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SIVB > SEC Filings for SIVB > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for SVB FINANCIAL GROUP


10-May-2013

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 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, 2012 ("2012 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 2012 Form 10-K. Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentations.
Management's Overview of First Quarter 2013 Performance Overall, we had a solid first quarter of 2013, which reflected the strength of our clients and our business. We had net income available to common stockholders of $40.9 million and diluted earnings per common share was $0.90, compared to $0.78 in the first quarter of 2012. In the first quarter of 2013, compared to the first quarter of 2012, we experienced strong growth in net interest income as a result of exceptional loan growth with record high average balances of $8.7 billion. Our total client funds (which consists of on-balance sheet deposits and off-balance sheet client investment funds) increased to an all time high of $42.3 billion as of March 31, 2013, reflecting growth from our existing clients and the addition of new clients. In addition, overall credit quality remained very strong, and we saw growth in fee income. Additionally, our liquidity and capital ratios continued to remain strong.
First quarter 2013 results (compared to the first quarter 2012, where applicable) included:

?         Continued strong growth in our lending business with record high
          average loan balances of $8.7 billion, an increase of $1.9 billion, or
          27.6 percent.


?         A provision for loan losses of $5.8 million, primarily attributable to
          net charge-offs of $4.3 million (or 0.20 percent of average total gross
          loans-annualized).


?         Average deposit balances of $18.8 billion, an increase of $1.8 billion,
          or 10.7 percent. Average total client funds (including both average
          on-balance sheet deposits and off-balance sheet client investment
          funds) were $41.3 billion, an increase of $5.4 billion, or 15.1
          percent.


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?         Net interest income (fully taxable equivalent basis) of $163.6 million,
          an increase of $12.2 million, or 8.1 percent, primarily due to an
          increase in interest income from loans attributable to growth in
          average balances of $1.9 billion. This increase was partially offset by
          lower yields earned on our overall loan portfolio. See "Results of
          Operations-Net Interest Income and Margin" for further details.


?         Our net interest margin decreased by 5 basis points to 3.25 percent,
          primarily reflective of a 69 basis point decrease in the overall yield
          of our loan portfolio. This decrease 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
          $36.6 million, an increase of $4.2 million, or 13.0 percent. This
          increase reflects increased client activity and continued growth in our
          business, primarily from foreign exchange fees, credit card fees and
          deposit service charges. See "Results of Operations-Noninterest Income"
          for a description and reconciliation of core fee income.


?          Gains on investment securities, net of noncontrolling interests, of
          $5.1 million, compared to $0.5 million. The gains for both periods were
          primarily from our non-marketable fund investments. 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 $149.0 million, an increase of $17.0 million, or
          12.9 percent. The increase was primarily driven by higher compensation
          expenses as a result of our strong financial performance and an
          increase in average full-time equivalent employees ("FTEs"), as well as
          increased premises and equipment and professional services expenses to
          support continued growth in our business and IT infrastructure
          initiatives. Average FTEs increased by 6.4 percent to 1,655 FTEs for
          the three months ended March 31, 2013, compared to 1,556 FTEs for the
          comparable 2012 period.


?         Overall, our liquidity remained strong based on the attributes of our
          period end available-for-sale securities portfolio, which totaled $10.9
          billion at March 31, 2013. Our available-for-sale securities portfolio
          continued to be a good source of liquidity as it was invested in high
          quality investments and generated steady monthly cash flows.
          Additionally, our available-for-sale securities portfolio continued to
          provide us with the ability to secure wholesale borrowings, as needed.


?         Overall, SVB Financial and the Bank continued to maintain strong
          capital positions. All of our capital ratios increased from December
          31, 2012 driven by strong quarterly earnings, while risk-weighted
          assets and average assets remained relatively flat. The Bank's Tier 1
          leverage ratio increased by 29 basis points to 7.35 percent at March 31
          2013, compared to 7.06 percent at December 31, 2012.


