DBRS Comments on SVB Financial Group’s 2Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 2Q12 financial results of SVB Financial Group (SVB or the Company). DBRS rates the Company’s Issuer & Senior Debt at A (low) with a Stable trend.

SVB reported net income available to common stockholders of $47.6 million for the quarter, up from $34.8 million in the previous quarter, but down from $65.8 million in 2Q11. 2Q12 results included pre-tax gains of $5 million from the sale of certain AFS securities and $4.2 million related to the sale of certain assets of the Company’s equity management services business (SVB Analytics). Excluding these gains, net income would have been $42.1 million, an improvement of $7.3 million sequentially.

DBRS views the quarterly results as strong with the Company delivering excellent loan growth while maintaining strong asset quality. Moreover, SVB added over 200 early stage clients during the quarter and 1H12 early stage client acquisitions are tracking slightly above 1H11’s pace. DBRS notes that early stage clients remain vital to the Company even though the later stage clients are the ones driving loan growth and are more profitable.

Average loans increased $432.8 million, or 6.4%, to a record $7.2 billion. Higher average loan balances were driven primarily by sponsor-led buyouts in the software niche, as well as from venture capital/private equity capital calls. Loans to any single client, at or above $20 million, increased to $2.4 billion, or 30.7% of total gross loans, up from 28.3% in 1Q12. Following strong 1H12 loan growth, SVB increased its guidance on average loan growth for 2012 to the “high 20%” range from the “mid 20%” range. Positively, the loan growth was funded by average deposit growth of $441.9 million with total average deposits reaching $17.4 billion at June 30, 2012. Deposit growth came from new clients, as well as increased fundraising activity from existing VC/PE clients. DBRS notes that SVB was able to keep more client funds off-balance sheet in 2Q12 with average client investment funds increasing approximately $1 billion to $19.9 billion, which helps the leverage ratio.

Long term debt declined by $143.6 million to $458.2 million during the quarter after the Company decided not to replace maturing debt given its strong liquidity position.

The net interest margin (NIM) compressed 8 basis points to 3.22%. Despite the margin contraction, the Company was still able to grow net interest income (FTE) by $1.0 million to $152.4 million. The decline in NIM reflected increased premium amortization expense on fixed-rate mortgage securities and overall lower yields on the loan portfolio, as SVB continues to grow relationships with later stage clients that tend to have less risk and lower yielding loans.

The provision for loan losses was $8.0 million compared to $14.5 million in 1Q12 and primarily reflected loan growth, not asset quality deterioration. Indeed, nonperforming loans declined by $14.6 million to a very low $27.1 million driven by charge-offs and repayments. Moreover, classified loan balances declined by 21%, as many early stage clients received additional financing. However, gross loan charge-offs more than doubled to $14.1 million, or 0.78% of average gross loans (annualized), reflecting a $7.1 million hardware loan charge-off that was specifically reserved for in 1Q12. Excluding this previously identified issue, gross charge-offs were consistent with previous quarters. With credit quality remaining quite strong, the Company lowered its net charge-off guidance for the year to be between 30 bps to 50 bps from 40 bps to 70 bps. Overall, the allowance for loan losses as a percentage of total gross loans was a sufficient 1.25%, especially considering current loss rates.

Noninterest income, net of noncontrolling interests and non-core items, was $57.8 million, an increase of $6.4 million primarily related to unrealized gains from nonmarketable securities, and to a lesser extent, higher net gains on derivative instruments. Meanwhile, noninterest expenses, net of noncontrolling interests, of $131.8 million were up modestly from $129.2 million in 1Q12 and included a larger provision for unfunded commitments.

Positively, strong earnings have been able to more than offset considerable balance sheet growth allowing the Company to build capital. The most restrictive capital metric remains the Company’s Tier 1 leverage ratio at the bank. During the quarter, the bank’s leverage ratio improved seven bps to 7.01%; the first time since 3Q10 the bank has exceeded the 7% threshold.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 31 May 2006
Most Recent Rating Update: 2 April 2012

For additional information on this rating, please refer to the linking document under Related Research.