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SIVB > SEC Filings for SIVB > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for SVB FINANCIAL GROUP

Form 10-Q for SVB FINANCIAL GROUP


8-Nov-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 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 our joint venture
          bank in China and our branch in the UK)

? The expansion and growth of our noninterest income sources

? Our current expectation that we will exceed our internal performance targets for 2013


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?         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, and their potential impact on us

You can identify these and other forward-looking statements by the use of words such as "becoming," "may," "will," "should," "could," "would," "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 Third Quarter 2013 Performance Overall, we had a strong third quarter of fiscal 2013, which was reflective of the strength of our clients and our business. We had net income available to common stockholders of $67.6 million and diluted EPS was $1.46. This compares to diluted EPS of $0.94 in the third quarter of 2012. Included in our results for the third quarter of 2013 were pre-tax gains of $31.9 million from the increased valuation of one of our portfolio companies, FireEye, which included gains from equity warrant assets and gains from non-marketable and other securities, net of noncontrolling interests and related incentive compensation expense. We experienced strong growth in net interest income as a result of exceptional loan growth with a record high average balance of $9.5 billion. Our total client funds (which consist of on-balance sheet deposits and off-balance sheet client investment funds) increased to an all-time high of $45.3 billion as of September 30, 2013, reflecting growth from our existing clients and the addition of new clients. In addition, overall credit quality, liquidity and capital ratios continued to remain strong.
Third quarter 2013 results (compared to the third quarter 2012, where applicable) included:

?         Continued strong growth in our lending business with record high
          average loan balances of $9.5 billion, an increase of $1.6 billion, or
          20.7 percent.


?         Average total client funds (consisting of both average on-balance sheet
          deposits and off-balance sheet client investment funds) of $45.3
          billion, an increase of $6.5 billion, or 16.8 percent.


?         Net interest income (fully taxable equivalent basis) of $177.5 million,
          an increase of $22.6 million, or 14.6 percent, primarily due to an
          increase in interest income from loans attributable to growth in
          average balances, partially offset by lower overall loan yield. See
          "Results of Operations-Net Interest Income and Margin" for further
          details.


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?         Net interest margin of 3.32 percent, an increase of 20 basis points,
          primarily reflective of a favorable shift in the lower premium
          amortization expense on available-for-sale securities and growth in
          loans, partially offset by lower overall loan yield.


?         A provision for loan losses of $10.6 million, compared to $6.8 million.
          The provision of $10.6 million for the third quarter of 2013 was
          primarily driven by $5.5 million in net charge-offs, an increase of
          $3.1 million in the reserve for impaired loans and $2.3 million related
          to new loans during the quarter.


?         Core fee income (deposit service charges, letters of credit fees,
          credit card fees, client investment fees, and foreign exchange fees) of
          $37.2 million, an increase of $2.8 million, or 8.1 percent. This
          increase reflects increased client activity and continued growth in our
          business, primarily from credit card fees, foreign exchange fees and
          deposit service charges. See "Results of Operations-Noninterest Income"
          for a description and non-GAAP reconciliation of core fee income.


?         Gains on investment securities of $187.9 million, compared to $20.2
          million. Non-GAAP gains on investment securities, net of noncontrolling
          interests, were $36.5 million, compared to $7.5 million. See "Results
          of Operations-Noninterest Income-Gains on Investment Securities, Net"
          for further details and a non-GAAP reconciliation of gains on
          investment securities, net of noncontrolling interests.


?         Gains on equity warrant assets of $18.8 million, compared to $0.5
          million. This increase was primarily driven by IPO and M&A activity,
          and included $8.1 million from a single warrant client, FireEye.


?         Noninterest expense of $160.5 million, an increase of $25.4 million, or
          18.8 percent. The increase was primarily driven by higher incentive
          compensation and benefits expense as a result of our strong performance
          in the third quarter of 2013 and our current expectation that we will
          exceed our internal performance targets for 2013. Compensation and
          benefits expense increased $17.7M, or 22.3%, to $96.9M for the three
          months ended September 30, 2013, compared to $79.3M 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 $10.2
          billion at September 30, 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. Both SVB Financial's and Bank's Tier 1 leverage
          ratios increased from December 31, 2012 by 40 basis points to 7.46
          percent and 69 basis points to 8.06 percent, respectively, at September
          30, 2013, primarily reflective of strong earnings and
          additional-paid-capital, partially offset by the increase in
          risk-weighted assets.

A summary of our performance for the three and nine months ended September 30, 2013 and 2012 is as follows:

                                Three months ended September 30,                Nine months ended September 30,
(Dollars in thousands,
except per share data
and ratios)                    2013             2012        % Change          2013            2012        % Change
Income Statement:
Diluted earnings per
share                     $      1.46       $     0.94      55.3   %      $     3.43       $    2.79      22.9   %
Net income available to
common stockholders            67,621           42,289      59.9             157,096         124,682      26.0
Net interest income           177,096          154,430      14.7             510,346         457,301      11.6
Net interest margin              3.32 %           3.12 %      20   bps          3.32 %          3.21 %      11   bps
Provision for loan
losses                    $    10,638       $    6,788      56.7   %      $   35,023       $  29,316      19.5   %
Noninterest income            257,650           69,139        NM             434,493         208,858     108.0
Noninterest expense           160,524          135,171      18.8             452,830         402,949      12.4
Non-GAAP net income
available to common
stockholders (1)               67,621           42,289      59.9             157,096         119,148      31.8
Non-GAAP diluted
earnings per share (1)           1.46             0.94      55.3                3.43            2.67      28.5
Non-GAAP noninterest
income, net of
noncontrolling interest
and excluding gains on
sales of certain assets
(2)                           105,820           55,615      90.3             229,422         164,834      39.2
Non-GAAP noninterest
expense, net of
noncontrolling interest
(3)                           157,234          132,448      18.7             443,813         393,461      12.8


