DBRS: SIVB’s 2Q14 Trends Remain Strong; FireEye Negatively Impacts Earnings

Summary:
• SVB reported net income available to common stockholders of $50.8 million, a decline from record 1Q14 earnings of $91.3 million, primarily reflecting the impact of FireEye, Inc.-related investments.
• The Company issued common stock to support continued robust balance sheet growth raising net proceeds of $434.9 million.
• DBRS rates SVB Financial Group Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) views SVB Financial Group’s (SVB or the Company) 2Q14 results as solid, even with a steep earnings decline sequentially, primarily reflecting the impact of FireEye, Inc. (FireEye)- related investments, as well as lower warrant gains. Indeed, the Company’s fundamentals remain strong with solid loan, deposit and client funds growth. Of note, SVB added a record 1,067 new clients during the quarter, and the Company’s targeted markets continue to thrive. Lastly, the balance sheet was strengthened through a common stock issuance and improving credit quality.

Losses on investment securities, net of noncontrolling interests, totaled $22.1 million, compared to gains of $37.4 million in 1Q14. Of note, FireEye-related investment losses were $30.4 million, net of noncontrolling interests, in the quarter. So far in 3Q14, FireEye’s stock price has declined again, albeit at a lesser rate, which would result in an additional loss of approximately $3.5 million, if the current price holds. Nonetheless, net of gains and losses, FireEye has still contributed over $50 million of earnings. Meanwhile, warrants gains were a solid $12.3 million, but less than half of 1Q14’s total that included outsized FireEye-related unrealized warrant gains. DBRS notes that these two items can introduce considerable volatility to earnings, but are important contributors to the Company’s overall business model.

Once again, average deposits, average loans, and average total client funds all increased during the quarter, as SVB’s targeted markets remain vibrant. The Company did note that competition has negatively impacted loan pricing. Indeed, competition, lower securities yields, and a shifting loan mix to less risky loans, resulted in the net interest margin contracting 34 basis points sequentially to 2.79%.

Given robust balance sheet growth, the Company issued common stock raising net proceeds of $434.9 million, of which, $400 million was downstreamed to the Bank. As a result, the Bank’s leverage ratio was once again within SVB’s targeted level of between 7% and 8% at 7.51%. To protect itself from potential capital volatility when interest rates rise, SVB transferred approximately $5.4 billion of securities to held-to-maturity.

Once again, the Company raised guidance in numerous categories, including loan and deposit growth, net interest income, and core fee income reflecting a favorable funding environment, robust new client acquisition, high valuations, and ample exit opportunities. SVB also guided towards a lower net interest margin.

DBRS rates SVB Financial Group Issuer & Senior Debt at A (low) with a Stable trend.

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