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SIVB > SEC Filings for SIVB > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for SVB FINANCIAL GROUP


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including in particular "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Part I, Item 2 of this report, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management has in the past and might in the future make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements are statements that are not historical facts. Broadly speaking, forward-looking statements include, but are not limited to, the following:
Projections of our net interest income, noninterest income, earnings per share, noninterest expenses (including professional services, compliance, compensation and other costs), cash flows, balance sheet positions, capital expenditures, liquidity and capitalization or other financial items

Descriptions of our strategic initiatives, plans or objectives for future operations, including pending sales or acquisitions

Forecasts of venture capital/private equity funding and investment levels

         Forecasts of future interest rates, economic performance, and income
          from investments


         Forecasts of expected levels of provisions for loan losses, loan growth
          and client funds

Descriptions of assumptions underlying or relating to any of the foregoing

In this Quarterly Report on Form 10-Q, we make forward-looking statements, including, but not limited to, those discussing our management's expectations about:

?         Market and economic conditions (including interest rate environment,
          and levels of public offerings, mergers/acquisitions and venture
          capital financing activities) and the associated impact on us


?         The sufficiency of our capital, including sources of capital (such as
          funds generated through retained earnings) and the extent to which
          capital may be used or required


?         The adequacy of our liquidity position, including sources of liquidity
          (such as funds generated through retained earnings)


?         The adequacy of our liquidity position, including sources of liquidity
          (such as funds generated through retained earnings)


?         The realization, timing, valuation and performance of equity or other
          investments

? The likelihood that the market value of our impaired investments will recover

?         Our intent to sell our investment securities prior to recovery of our
          cost basis, or the likelihood of such


?         Expected cash requirements for unfunded commitments to certain
          investments, including capital calls


?         Our overall management of interest rate risk, including managing the
          sensitivity of our interest-earning assets and interest-bearing
          liabilities to interest rates, and the impact to earnings from a change
          in interest rates


?         The credit quality of our loan portfolio, including levels and trends
          of nonperforming loans, impaired loans, criticized loans and troubled
          debt restructurings


?         The adequacy of reserves (including allowance for loan and lease
          losses) and the appropriateness of our methodology for calculating such
          reserves

? The level of loan and deposit balances

? The level of client investment fees and associated margins

? The profitability of our products and services

?         Our strategic initiatives, including the expansion of operations in
          China, India, Israel, the UK and elsewhere (such as establishing our
          joint venture bank in China and a branch in the UK)


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? The expansion and growth of our noninterest income sources

?         Distributions of venture capital, private equity or debt fund
          investment proceeds; intentions to sell such fund investments


?         The changes in, or adequacy of, our unrecognized tax benefits and any
          associated impact

? The impact from the IRS audit examination results

? The extent to which counterparties, including those to our forward and option contracts, will perform their contractual obligations

? The effect of application of certain accounting pronouncements

? The effect of lawsuits and claims

?         Regulatory developments, including the nature and timing of the
          adoption and effectiveness of new requirements under the Dodd-Frank Act
          (as defined below), Basel guidelines, and other applicable laws and
          regulations

You can identify these and other forward-looking statements by the use of words such as "becoming," "may," "will," "should," "predicts," "potential," "continue," "anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends," the negative of such words, or comparable terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we have based these expectations on our beliefs as well as our assumptions, and such expectations may prove to be incorrect. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our management's forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see "Risk Factors" set forth in our Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K"), as filed with the SEC. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this report. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this filing are made only as of the date of this filing. We assume no obligation and do not intend to revise or update any forward-looking statements contained in this Quarterly Report on Form 10-Q. The following discussion and analysis of financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and accompanying notes as presented in Part I, Item 1 of this report and in conjunction with our 2011 Form 10-K. Reclassifications
Certain reclassifications have been made to prior period results to conform to the current period's presentations. Such reclassifications had no effect on our results of operations or stockholders' equity. Management's Overview of Third Quarter 2012 Performance Overall, we had a strong third quarter of 2012, which reflected the strength of our clients and our business. We had net income available to common stockholders of $42.3 million and diluted earnings per common share of $0.94. In the third quarter of 2012, compared to the third quarter of 2011, we experienced strong growth in net interest income as a result of exceptional loan growth during the quarter with record high average balances of $7.9 billion. Our total client funds, which consists of on-balance sheet deposits and off-balance sheet client investment funds, also increased reflecting growth from our existing clients and the addition of new clients. In addition, overall credit quality remains strong, and we saw continued growth in fee income and solid gains from our investment securities portfolio. Additionally, our liquidity and capital ratios continued to remain strong.
Third quarter 2012 results (compared to the third quarter 2011, where applicable) included:

?         Continued strong growth in our lending business with record high
          average loan balances of $7.9 billion, an increase of $1.9 billion, or
          31.6 percent.


