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SIVB > SEC Filings for SIVB > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for SVB FINANCIAL GROUP

Form 10-K for SVB FINANCIAL GROUP


27-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations contains forward-looking statements. These statements are based on current expectations and assumptions, which are subject to risks and uncertainties. See our cautionary language at the beginning of this report under "Forward Looking Statements". Actual results could differ materially because of various factors, including but not limited to those discussed in "Risk Factors," under Part I, Item 1A.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and supplementary data as presented in Item 8 of this report. Certain reclassifications have been made to prior years' results to conform to the current period's presentations. Such reclassifications had no effect on our results of operations or stockholders' equity. Overview of Company Operations
SVB Financial is a diversified financial services company, as well as a bank holding company and a financial holding company. SVB Financial was incorporated in the state of Delaware in March 1999. Through our various subsidiaries and divisions, we offer a variety of banking and financial products and services. For 30 years, we have been dedicated to helping entrepreneurs succeed, especially in the technology, life science, venture capital/private equity and premium wine industries. We provide our clients of all sizes and stages with a diverse set of products and services to support them through all stages of their life cycles.
We offer commercial and private banking products and services through our principal subsidiary, the Bank, which is a California-state chartered bank founded in 1983 and a member of the Federal Reserve System. Through its subsidiaries, the Bank also offers, investment advisory, asset management, private wealth management and brokerage services. We also offer non-banking products and services, such as funds management, venture capital and private equity investment, and business valuation services, through our subsidiaries and divisions.
Management's Overview of 2013 Financial Performance Overall, we had another strong year in 2013, which reflected the strength of our clients and our business. We had record net income available to common stockholders of $215.9 million, with a diluted EPS of $4.70 in 2013, compared to $3.91 in 2012. In 2013, compared to 2012, we experienced strong growth in net interest income as a result of outstanding loan growth with a record high average balance of $9.4 billion. We also experienced strong growth in noninterest income as a result of exceptional gains on investment securities, net, and equity warrant assets. Included in our results for the year were pre-tax gains of $55.0 million from the increased valuation of two of our portfolio companies, FireEye, Inc. ("FireEye") and Twitter, Inc. ("Twitter"), which included gains from equity warrant assets and gains from non-marketable and other securities, net of noncontrolling interests. Our total client funds, which consist of on-balance sheet deposits and off-balance sheet client investment funds, also increased, reflecting growth from our existing clients and new clients. In addition, overall credit quality remained strong, we saw continued growth in fee income and our liquidity and capital ratios continued to remain strong.
2013 results (compared to 2012, where applicable) reflected strong performance across all areas of our businesses and included:
?         Average loan balances of $9.4 billion, an increase of $1.8 billion, or
          23.7 percent. Period-end loan balances were $10.9 billion, an increase
          of $2.0 billion, or 21.9 percent.


?         Average deposit balances of $19.6 billion, an increase of $1.7 billion,
          or 9.5 percent. Period-end deposit balances were $22.5 billion, an
          increase of $3.3 billion, 17.2 percent.


?         Average total client funds (including both on-balance sheet deposits
          and off-balance sheet client investment funds) were $43.8 billion, an
          increase of $5.7 billion, or 15.0 percent. Period-end total client
          funds were $48.8 billion, an increase of $7.1 billion, or 17.1 percent.


?         Net interest income (fully taxable equivalent basis) of $699.1 million,
          an increase of $79.3 million, primarily due to an increase in interest
          income from loans attributable to growth in average balances of $1.8
          billion. This increase was partially offset by a decrease in the
          overall yield of our loan portfolio from a shift in the mix of our late
          stage and sponsor-led buyout portfolios from national Prime rate, to
          LIBOR, indexed loans, in addition to, lower rates on existing and new
          capital call lines, as a result of increased competition.


?         Our net interest margin increased to 3.29 percent, compared to 3.19
          percent, primarily due to growth in average loan balances
          (higher-yielding assets), partially offset by lower loan yields from a
          continued shift in the mix of our loans as noted previously.


?         A provision for loan losses of $63.7 million, compared to $44.3
          million. The provision of $63.7 million in 2013 was primarily driven by
          net charge-offs of $31.5 million and period-end loan growth of $2.0
          billion resulting in a provision


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of $21.9 million. Net charge-offs in 2013 were 0.33 percent of average total gross loans, reflecting the strong overall credit quality of our portfolio. ? Non-GAAP core fee income (deposit service charges, letters of credit fees, credit card fees, lending related fees, client investment fees, and foreign exchange fees) of $175.5 million, an increase of $17.1 million, or 10.8 percent. This increase reflects increased client activity and continued growth in our business, primarily from credit card fees, foreign exchange fees and lending related fees. See "Results of Operations-Noninterest Income" for a description and reconciliation of non-GAAP core fee income.

