DBRS: SIVB Reports Higher 3Q14 Net Income QoQ; Continued Strong Growth

Summary:
• SVB reported higher sequential quarter net income available to common stockholders of $63.0 million, driven primarily by substantially higher net interest income that more than offset a higher loan loss provision and increased expenses.
• The Company’s targeted market remains vibrant resulting in strong growth in loans, deposits, and total client funds driven by higher VC funding and increased exit activity.
• 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) 3Q14 results positively, although robust growth continues to pressure capital metrics. The Company reported higher net income driven primarily by substantially higher net interest income that more than offset a higher loan loss provision and increased expenses. Losses from the impact of FireEye, Inc.- related investments moderated materially from 2Q14 levels, but still resulted in a $9.5 million loss, net of noncontrolling interests, in the quarter. Positively, liquidity remains robust and impaired loans declined by almost half.

Even with increased competition, the Company added over 1,300 clients in the quarter, as it remains the dominant player with early-stage companies and the companies that serve them. The business environment remained strong during the third quarter with increased venture capital funding, as well as ample exit activity, including both IPOs and M&A. Moreover, pipelines remain healthy and SVB believes 2015 will be another year of strong growth.

Net interest income, on a fully taxable equivalent basis, increased a significant 8% during the quarter, driven by higher average securities and loans balances that more than offset net interest margin pressure. Notably, deposit growth was used to fund securities purchases, primarily U.S. Treasuries. Overall, average fixed income investment securities increased $3.0 billion, while average loan balances increased by 3.2%. Warrant gains and core fee income were solid in the quarter, and losses related to FireEye moderated materially leading to higher noninterest income, net of noncontrolling interests.

Noninterest expenses increased 5% QoQ, as the Company continues to invest in expanding its product offerings, as well as continued investments in ongoing business and IT infrastructure initiatives. Increased regulatory and compliance costs will remain a headwind.

Positively, impaired loan balances decreased and are at very low levels. However, higher gross charge-offs and loan growth resulted in the provision for loan losses to increase $14.5 million following a very low provision in 2Q14. DBRS notes that the gross charge-offs were primarily related to early-stage software and hardware companies.

SVB continues to experience significant growth that has pressured capital metrics despite strong earnings and no shareholder payouts. The Company’s most restrictive capital metric remains the Bank’s leverage ratio, which ended the quarter at 7.05%, or just above the low end of the 7% to 8% targeted range. While retained earnings will support growth to an extent, SVB is planning to offer more off-balance sheet products to reduce deposit balances. Moreover, the Company may choose to tap the capital markets again to support growth, including a potential debt issuance.

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.