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A summary of our performance for the three months ended March 31, 2013 and 2012 is as follows:

                                                             Three months ended March 31,
(Dollars in thousands, except per share data and
ratios)                                                  2013            2012         % Change
Income Statement:
Diluted earnings per share                           $      0.90     $      0.78      15.4   %
Net income available to common stockholders               40,891          34,790      17.5
Net interest income                                      163,169         150,937       8.1
Net interest margin                                         3.25 %          3.30 %      (5 ) bps
Provision for loan losses                            $     5,813     $    14,529     (60.0 ) %
Noninterest income                                        78,604          59,293      32.6
Noninterest expense                                      149,014         132,012      12.9
Non-GAAP noninterest income, net of noncontrolling
interest (1)                                              56,114          51,375       9.2
Non-GAAP noninterest expense, net of
noncontrolling interest (2)                              146,154         129,194      13.1
Balance Sheet:
Average loans, net of unearned income                $ 8,680,917     $ 6,804,348      27.6   %
Average noninterest-bearing demand deposits           13,386,501      12,025,997      11.3
Average interest-bearing deposits                      5,399,012       4,939,766       9.3
Average total deposits                                18,785,513      16,965,763      10.7
Earnings Ratios:
Return on average assets (annualized) (3)                   0.74 %          0.69 %     7.2   %
Return on average SVBFG stockholders' equity
(annualized) (4)                                            8.89            8.61       3.3
Asset Quality Ratios:
Allowance for loan losses as a percentage of total
period-end gross loans                                      1.26 %          1.41 %     (15 ) bps
Allowance for loan losses for performing loans as
a percentage of total gross performing loans                1.18            1.16         2
Gross loan charge-offs as a percentage of average
total gross loans (annualized)                              0.26            0.41       (15 )
Net loan charge-offs as a percentage of average
total gross loans (annualized)                              0.20            0.21        (1 )
Capital Ratios:
Total risk-based capital ratio                             14.59 %         14.30 %      29   bps
Tier 1 risk-based capital ratio                            13.30           12.91        39
Tier 1 leverage ratio                                       8.39            8.04        35
Tangible common equity to tangible assets (5)               8.26            7.87        39
Tangible common equity to risk-weighted assets (5)         13.94           13.54        40
Bank total risk-based capital ratio                        13.01           12.59        42
Bank tier 1 risk-based capital ratio                       11.70           11.16        54
Bank tier 1 leverage ratio                                  7.35            6.94        41
Bank tangible common equity to tangible assets (5)          7.62            7.16        46
Bank tangible common equity to risk-weighted
assets (5)                                                 12.45           11.94        51
Other Ratios:
Operating efficiency ratio (6)                             61.52 %         62.65 %    (1.8 ) %
Non-GAAP operating efficiency ratio (2)                    66.53 %         63.72 %     4.4
Book value per common share (7)                      $     41.85     $     37.19      12.5
Other Statistics:
Average full-time equivalent employees                     1,655           1,556       6.4   %
Period-end full-time equivalent employees                  1,663           1,554       7.0

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

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

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

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

(5) 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.

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

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


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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 three months ended March 31, 2013 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 2012 Form 10-K. 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.


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                                                                     2013 Compared to 2012
                                                     Three months ended March 31, increase (decrease) due
                                                                         to change in
(Dollars in thousands)                                   Volume               Rate               Total
Interest income:
Federal Reserve deposits, federal funds sold,
securities purchased under agreements to resell
and other short-term investment securities           $      (314 )       $        (5 )       $      (319 )
Available-for-sale securities (taxable)                    1,606              (3,229 )            (1,623 )
Available-for-sale securities (non-taxable)                 (134 )               (21 )              (155 )
Loans, net of unearned income                             26,984             (12,701 )            14,283
Increase (decrease) in interest income, net               28,142             (15,956 )            12,186
Interest expense:
NOW deposits                                                  26                  12                  38
Money market deposits                                        396                 169                 565
Money market deposits in foreign offices                      (9 )                 -                  (9 )
Time deposits                                                 21                 (27 )                (6 )
Sweep deposits in foreign offices                            (18 )                 -                 (18 )
Total increase in deposits expense                           416                 154                 570
Short-term borrowings                                         18                  (1 )                17
5.375% Senior Notes                                            -                   6                   6
Junior Subordinated Debentures                                (4 )                 5                   1
5.70% Senior Notes                                          (503 )                 -                (503 )
6.05% Subordinated Notes                                      (2 )               (12 )               (14 )
Other long-term debt                                         (69 )                 -                 (69 )
Total decrease in borrowings expense                        (560 )                (2 )              (562 )
(Decrease) increase in interest expense, net                (144 )               152                   8
Increase (decrease) in net interest income           $    28,286         $   (16,108 )       $    12,178