?         Non-GAAP net gains on investment securities, net of noncontrolling
          interests and excluding gains on sales of certain-available-for-sale
          securities of $77.3 million compared to $31.5 million. The increase was
          primarily related to strong IPO and M&A activity with primary
          contributions from FireEye and Twitter. See "Results of
          Operations-Noninterest Income-Gains on Investment Securities, Net" for
          further details and a reconciliation of non-GAAP net gains on
          investment securities, net of noncontrolling interests.


?         Gains of $46.1 million from equity warrant assets, an increase of $26.7
          million, or 137.8 percent. The increase was primarily driven by healthy
          IPO and M&A activity, including the FireEye and Twitter IPOs.


?         Noninterest expense of $621.7 million, an increase of $75.7 million, or
          13.9 percent. The increase was primarily due to increases in incentive
          compensation and other employee benefits as a result of the strong
          performance in 2013 relative to our internal performance targets.


?         Overall, our liquidity remained strong based on the attributes of our
          period-end available-for-sale securities portfolio, which totaled $12.0
          billion at December 31, 2013, compared to $11.3 billion at December 31,
          2012. 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.


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A summary of our performance in 2013 compared to 2012 is as follows:

                                                                 Year ended December 31,
 (Dollars in thousands, except per share data and
ratios)                                                    2013            2012         % Change
Income Statement:
Diluted earnings per share                             $      4.70     $      3.91      20.2   %
Net income available to common stockholders                215,853         175,103      23.3
Net interest income                                        697,344         617,864      12.9
Net interest margin                                           3.29 %          3.19 %      10   bps
Provision for loan losses                              $    63,693     $    44,330      43.7   %
Noninterest income                                         673,206         335,546     100.6
Noninterest expense                                        621,680         545,998      13.9
Non-GAAP net income available to common stockholders
(1)                                                        215,853         169,569      27.3
Non-GAAP diluted earnings per common share (1)                4.70            3.79      24.0
Non-GAAP noninterest income, net of noncontrolling
interests and excluding gains on sales of certain
assets (2)                                                 330,302         240,408      37.4
Non-GAAP noninterest expense, net of noncontrolling
interests (3)                                              608,966         534,662      13.9
Balance Sheet:
Average loans, net of unearned income                  $ 9,351,378     $ 7,558,928      23.7   %
Average noninterest-bearing demand deposits             13,892,006      12,765,506       8.8
Average interest-bearing deposits                        5,727,188       5,144,582      11.3
Average total deposits                                  19,619,194      17,910,088       9.5
Earnings Ratios:
Return on average assets (4)                                  0.93 %          0.82 %    13.4   %
Return on average common SVBFG stockholders' equity
(5)                                                          11.20           10.09      11.0
Asset Quality Ratios:
Allowance for loan losses as a percentage of total
period-end gross loans                                        1.30 %          1.23 %       7   bps
Allowance for loan losses for performing loans as a
percentage of total gross performing loans                    1.11            1.16        (5 )
Gross loan charge-offs as a percentage of average
total gross loans (annualized)                                0.45            0.44         1
Net loan charge-offs (recoveries) as a percentage of
average total gross loans (annualized)                        0.33            0.31         2
Capital Ratios:
SVBFG total risk-based capital ratio                         13.13 %         14.05 %     (92 ) bps
SVBFG tier 1 risk-based capital ratio                        11.94           12.79       (85 )
SVBFG tier 1 leverage ratio                                   8.31            8.06        25
SVBFG tangible common equity to tangible assets (6)           7.44            8.04       (60 )
SVBFG tangible common equity to risk-weighted assets
(6)                                                          11.63           13.53      (190 )
Bank total risk-based capital ratio                          11.32           12.53      (121 )
Bank tier 1 risk-based capital ratio                         10.11           11.24      (113 )
Bank tier 1 leverage ratio                                    7.04            7.06        (2 )
Bank tangible common equity to tangible assets (6)            6.59            7.41       (82 )
Bank tangible common equity to risk-weighted assets
(6)                                                           9.87           12.08      (221 )
Other Ratios:
Operating efficiency ratio (7)                               45.30 %         57.15 %   (20.7 ) %
Non-GAAP operating efficiency ratio (3)                      59.16           62.16      (4.8 )
Book value per common share (8)                        $     42.93     $     41.02       4.7
Other Statistics:
Average full-time equivalent employees                       1,669           1,581       5.6   %
Period-end full-time equivalent employees                    1,704           1,615       5.5

(1) See "Non-GAAP Net Income and Non-GAAP Diluted Earnings Per Common Share" below 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" below for a description and reconciliation of non-GAAP noninterest income.

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

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

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


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(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.

