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SVB Financial Group (SIVB - Analyst Report) reported first-quarter 2013 earnings of 90 cents per share, marginally surpassing the Zacks Consensus Estimate of 88 cents. This also compared favorably with the prior-year quarter’s earnings of 78 cents.

Better-than-expected results benefited from growth in top line, partially offset by a rise in operating expenses. Improving asset quality as well as capital and profitability ratios, and stable loan and deposit growth were also among the positives.

In the reported quarter, net income came in at $40.9 million, up 17.5% from $34.8 million in the year-ago quarter.

Performance Details

SVB Financial’s total revenue in the first quarter came in at $249.6 million, growing 14.5% from $218.1 million in the prior-year quarter. This was also ahead of the Zacks Consensus Estimate of $225.0 million.

Net interest income (NII) climbed 8.1% year over year to $163.2 million. However, net interest margin (NIM) decreased 53 basis points (bps) from the prior-year quarter to 3.25%.

Non-interest income soared 32.6% from the prior-year quarter to $78.6 million. The rise was primarily driven by higher gains on investment securities and derivative securities, credit card fees, deposit service charges and client investment fees. These were partially offset by lower other income.

Non-interest expense was $149.0 million, up 12.9% from $132.0 million in the prior-year quarter. The expense crept up due to increases in compensation and benefit costs, professional services expense and higher FDIC assessment fees.

The efficiency ratio decreased to 66.53% from 63.72% in the prior-year quarter. A rise in efficiency ratio indicates decline in profitability.

SVB Financial’s total loans as of Mar 31, 2013 were $8.8 billion, up 24.2% from $7.1 billion as of Mar 31, 2012. Total deposits surged 15.5% year over year to $19.3 billion.

Asset Quality

Asset quality witnessed an improvement in the reported quarter. The ratio of allowance for credit losses to total gross loans was 1.26%, down 15 bps from the prior-year quarter. Further, the ratio of net charge-offs to average gross loans came in at 0.20%, down 1 basis point year over year.

Moreover, provision for loan losses decreased 60.0% from the year-ago quarter to $5.8 million. However, total nonperforming assets came in at $44.4 million, up 6.4% from the prior-year quarter.

Profitability and Capital Ratios

SVB Financial’s capital and profitability ratios improved in the quarter. As of Mar 31, 2013, tier 1 risk-based capital ratio was 13.30%, up from 12.91% as of Mar 31, 2012.

Total risk-based capital ratio came in at 14.59% compared with 14.30% in the year-ago quarter. Tangible equity to tangible assets ratio was 8.26%, up from 7.87% as of Mar 31, 2012.

The annualized return on average assets was 0.74%, up from 0.69% as of Mar 31, 2012. Annualized return on common equity came in at 8.89%, up from 8.61% as of Mar 31, 2012.

Guidance

For 2013, management anticipates NII growth in high single digits and NIM in the range of 3.15–3.25%, mainly due to prepayment rates on mortgage-backed securities. Moreover, the core fee income growth rate is expected in the low teens.

Further, operating expenses (non-GAAP) would increase 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.

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.

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 its 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 #2 (Buy). Other West Banks that are worth considering include Glacier Bancorp Inc. (GBCI - Snapshot Report), Preferred Bank (PFBC - Snapshot Report) and BofI Holding, Inc. (BOFI - Snapshot Report). While the first 2 stocks carry a Zacks Rank #1 (Strong Buy), the third has same rank as SVB Financial.

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