?         A provision for loan losses of $6.8 million, primarily attributable to
          loan growth. Net charge-offs of $3.4 million (or 0.17 percent of
          average total gross loans-annualized) for the third quarter of 2012
          reflects the strong overall credit quality of our portfolio.


?         Average deposit balances of $18.3 billion, an increase of $2.5 billion,
          or 15.5 percent. Average total client funds


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(including both average on-balance sheet deposits and off-balance sheet client investment funds) were $39.2 billion, an increase of $5.5 billion, or 16.2 percent.

?         Net interest income (fully taxable equivalent basis) of $154.9 million,
          an increase of $19.0 million, primarily due to an increase in interest
          income from loans mainly attributable to growth in average balances of
          $1.9 billion. These increases were partially offset by lower yields
          earned on our overall loan portfolio.


?         Our net interest margin remained relatively flat at 3.12 percent,
          compared to 3.13 percent. Our net interest margin was impacted by
          decrease in the overall yield of our available-for-sale securities due
          to increased premium amortization expense from increasing prepayment
          rates on our mortgage-backed securities and a decrease in the yield of
          our loan portfolio. The decrease in yields was largely offset by strong
          growth in average loan balances, which has resulted in a favorable
          change in our mix of interest-earning assets.


?         Core fee income (deposit service charges, letters of credit fees,
          credit card fees, client investment fees, and foreign exchange fees) of
          $34.4 million, an increase of $4.1 million, or 13.5 percent. This
          increase reflects increased client activity and continued growth in our
          business, primarily from credit card fees, client investments fees and
          foreign exchange fees. See "Results of Operations-Noninterest Income"
          for a description and reconciliation of core fee income.


?          Gains on investment securities, net of noncontrolling interests, of
          $7.5 million, compared to $9.3 million. See "Results of
          Operations-Noninterest Income-Gains on Investment Securities, Net" for
          further details and a reconciliation of gains on investment securities,
          net of noncontrolling interests.


?         Noninterest expense of $135.2 million, an increase of $7.7 million, or
          6.1 percent. The increase was primarily due to increased premises and
          equipment and professional services expenses to support continued
          growth in our business and IT infrastructure initiatives. In addition,
          average full-time equivalent employees ("FTEs") increased by 7.8
          percent to 1,594 average FTEs, compared to 1,478 average FTEs, which
          contributed to an increase in salaries and wages expense.


?         Overall, our liquidity remained strong based on our period end
          available-for-sale securities portfolio of $11.0 billion at
          September 30, 2012. Our available-for-sale securities portfolio
          continues to be a good source of liquidity as it is invested in high
          quality investments and generates substantial monthly cash flows.
          Additionally, our available-for-sale securities portfolio provides us
          the ability to secure wholesale borrowings, if needed.

A summary of our performance for the three and nine months ended September 30, 2012 and 2011 is as follows:

                                         Three months ended September 30,                 Nine months ended September 30,
 (Dollars in thousands,
 except per share data and
ratios)                                2012             2011         % Change          2012             2011         % Change
Income Statement:
Diluted earnings per share         $      0.94     $      0.86        9.3   %      $      2.79     $      3.12      (10.6 ) %
Net income available to common
stockholders                            42,289          37,571       12.6              124,682         136,328       (8.5 )
Net interest income                    154,430         135,455       14.0              457,301         386,207       18.4
Net interest margin                       3.12 %          3.13  %      (1 ) bps           3.21 %          3.07  %      14   bps
Provision for (reduction of)
loan losses                        $     6,788     $       769         NM   %      $    29,316     $    (2,144 )       NM   %
Noninterest income                      69,139          95,611      (27.7 )            208,858         309,273      (32.5 )
Noninterest expense                    135,171         127,451        6.1              402,949         365,918       10.1
Non-GAAP net income available to
common stockholders (1)                 42,289          37,571       12.6              119,148         111,941        6.4
Non-GAAP diluted earnings per
share (1)                                 0.94            0.86        9.3                 2.67            2.57        3.9
Non-GAAP noninterest income, net
of noncontrolling interest and
excluding gains on sales of
available-for-sale-securities
(2)                                     55,615          54,372        2.3              164,834         160,600        2.6
Non-GAAP noninterest expense,
net of noncontrolling interest
and excluding net gains from
debt repurchases (3)                   132,448         124,685        6.2              393,461         360,173        9.2
Balance Sheet:
Average loans, net of unearned
income                             $ 7,907,606     $ 6,006,614       31.6   %      $ 7,318,537     $ 5,619,709       30.2   %
Average noninterest-bearing
demand deposits                     12,914,697      10,634,757       21.4           12,403,438       9,783,426       26.8
Average interest-bearing
deposits                             5,345,647       5,169,279        3.4            5,143,756       5,467,512       (5.9 )
Average total deposits              18,260,344      15,804,036       15.5           17,547,194      15,250,938       15.1


