DBRS Comments on SVB Financial Group’s 1Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 1Q13 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 $40.9 million for the quarter, down from $50.4 million in the previous quarter, but up from $34.8 million a year ago.

Highlights of the quarter include continued average loan growth, net interest margin (NIM) expansion, solid expense control considering seasonal items, and maintenance of the strong balance sheet. DBRS notes that SVB added 438 new early stage clients in 1Q13, up from 352 in 1Q12.

Nonetheless, noninterest income had material declines in the more volatile warrant gains and net gains on investment securities following a very robust 4Q12. Overall, (adjusting for noncontrolling interests) total revenues declined by 7% while expenses increased 2% resulting in negative operating leverage.

The Company announced that its Chief Credit Officer, Dave Jones, will be taking on a new role as President of Asia and moving to China. Marc Cadieux, who has been with the Company for 21 years and was previously the Assistant Chief Credit Officer, will take over the role by the end of 3Q13. DBRS believes the transition will be seamless, and views the successor as highly competent in what is a highly specialized discipline, given the Company’s unique list of clients ranging from startups to well-established large companies.

During the quarter, average loan balances increased 4.9%, but period-end loan balances declined 1.1%. The Company benefited from a full quarter’s effect of the accelerated sponsor-led buyouts by later stage clients in 4Q12, but capital call lines were paid down, as expected. Loans greater than $20 million declined modestly in the quarter to $3.0 billion, or 33.4% of total gross loans.

In 1Q13, average deposits declined by 1.1% (the first decline in 23 quarters), as the Company had success growing off-balance sheet client investment funds, which increased by $1.3 billion, or 6.2%. Overall, average total client funds, which include both deposits and off-balance sheet client investment funds, reached a record $41.3 billion bolstered by the strong funding environment for both private and public clients.

Unlike at most other banks, the Company was able to grow net interest income and expand the NIM. Specifically, net interest income (FTE) increased $2.6 million, or 1.6%, to $163.6 million benefitting from average earning asset growth. Additionally, the NIM expanded by 12 basis points to 3.25% reflecting lower premium amortization on securities, as well as cash being used to fund higher yielding loans and securities.

Noninterest income, net of noncontrolling interests, declined by $19.5 million, or 25.7%, to $56.1 million. As noted earlier, net gains on investment securities, net of noncontrolling interests, were $5.1 million, down from $17.2 million in 4Q12. DBRS notes that 4Q12 gains included $9.2 million from a single investment. Meanwhile, net gains on equity warrant assets were $3.5 million, down from $7.0 million sequentially. Positively, foreign exchange and credit cards both delivered solid growth.

Expenses were well controlled considering seasonal expenses totaling $5.8 million with noninterest expenses, net of noncontrolling interests, increasing $5 million to $146.2 million.

Credit quality remains strong despite impaired loans increasing $6 million in the quarter to $44 million with nonperforming loans representing a low 0.50% of total gross loans. Moreover, classified loans decreased by 14% driven by additional funding for some early stage clients. The provision for loan losses was $5.8 million, down considerably from 4Q12. Net charge-offs were $4.3 million with the majority of gross charge-offs coming from life science and hardware clients. DBRS believes the allowance for loan losses remains sufficient at 1.26% of total gross loans.

Capital metrics remain sound and improved during the quarter. Specifically, the Company’s tangible common equity to tangible assets ratio grew 22 basis points to 8.26%. Notably, Silicon Valley Bank’s once pressured leverage ratio improved to 7.35%.

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

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