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SVB Financial Group (SIVB - Analyst Report) reported second-quarter operating earnings of $1.06 per share. This outpaced both the Zacks Consensus Estimate and the prior-year quarter’s earnings of 94 cents.

The better-than-expected results were aided by growth in revenues, partially offset by a rise in operating expenses. An improvement in capital ratios as well as loan and deposit were among the positives. Further, asset quality was a mixed bag, while profitability ratios declined.

In the reported quarter, GAAP net income available to common stockholders was $48.6 million, up 2.1% from the year-ago quarter.

Performance Details

SVB Financial’s total revenue came in at $276.2 million, growing 15.0% from $240.2 million in the prior-year quarter. This easily beat the Zacks Consensus Estimate of $228.0 million.

Net interest income (NII) surged 11.9% year over year to $170.1 million. Further, net interest margin (NIM) increased 18 basis points (bps) from the prior-year quarter to 3.40%.

Non-interest income jumped 22.1% from the prior-year quarter to $98.2 million. All fee income components, except other income, rose in the reported quarter.

Non-interest expense was $143.3 million, up 27.6% from $135.8 million in the prior-year quarter. The expense crept up mainly due to increases in compensation and benefit costs, professional service expenses and FDIC assessment fees.

The efficiency ratio decreased to 59.01% from 62.70% in the prior-year quarter. A fall in efficiency ratio indicates improvement in profitability.

SVB Financial’s total loans as of Jun 30, 2013 were $9.6 billion, up 23.5% from $7.8 billion as of Jun 30, 2012. Total deposits rose 3.4% year over year to $18.7 billion.

Asset Quality

Asset quality witnessed mixed results in the reported quarter. The ratio of allowance for credit losses to total gross loans was 1.23%, down 2 bps from the prior-year quarter. Further, the ratio of net charge-offs to average gross loans came in at 0.49%, down 10 bps year over year.

However, provision for loan losses increased from $8.0 million in the prior-year quarter to $18.6 million.

Profitability and Capital Ratios

SVB Financial’s capital ratios improved, while profitability ratios deteriorated. As of Jun 30, 2013, Tier 1 risk-based capital ratio was 12.84%, up from 12.62% as of Jun 30, 2012.

Total risk-based capital ratio came in at 14.03%, up from 13.85% in the year-ago quarter. Tangible equity to tangible assets ratio was 8.34%, up from 8.06% as of Jun 30, 2012.

Annualized return on average assets was 0.88%, down from 0.92% as of Jun 30, 2012. Annualized return on common equity came in at 10.12%, decreasing from 11.21% as of Jun 30, 2012.


For 2013, management anticipates NII growth in high single digits and NIM in the range of 3.25–3.35%, mainly due to prepayment rates on mortgage-backed securities. Moreover, the core fee income growth rate is expected in low double digits.

Further, operating expenses (non-GAAP) will likely increase in the mid single-digit range. Additionally, average loan growth is expected in the low twenties, while average deposit balances will rise in mid single digits.

Net loan charge-offs are also anticipated in the range of 0.30–0.50% of average total gross loans. Nonperforming loans as a percentage of total gross loans and allowance for loan losses as a percentage of total gross performing loans will be comparable to the 2012 levels.

Performance of Other West Banks

Among other West banks, the earnings for First Republic Bank (FRC - Analyst Report), City National Corp. (CYN - Snapshot Report) and Zions Bancorp. (ZION - Analyst Report) beat the Zacks Consensus Estimate. The better-than-expected results for all 3 were mainly driven by top-line growth, partially offset by a rise in operating expenses.

Our Viewpoint

SVB Financial boasts an impressive growth story with steady progress on the organic front. Furthermore, the accelerating growth in loans and low-cost deposits, along with a decrease in long-term debt, are remarkable.

Improving credit quality and stabilizing capital ratios add strength to SVB Financial’s financials. However, increased expenses, a low interest rate environment, slow economic growth and stringent regulations are expected to dent its profitability in the near term.

SVB Financial currently carries a Zacks Rank #3 (Hold).

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