Thread by @RagingVentures

Silicon Valley Bank $SIVB reports earnings tomorrow

Investors have rightfully been fixated on $SIVB's large exposure to the stressed venture world, with the stock down a lot.

However, dig just a little deeper, and you will find a much bigger set of problems at $SIVB... 1/10

$SIVB rode the VC boom like a champ

Deposits grew from $61 b at Q4 '19 to $189 b at Q4 '21. Interest rates were so low, these deposits were like free money (~25 bps avg. cost). 2/10

$SIVB used these inflows to:

- Increase loans 100% to $66 b

- Go hog wild with its "held-to-maturity" (HTM) securities portfolio, ramping its mostly Agency mortgage holdings from $13.5 b at Q4 '19 to $99 b at Q4 '21.

3/10

$SIVB's big problems are with its HTM portfolio

The bank basically increased its security portfolio by 700% at a generational TOP in the bond market, buying $88 b of mostly 10+ year mortgages with an average yield of just 1.63% at Sept 30th. Oops! 4/10

$SIVB's HTM securities had mark-to-market losses as of Q3 of $15.9 b...compared to just $11.5 b of tangible common equity!!

Luckily, regulators do not force $SIVB to mark HTM securities to market. But the bank would be functionally underwater if it were liquidated today. 5/10

On top of this, due to the Fed's interest rate hikes, $SIVB is seeing accelerating deposit outflows (-6.5% ytd), a mix shift away from non-interest accounts, and skyrocketing interest costs (money markets now yield 4%). Also, $SIVB's venture clients are burning cash! 6/10

Basically, as its funding costs reset higher, $SIVB is facing a massive negative carry cost on its HTM, largely fixed-yield securities portfolio (which is not running off quickly, due to the nature of mortgage convexity). 7/10

The risk for $SIVB is that deposit outflows accelerate at such a pace that it is forced to either raise equity capital and/or sell down its HTM securities portfolio, thus realizing substantial losses. You can bet that $SIVB is praying for a Fed pivot! 8/10

$SIVB's clients also face a risk. With the bank's stretched balance sheet, will it tighten and/or pull back on credit lines? Worse, could customers become uncomfortable with $SIVB as a counter-party, due to unrealized balance sheet losses? 9/10

$SIVB's mgmt has tried to blame its challenges on its venture-related exposure. However, it is hard to hide from the fact that mgmt bought the TOP of the bond market.

Tomorrow's earnings and this year should be interesting.

Caveat Emptor! (Disclosure: I am short) 10/10