DBRS Comments on SVB Financial Group’s 3Q13 Results – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $67.6 million for the quarter, up significantly from $48.6 million in the previous quarter and from $42.3 million a year ago. 3Q13 results included pre-tax gains of $31.9 million related to one portfolio company, FireEye, Inc. (FireEye).

Highlights of the quarter include robust gains on securities and warrants, strong loan and deposit growth, lower credit costs, and improved core fee income. As a result, SVB delivered significant positive operating leverage in the quarter. The Company continues to experience net interest margin pressure, but management noted that SVB is primarily focused on growing net interest income.

SVB benefited from a healthy IPO environment that saw 26 companies go public in the quarter. Of the 54 U.S. venture-backed IPOs so far in 2013, over half have been SVB clients. During the quarter, the Company added another 349 early stage clients. Moreover, fundraising and investments both increased during the quarter. Lastly, SVB also added 27 corporate finance clients, as the Company continues to make considerable progress in banking larger, more established companies as well.

On a FTE basis, net interest income increased $7 million, or 4.1%, to $177.5 million despite net interest margin contraction of 8 bps to 3.32%. Positively, average loans grew 5.8% to $9.5 billion primarily driven by the venture capital/private equity and later-stage software portfolios. Meanwhile, average deposits grew a solid 2.1% to $19.6 billion. However, the deposit growth was primarily held at the Federal Reserve, which put pressure on the margin. As a result of the strong loan and deposit growth, the Company lifted guidance for FY13 net interest income.

Noninterest income, net of noncontrolling interests, jumped a significant $38.3 million, or 57%, to $105.8 million reflecting robust gains in non-marketable and other securities and equity warrant assets mostly associated with the FireEye 3Q13 IPO. Meanwhile, core fee income was up almost 2% to $37.2 million.

Noninterest expense, net of noncontrolling interests, increased $16.8 million, or almost 12%, to $157.2 million driven by higher incentive compensation given the Company’s strong performance. Despite the large increase in expenses, SVB reported a non-GAAP operating efficiency ratio of 55.5% bringing this ratio below 60% for the year.

For 2014, the Company currently expects average loan growth in the mid-teens, net charge-offs between 0.30% and 0.50% of average gross loans, and positive operating leverage.

Asset quality remains strong with both impaired loans and gross charge-offs improving. Specifically, impaired loans declined $3 million to $38 million. Meanwhile, gross charge-offs declined by $7.2 million to $8.1 million and were primarily related to hardware and software clients. Loans to any single client of $20 million or more comprised 36.0% of total gross loans. As a result of improving credit trends, the provision for loan losses was $10.6 million, an incremental $8.0 million improvement from 2Q13. Overall, the allowance for loan losses remains sound at 1.26%.

Strong quarterly earnings offset balance sheet growth. As a result, capital metrics remain sound with the Company’s tangible common equity to tangible assets ratio at 8.19%. DBRS notes that the once restrictive Bank leverage ratio remains well within SVB’s comfort zone at 7.46%.

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

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