Net Interest Income (Fully Taxable Equivalent Basis)
Three months ended March 31, 2013 and 2012

Net interest income increased by $12.2 million to $163.6 million for the three months ended March 31, 2013, compared to $151.4 million for the comparable 2012 period. Overall, we saw an increase in our net interest income primarily due to strong growth in average loan balances, partially offset by lower yields earned on our loans and available-for-sale securities.
The main factors affecting interest income and interest expense for the three months ended March 31, 2013, compared to the comparable 2012 period are discussed below:
Interest income for the three months ended March 31, 2013 increased by $12.2 million primarily due to:

?            A $14.3 million increase in interest income on loans to $123.7
             million for the three months ended March 31, 2013, compared to
             $109.5 million for the comparable 2012 period. This increase was
             reflective of an increase in average loan balances of $1.9 billion,
             partially offset by a decrease of 69 basis points in the overall
             yield on our loan portfolio. The decrease in yields was reflective
             of a continued change in the mix of our loans that are indexed to
             the national Prime rate instead of the SVB Prime rate. Additionally,
             loan yields were impacted by our success in growing our later stage
             client portfolio, which typically is benchmarked to three-month
             LIBOR and bears lower credit risk and therefore lower relative
             yield.


?            A $1.8 million decrease in interest income on available-for-sale
             securities to $47.0 million for the three months ended March 31,
             2013, compared to $48.8 million for the comparable 2012 period. The
             decrease was reflective of a decrease of 12 basis points in overall
             yields, partially offset by an increase related to higher average
             balances of $390 million. The decrease of 12 basis points in overall
             yields was comprised of a 19 basis points decrease in coupon yields,
             partially offset by a 7 basis points increase from lower premium
             amortization expense. The decrease in coupon yields was driven by
             paydowns of higher-yielding securities being reinvested in
             lower-yielding securities in the low interest rate environment.
             Premium amortization


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expense decreased by $1.5 million to $8.3 million for the three months ended March 31, 2013. As of March 31, 2013, the remaining unamortized premium balance on our available-for-sale securities portfolio was $106 million.
Interest expense for the three months ended March 31, 2013 remained flat at $7.8 million. The items impacting interest expense were as follows:

?            An increase in interest expense from interest-bearing deposits of
             $0.6 million, mainly attributable to an increase of $459 million in
             average interest-bearing deposits.


?            A decrease in interest expense of $0.6 million related to our
             long-term debt, mainly attributable to a decrease of $0.5 million
             related to our 5.70% Senior Notes, which matured on June 1, 2012.

Net Interest Margin (Fully Taxable Equivalent Basis) Our net interest margin decreased by 5 basis points to 3.25 percent for the three months ended March 31, 2013, compared to 3.30 percent for the comparable 2012 period. The decrease in our net interest margin was primarily driven by lower overall yields on our loans and available-for-sale securities (as discussed above), largely offset by a favorable change in the mix of our interest-earnings assets. Our loan portfolio (higher-yielding assets) comprised 42.6 percent of our average interest-earning assets during the three months ended March 31, 2013, compared to 36.8 percent for the comparable 2012 period. Our interest-earning cash and cash equivalents (lower-yielding assets) comprised 4.0 percent of our average interest-earning assets during the three months ended March 31, 2013, compared to 6.3 percent for the comparable 2012 period.


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