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Earnings Ratios:
Return on average assets
(annualized) (4)                 0.77 %        0.79  %   (2.5 ) %           0.79 %        0.99  %   (20.2 ) %
Return on average common
SVBFG stockholders'
equity (annualized) (5)          9.44          9.93      (4.9 )             9.77         12.95      (24.6 )
Asset Quality Ratios:
Allowance for loan losses
as a percentage of total
period-end gross loans           1.23 %        1.34  %    (11 ) bps         1.23 %        1.34  %     (11 ) bps
Allowance for loan losses
for performing loans as a
percentage of total gross
performing loans                 1.16          1.25        (9 )             1.16          1.25         (9 )
Gross loan charge-offs as
a percentage of average
total gross loans
(annualized)                     0.23          0.54       (31 )             0.47          0.40          7
Net loan charge-offs
(recoveries) as a
percentage of average
total gross loans
(annualized)                     0.17         (0.15 )      32               0.32         (0.11 )       43
Capital Ratios:
Total risk-based capital
ratio (6)                       14.34 %       14.81  %    (47 ) bps        14.34 %       14.81  %     (47 ) bps
Tier 1 risk-based capital
ratio (6)                       13.07         13.42       (35 )            13.07         13.42        (35 )
Tier 1 leverage ratio            8.02          8.01         1               8.02          8.01          1
Tangible common equity to
tangible assets (7)              8.27          8.00        27               8.27          8.00         27
Tangible common equity to
risk-weighted assets (6)
(7)                             13.93         14.21       (28 )            13.93         14.21        (28 )
Bank total risk-based
capital ratio (6)               12.70         13.07       (37 )            12.70         13.07        (37 )
Bank tier 1 risk-based
capital ratio (6)               11.41         11.63       (22 )            11.41         11.63        (22 )
Bank tier 1 leverage
ratio                            7.00          6.93         7               7.00          6.93          7
Bank tangible common
equity to tangible assets
(7)                              7.61          7.31        30               7.61          7.31         30
Bank tangible common
equity to risk-weighted
assets (6) (7)                  12.40         12.60       (20 )            12.40         12.60        (20 )
Other Ratios:
Operating efficiency
ratio (8)                       60.33 %       55.04  %    9.6   %          60.36 %       52.50  %    15.0   %
Non-GAAP operating
efficiency ratio (3)            62.93 %       65.53  %   (4.0 )            63.11 %       65.70  %    (3.9 )
Book value per common
share (9)                   $   40.10     $   35.50      13.0          $   40.10     $   35.50       13.0
Other Statistics:
Average full-time
equivalent employees            1,594         1,478       7.8   %          1,572         1,428       10.1   %
Period-end full-time
equivalent employees            1,602         1,504       6.5              1,602         1,504        6.5

NM-Not meaningful
(1) See "Non-GAAP Net Income and Non-GAAP Diluted Earnings Per Common Share" for a description and reconciliation of non-GAAP net income available to common stockholders and non-GAAP diluted earnings per share.

(2) See "Results of Operations-Noninterest Income" for a description and reconciliation of non-GAAP noninterest income.

(3) See "Results of Operations-Noninterest Expense" for a description and reconciliation of non-GAAP noninterest expense and non-GAAP operating efficiency ratio.

(4) Ratio represents annualized consolidated net income available to common stockholders divided by quarterly average assets.

(5) Ratio represents annualized consolidated net income available to common stockholders divided by quarterly average SVBFG stockholders' equity.

(6) Our risk-weighted assets at September 30, 2012 reflect a refinement in our determination of certain unfunded credit commitments related to the contractual borrowing base.

(7) See "Capital Resources-Capital Ratios" for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets.

(8) The operating efficiency ratio is calculated by dividing total noninterest expense by total taxable-equivalent net interest income plus noninterest income.

(9) Book value per common share is calculated by dividing total SVBFG stockholders' equity by total outstanding common shares at period-end.

