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SVB Financial Group (SIVB - Analyst Report) reported its fourth quarter 2012 adjusted earnings of $1.12 per share, significantly surpassing the Zacks Consensus Estimate of 88 cents. This also compared favorably with the prior-year quarter’s earnings of 91 cents.

Better-than-expected quarterly results came on the back of improved top line, partially offset by an increase in operating expenses. Moreover, stable capital and profitability ratios as well as decent loan and deposit growth were the other highlights. However, credit quality slightly deteriorated during the quarter.

In the reported quarter, net income came in at $50.4 million compared with $35.6 million in the year-ago period.

In 2012, adjusted earnings per share stood at $3.79 per share, outpacing the Zacks Consensus Estimate of $3.66 by 3.6% and last year’s earnings of $3.38 by 12.1%. After considering certain non-recurring items, net income was $175.1 million or $3.91 per share compared with $171.9 million or $3.94 per share in 2011.

Behind the Headlines

SVB Financial’s total revenue in the fourth quarter came in at $294.9 million, growing 33.5% from $220.9 million in the prior-year quarter. Also, this is higher than the Zacks Consensus Estimate of $215.0 million.

In 2012, total revenue was $984.3 million, up 3.6% year over year. This came significantly higher than the Zacks Consensus Estimate of $837.0 million.

Net interest income (NII) climbed 14.6% year over year to $160.6 million. Also, net interest margin (NIM) increased 3 basis points (bps) from the prior-year quarter to 3.13%.

Non-interest income soared 73.4% from the prior-year quarter to $126.7 million. The rise was primarily driven by higher gains on investment securities, credit card fees and client investment fees. These positives were partially offset by lower gains on derivative securities.

Non-interest expense was $143.0 million, up 6.2% from $134.7 million in the prior-year quarter. The rise was mainly a result of higher compensation and benefits costs and increase in FDIC assessment fees.

The efficiency ratio declined to 59.67% from 65.15% in the prior quarter. A fall in efficiency ratio indicates improvement in profitability.

SVB Financial’s total loans as of Dec 31, 2012 were $8.9 billion, rising 28.4% from $7.0 billion as of Dec 31, 2011. Total deposits jumped 14.8% year over year to $19.2 billion.

Asset Quality

Asset quality marginally deteriorated in the reported quarter. The ratio of allowance for credit losses to total gross loans was 1.23%, in line with the prior quarter but dipping 5 bps from the prior-year quarter.

Further, the ratio of net charge offs to average gross loans came in at 0.28%, up 11 bps sequentially and 6 bps year over year. Moreover, provision for loan losses increased significantly from the previous quarter and 82.1% from the year-ago quarter to $15.0 million.

Further, total nonperforming assets stood at $38.3 million, down 2.8% from last quarter but up 4.5% from the prior-year quarter.

Profitability and Capital Ratios

SVB Financial’s capital ratios exhibited a modestly cautious approach. As of Dec 31, 2012, tier 1 risk-based capital ratio was 12.79% compared with 13.07% as of Sep 30, 2012 and 12.62% as of Dec 31, 2011.

Total risk-based capital ratio came in at 14.05% as against 14.34% in the prior quarter and 13.95% in the year-ago quarter. Tangible equity to tangible assets ratio stood at 8.04%, down from 8.27% as of Sep 30, 2012 but up from 7.86% as of Dec 31, 2011.

SVB Financial’s profitability ratios witnessed improvement. The annualized return on average assets was 0.90%, up from 0.77% as of Sep 30, 2012 and 0.72% as of Dec 31, 2011. Annualized return on common equity came in at 10.99%, up from 9.44% as of Sep 30, 2012 and 8.99% as of Dec 31, 2011.

Guidance

For 2013, management anticipates NII growth in the mid-single digits and NIM in the range of 3.10%–3.20%, mainly due to prepayment rates on mortgage-backed securities. Moreover, core fee income growth rate is expected to be in the mid teens.

Further, operating expenses (non-GAAP) would grow in the mid-single digits range. Additionally, average loan growth is expected in the low twenties, while average deposit balances would grow in the mid-single digits.

Moreover, net loan charge-offs is 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.

Our Viewpoint

SVB Financial boasts an impressive growth story with a steady progress on the organic front. Moreover, accelerating growth in loans and low-cost deposits, along with significant decline in long-term debt, are remarkable. Improving credit quality and stabilizing capital ratios further strength its financials. Yet, elevated expenses, low interest rate environment, slow economic growth rate and stringent regulations are expected to marginally dent its profitability in the near term.

SVB Financial currently retains a Zacks Rank #3 (Hold). However, other west banks that are worth considering include Central Valley Community Bancorp (CVCY - Snapshot Report) and Western Alliance Bancorporation (WAL - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy). Another stock in the same sector, BofI Holding, Inc. (BOFI - Snapshot Report) carries a Zacks Rank #2 (Buy).

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