DBRS Comments on SVB Financial Group’s 4Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 4Q12 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 $50.4 million for the quarter, up from $42.3 million in the previous quarter and from $35.6 million in 4Q11.

Highlights of the quarter include robust gains on investment securities (net of noncontrolling interests), solid warrant gains, record high loan balances, and the maintenance of a healthy balance sheet. DBRS notes that the strong 4Q12 and FY12 results exceeded the Company’s internal financial targets. While expenses did increase by a high 5.8% sequentially, the expense growth was primarily driven by higher incentive compensation related to the Company’s outperformance. Even with the increase in expenses, SVB delivered positive operating leverage sequentially, as well as for the year. For 2012, the Company added over 1,800 new early-stage clients, a record.

For 2013, management expects average loan balances to increase at a percentage rate in the low twenties and for fees (excluding warrants, investment gains and “Other” noninterest income) to increase at a percentage rate in the mid-teens. Meanwhile, management expects average deposits, net interest income, and expenses net of noncontrolling interests to all increase in the mid-single digits. Lastly, the margin is expected to be between 3.10% and 3.20% and asset quality should remain strong.

Average loan balances increased $367 million, or 4.6%, to $8.3 billion, while period-end loans grew an even more robust 9.2%. The loan growth came primarily from sponsor-led buyouts of later stage clients in the Company’s software portfolio and capital call lines of credit from VC/PE clients. Loans greater than $20 million continue to represent a larger component of the loan portfolio reaching $3.1 billion, or 34.8% of the loan portfolio, which DBRS views as a concentration risk.

The average loan growth was more than funded by deposit growth with average deposits growing $731 million, or 4.0%, to $19.0 billion. The growth primarily came from noninterest-bearing deposits, which comprised a high 73% of average total deposits. Overall, net interest income (FTE) increased $6.1 million sequentially to $161.0 million reflecting earning asset growth, as well as a very modest increase of one basis point in the net interest margin to 3.13%.

The quarterly results benefited from both gains on investment securities, net of noncontrolling interests, as well as gains on equity warrant assets. Specifically, gains on investment securities, net of noncontrolling interests, increased a robust $9.8 million sequentially to $17.2 million driven primarily from one investment that contributed $9.2 million of the gains. Meanwhile, warrant gains increased $6.5 million to $7.0 million reflecting increased valuations from several warrant positions. DBRS notes that these two items are hard to predict and can add volatility to quarterly results.

While the provision for loan losses increased $8.2 million to $15.0 million sequentially, the increase was driven by strong loan growth, not asset quality deterioration. Indeed, credit quality remains healthy even with higher gross charge-offs. Specifically, gross charge-offs were $7.6 million in 4Q12 primarily related to hardware and life sciences clients, which was a $3.0 million increase from $4.6 million in 3Q12. Overall, net charge-offs remained very manageable at 0.28% of average total gross loans (annualized). Meanwhile, nonperforming loans remain very low at just 0.42% of total gross loans.

Capital remains solid with retained earnings supporting the balance sheet growth. Overall, the Company’s tangible common equity to tangible assets ratio was 8.04%. In the past, the Bank’s leverage ratio was the metric under the most pressure from the significant balance sheet growth at SVB. At 7.05%, the leverage ratio remains in the Company’s comfort zone.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]