Non-GAAP Net Income and Non-GAAP Diluted Earnings Per Common Share We use and report non-GAAP net income and non-GAAP diluted earnings per common share, which excludes gains from sales of certain available-for-sale securities and net gains from debt repurchases and termination of corresponding interest rate swaps, as well as gains from the sale of certain assets related to our equity management services business. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that do not occur every reporting period. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and related trends, and when planning, forecasting and analyzing future periods. However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or preferable to, financial measures prepared in


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accordance with GAAP.
A reconciliation of GAAP to non-GAAP net income available to common stockholders and non-GAAP diluted earnings per common share for the three and nine months ended September 30, 2012 and 2011 is as follows:

                                          Three months ended September 30,         Nine months ended September 30,
(Dollars in thousands, except per
share data and ratios)                         2012                2011               2012                 2011
Net income available to common
stockholders                            $          42,289     $     37,571     $       124,682       $       136,328
Less: gains on sales of
available-for-sale securities (1)                       -                -              (4,955 )             (37,314 )
Tax impact of gains on sales of
available-for-sale securities                           -                -               1,974                14,810
Less: gains on the sale of certain
assets related to our equity
management services business (2)                        -                -              (4,243 )                   -
Tax impact of gains on the sale of
certain assets related to our equity
management services business                            -                -               1,690                     -
Less: net gain from note repurchases
and termination of corresponding
interest rate swaps (3)                                 -                -                   -                (3,123 )
Tax impact of net gain from note
repurchases and termination of
corresponding interest rate swaps                       -                -                   -                 1,240
Non-GAAP net income available to
common stockholders                     $          42,289     $     37,571     $       119,148       $       111,941
GAAP earnings per common
share-diluted                                        0.94             0.86                2.79                  3.12
Less: gains on sales of
available-for-sale securities (1)                       -                -               (0.11 )               (0.85 )
Tax impact of gains on sales of
available-for-sale securities                           -                -                0.05                  0.34
Less: gains on the sale of certain
assets related to our equity
management services business (2)                        -                -               (0.10 )                   -
Tax impact of gains on the sale of
certain assets related to our equity
management services business                            -                -                0.04                     -
Less: net gain from note repurchases
and termination of corresponding
interest rate swaps (3)                                 -                -                   -                 (0.07 )
Tax impact of net gain from note
repurchases and termination of
corresponding interest rate swaps                       -                -                   -                  0.03
Non-GAAP earnings per common
share-diluted                                        0.94             0.86                2.67                  2.57
Weighted average diluted common
shares outstanding                             44,914,564       43,791,238          44,692,224            43,641,185

(1) Gains on the sales of $315.7 million and $1.4 billion in certain available-for-sale securities in the second quarters of 2012 and 2011, respectively.

(2) Net gains of $4.2 million from the sale of certain assets related to our equity management services business in the second quarter of 2012.

(3) Net gains of $3.1 million from the repurchase of $108.6 million of our 5.70% Senior Notes and $204.0 million of our 6.05% Subordinated Notes and the termination of the corresponding portions of interest rate swaps in the second quarter of 2011.

Critical Accounting Policies and Estimates The accompanying management's discussion and analysis of results of operations and financial condition is based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. Management evaluates estimates and assumptions on an ongoing basis. Management bases its estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.
There have been no significant changes during the nine months ended September 30, 2012 to the items that we disclosed as our critical accounting policies and estimates in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Part II, Item 7 of our 2011 Form 10-K.


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Results of Operations
Net Interest Income and Margin (Fully Taxable Equivalent Basis) Net interest income is defined as the difference between interest earned on loans, available-for-sale securities and short-term investment securities, and interest paid on funding sources. Net interest income is our principal source of revenue. Net interest margin is defined as the amount of annualized net interest income, on a fully taxable equivalent basis, expressed as a percentage of average interest-earning assets. Net interest income and net interest margin are presented on a fully taxable equivalent basis to consistently reflect income from taxable loans and securities and tax-exempt securities based on the federal statutory tax rate of 35.0 percent.
Analysis of Net Interest Income Changes Due to Volume and Rate (Fully Taxable Equivalent Basis)
Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume change." Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as "rate change." The following table sets forth changes in interest income for each major category of interest-earning assets and interest expense for each major category of interest-bearing liabilities. The table also reflects the amount of simultaneous changes attributable to both volume and rate changes for the years indicated. For this table, changes that are not solely due to either volume or rate are allocated in proportion to the percentage changes in average volume and average rate.

                                                  2012 Compared to 2011                                 2012 Compared to 2011
                                        Three months ended September 30, increase        Nine months ended September 30, increase (decrease)
. . .
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