazing it is across the board. You can look at there's so many things in ad tech, there's so many things in the broad energy and clean tech that's getting so much excitement, so much in health care broadly speaking in healthcare services and biotechnology and digital health. It is literally in every area. And so when you hear us talk about the reason we're optimistic about the medium and long-term of the innovation economy, it’s -- we get to spend time on the ground with these companies and watching them grow at such an incredible pace.

So to your question, is there one area? Is there one segment that stands at above the other ones? The answer is not really, they're all doing amazing things. And I actually believe like a lot of times when you have recalibration where we are right now, companies end up being better in the end, because when you have money that is free the way it was the last couple of years. You're just not as disciplined and I think companies are going to get back on the right track and really make the right decisions for the long-term. So as much as you'd like to say, nobody wants a correction, a recalibration. I think it's actually going to be healthy in the long run.

David Smith

Got it. Thank you.

Greg Becker

Yes.

Operator

There are no further questions at this time. I will now turn the call back over to Mr. Greg Becker.

Greg Becker

Great. Thank you. So I’m going thank everyone for joining us. Obviously, we spent a lot of time talking about the market. The markets volatile has a lot going on. But it's a great way to close with the last question, which is the view of why we view where we are and where we sit. And what do we get to do every day is being so optimistic and positive. Clearly, we've taken our outlook down given the uncertainty that we have, and we talked a lot about liquidity and client flows and I think we've given you a lot of context behind that, so that you can look and look where we're headed and where we assume we're going to end up the balance of this year and into next year.

There's also so many positives that have gone on the last few quarters such as the core fee, income growth and new client acquisition and having this strong loan pipeline, the team enhancements across all four businesses and even the support and infrastructure that again, we look around the table and just feel really, really good about what's being built. And if you look at it with the four businesses and SEB Securities and SEB Private, and all those businesses working together and right now is the time when they want advice. Our ability to sit in front of the most amazing companies right now and get their attention and have them work with us to come up with solutions has never been stronger. So there is definitely an optimistic tone, despite the challenges that may be in front of us.

Huge thanks to our team, they're the ones that have to do the heavy lifting every single day and they get also the positive side of working with our great clients. Appreciate our clients for their support of us and working with us and we look forward to working with them through this market. So thanks to everyone for joining us. Have a wonderful day. Thank you.

Operator

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.

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