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Balance Sheet:
Average loans, net of
unearned income             $ 9,545,941     $ 7,907,606      20.7   %      $ 9,086,179     $ 7,318,537      24.2   %
Average
noninterest-bearing
demand deposits              13,665,460      12,914,697       5.8           13,437,503      12,403,438       8.3
Average interest-bearing
deposits                      5,894,428       5,345,647      10.3            5,551,857       5,143,756       7.9
Average total deposits       19,559,888      18,260,344       7.1           18,989,360      17,547,194       8.2
Earnings Ratios:
Return on average assets
(annualized) (4)                   1.16 %          0.77 %    50.6   %             0.93 %          0.79 %    17.7   %
Return on average SVBFG
stockholders' equity
(annualized) (5)                  14.05            9.44      48.8                11.06            9.77      13.2
Asset Quality Ratios:
Allowance for loan losses
as a percentage of total
period-end gross loans             1.26 %          1.23 %       3   bps           1.26 %          1.23 %       3   bps
Allowance for loan losses
for performing loans as a
percentage of total gross
performing loans                   1.13            1.16        (3 )               1.13            1.16        (3 )
Gross loan charge-offs as
a percentage of average
total gross loans
(annualized)                       0.34            0.23        11                 0.43            0.47        (4 )
Net loan charge-offs as a
percentage of average
total gross loans
(annualized)                       0.23            0.17         6                 0.31            0.32        (1 )
Capital Ratios:
Total risk-based capital
ratio                             14.16 %         14.34 %     (18 ) bps          14.16 %         14.34 %     (18 ) bps
Tier 1 risk-based capital
ratio                             12.96           13.07       (11 )              12.96           13.07       (11 )
Tier 1 leverage ratio              8.75            8.02        73                 8.75            8.02        73
Tangible common equity to
tangible assets (6)                8.19            8.27        (8 )               8.19            8.27        (8 )
Tangible common equity to
risk-weighted assets (6)          12.96           13.93       (97 )              12.96           13.93       (97 )
Bank total risk-based
capital ratio                     12.31           12.70       (39 )              12.31           12.70       (39 )
Bank tier 1 risk-based
capital ratio                     11.08           11.41       (33 )              11.08           11.41       (33 )
Bank tier 1 leverage
ratio                              7.46            7.00        46                 7.46            7.00        46
Bank tangible common
equity to tangible assets
(6)                                7.34            7.61       (27 )               7.34            7.61       (27 )
Bank tangible common
equity to risk-weighted
assets (6)                        11.17           12.40      (123 )              11.17           12.40      (123 )
Other Ratios:
Operating efficiency
ratio (7)                         36.89 %         60.33 %   (38.9 ) %            47.86 %         60.36 %   (20.7 ) %
Non-GAAP operating
efficiency ratio (3)              55.50           62.93     (11.8 )              59.89           63.11      (5.1 )
Book value per common
share (8)                   $     42.64     $     40.10       6.3          $     42.64     $     40.10       6.3
Other Statistics:
Average full-time
equivalent employees              1,675           1,594       5.1   %            1,662           1,572       5.7   %
Period-end full-time
equivalent employees              1,683           1,602       5.1                1,683           1,602       5.1

(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 and year-to-date average assets.

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

(6) 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.

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

(8) 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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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 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 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, 2013 and 2012 is as follows:

                                        Three months ended September 30,       Nine months ended September 30,
(Dollars in thousands, except per
share data and ratios)                       2013                2012               2013               2012
Net income available to common
stockholders                          $          67,621     $     42,289     $        157,096     $    124,682
Less: gains on sales of certain
available-for-sale securities (1)                     -                -                    -           (4,955 )
Tax impact of gains on sales of
certain available-for-sale
securities                                            -                -                    -            1,974
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
Non-GAAP net income available to
common stockholders                   $          67,621     $     42,289     $        157,096     $    119,148
GAAP earnings per common
share-diluted                         $            1.46     $       0.94     $           3.43     $       2.79
Less: gains on sales of certain
available-for-sale securities (1)                     -                -                    -            (0.11 )
Tax impact of gains on sales of
certain available-for-sale
securities                                            -                -                    -             0.05
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
Non-GAAP earnings per common
share-diluted                         $            1.46     $       0.94     $           3.43     $       2.67
Weighted average diluted common
shares outstanding                           46,202,409       44,914,564           45,765,307       44,692,224

(1) Gains on the sale of $316 million in certain available-for-sale securities in the second quarter of 2012.

(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.

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, 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.


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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.

                                                2013 Compared to 2012                                2013 Compared to 2012
                                      Three months ended September 30, increase       Nine months ended September 30, increase (decrease)
                                             (decrease) due to change in                               due to change in
(Dollars in thousands)                Volume             Rate             Total           Volume              Rate              Total
Interest income:
Federal Reserve deposits,
federal funds sold, securities
purchased under agreements to
resell and other short-term
investment securities             $      384         $    (357 )       $       27     $     (200 )       $      (270 )       $     (470 )
Available-for-sale securities
(taxable)                             (1,810 )           6,921              5,111         (2,454 )             6,527              4,073
Available-for-sale securities
. . .
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