DBRS Comments on SVB Financial Group’s 2Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 2Q13 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 $48.6 million for the quarter, up from $40.9 million in the previous quarter and from $47.6 million a year ago.

Highlights of the quarter include strong average loan growth, net interest margin (NIM) expansion, solid warrant and investment securities gains, all of which contributed to positive operating leverage sequentially. SVB noted that the venture capital environment improved during the quarter with over twice as many venture-backed IPOs in 2Q13 compared to 1Q13, as well as higher investment. The Company added 318 new early-stage clients during the quarter bringing year-to-date totals to 550, or nearly double the amount of early-stage new clients added in 2010.

Net interest income, on a FTE basis increased $6.9 million, or 4.2%, to $170.5 million during the quarter primarily reflecting loan growth and NIM expansion. Specifically, the margin expanded 15 basis points to 3.40% reflecting a shift in earning assets to loans away from lower yielding securities, lower premium amortization expense, and higher loan fee income.

Average loan balances increased 3.9% to $9.0 billion with the growth coming primarily from later stage software clients. Period-end balances were up even more reflecting higher capital call lines of credit. Since these loans are short-term in nature, the Company expects 3Q13 period-end loan balances to be relatively stable. Loans to any single client, equal to or greater than $20 million increased a substantial $600 million to $3.6 billion, or 36.7% of total gross loans driven by the aforementioned capital call lines of credit.

SVB benefited from solid investment securities gains and warrant gains. Indeed, net of noncontrolling interests, net gains on investment securities increased $4.4 million to $9.5 million. Meanwhile, net gains on equity warrant assets increased $3.7 million to $7.2 million. DBRS notes that both these gains were driven primarily by higher valuations, not realized gains. Overall, noninterest income, net of noncontrolling interests, totaled $67.5 million compared to $56.1 million in1Q13 with SVB’s core fee income remaining relatively stable at $36.5 million.

Compared to earlier guidance, the Company raised its NIM guidance 10 basis points for the year, but lowered its growth rate on core fee income to the low teens reflecting lower than originally expected foreign exchange fees.

Noninterest expense, net of noncontrolling interests, declined $5.8 million to $140.4 million sequentially reflecting higher seasonal expenses incurred in 1Q13.

Gross charge-offs were $15.4 million in 2Q13 compared to $5.6 million in the first quarter. The losses came primarily from the other commercial loan and hardware portfolios. Including $4.2 million of recoveries, net charge-offs were $11.2 million, or 0.49% of average gross loans (annualized). The provision for loan losses increased $12.8 million to $18.6 million with $8.8 million of the increase related to loan growth with the remainder providing for net charge-offs, as well as increasing the reserve for impaired loans. Overall, the allowance for loan losses remains sufficient at 1.23% of total gross loans.

With the increase in interest rates, the Company’s available-for-sale securities portfolio fair value declined by $173 million. DBRS notes that the duration of the portfolio remains relatively short at 2.7 years, but is up from 2.4 years at March 31, 2013.

Despite the adverse movement in accumulated other comprehensive income, SVB’s tangible common equity to tangible assets ratio increased 8 basis points during the quarter to 8.34% reflecting earnings retention and a smaller balance sheet. The Company continues to make progress improving it’s once most restrictive capital ratio, the Bank’s leverage ratio, which now stands at 7.66% at June 30, 2013.

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

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