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, in the year applicable, gains from sales of certain available-for-sale securities 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 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 2013 and 2012 is as follows:

                                                                  Year ended December 31,
(Dollars in thousands, except per share data and ratios)           2013               2012
Net income available to common stockholders                 $    215,853         $    175,103
Less: gains on sales of available-for-sale securities (1)              -               (4,955 )
Tax impact of gains on sales of certain
available-for-sale securities                                          -                1,974
Less: net gains on the sale of certain assets related to
our equity management services business (2)                            -               (4,243 )
Tax impact of net gains on the sale of certain assets
related to our equity management services business                     -                1,690
Non-GAAP net income available to common stockholders        $    215,853         $    169,569
GAAP earnings per common share-diluted                      $       4.70         $       3.91
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: net gains on the sale of certain assets related to
our equity management services business (2)                            -                (0.10 )
Tax impact of net gains on the sale of certain assets
related to our equity management services business                     -                 0.04
Non-GAAP earnings per common share-diluted                  $       4.70         $       3.79
Weighted average diluted common shares outstanding            45,943,686           44,764,395

(1) Gains on the sales 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 Our accounting policies are fundamental to understanding our financial condition and results of operations. We have identified four policies as being critical because they require us to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain, and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. We evaluate our estimates and assumptions on an ongoing basis and we base these 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.
Our critical accounting policies include those that address the adequacy of the allowance for loan losses and reserve for unfunded credit commitments, measurements of fair value, the valuation of equity warrant assets and the recognition and measurement of income tax assets and liabilities. Our senior management has discussed and reviewed the development, selection, application and disclosure of these critical accounting policies with the Audit Committee of our Board of Directors.


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Allowance for Loan Losses and Reserve for Unfunded Credit Commitments Allowance for Loan Losses
The allowance for loan losses is management's estimate of credit losses inherent in the loan portfolio at the balance sheet date. We consider our accounting policy for the allowance for loan losses to be critical as estimation of the allowance involves material estimates by us and is particularly susceptible to significant changes in the near term. Determining the allowance for loan losses requires us to make forecasts that are highly uncertain and require a high degree of judgment. Our loan loss reserve methodology is applied to our loan portfolio and we maintain the allowance for loan losses at levels that we believe are appropriate to absorb estimated probable losses inherent in our loan portfolio.
Our allowance for loan losses is established for loan losses that are probable but not yet realized. The process of anticipating loan losses is inherently imprecise. We apply a systematic process for the evaluation of individual loans and pools of loans for inherent risk of loan losses. On a quarterly basis, each loan in our portfolio is assigned a credit risk rating through an evaluation process, which includes consideration of such factors as payment status, the financial condition of the borrower, borrower compliance with loan covenants, underlying collateral values, potential loan concentrations, and general economic conditions.
The allowance for loan losses is based on a formula allocation for similarly risk-rated loans by client industry sector and individually for impaired loans. Our formula allocation is determined on a quarterly basis by utilizing a historical loan loss migration model, which is a statistical model used to estimate an appropriate allowance for outstanding loan balances by calculating the likelihood of a loan being charged-off based on its credit risk rating using historical loan performance data from our portfolio. The formula allocation provides the average loan loss experience for each portfolio segment, which considers our quarterly historical loss experience since the year 2000, both by risk-rating category and client industry sector. The resulting loan loss factors for each risk-rating category and client industry sector are ultimately applied to the respective period-end client loan balances for each corresponding risk-rating category by client industry sector to provide an estimation of the allowance for loan losses.
We apply qualitative allocations to the results we obtained through our historical loan loss migration model to ascertain the total allowance for loan losses. These qualitative allocations are based upon management's assessment of the risks that may lead to a loan loss experience different from our historical loan loss experience. These risks are aggregated to become our qualitative allocation. Based on management's prediction or estimate of changing risks in the lending environment, the qualitative allocation may vary significantly from period to period and includes, but is not limited to, consideration of the following factors:

        Changes in lending policies and procedures, including underwriting
         standards and collections, and charge-off and recovery practices;


        Changes in national and local economic business conditions, including
         the market and economic condition of our clients' industry sectors;

Changes in the nature of our loan portfolio;

Changes in experience, ability, and depth of lending management and staff;

        Changes in the trend of the volume and severity of past due and
         classified loans;


        Changes in the trend of the volume of nonaccrual loans, troubled debt
         restructurings, and other loan modifications;


        Reserve floor for portfolio segments that would not draw a minimum
         reserve based on the lack of historical loan loss experience;

Reserve for large funded loan exposure; and

Other factors as determined by management from time to time.

A committee comprised of senior management evaluates the adequacy of the allowance for loan losses.
Reserve for Unfunded Credit Commitments
The level of the reserve for unfunded credit commitments is determined following a methodology that parallels that used for the allowance for loan losses. We consider our accounting policy for the reserve for unfunded credit commitments to be critical as estimation of the reserve involves material estimates by our management and is particularly susceptible to significant changes in the near term. We record a liability for probable and estimable losses associated with our unfunded credit commitments. Each quarter, every unfunded client credit commitment is allocated to a credit risk-rating category in accordance with each client's credit risk rating. We use the historical loan loss factors described under our allowance for loan losses to calculate the possible loan loss experience if unfunded credit commitments are funded. Separately, we use historical trends to calculate the probability of an unfunded credit commitment being funded. We apply the loan funding probability factor to risk-


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factor adjusted unfunded credit commitments by credit risk-rating to derive the reserve for unfunded credit commitments. The reserve for unfunded credit commitments also includes certain qualitative allocations as deemed appropriate by management.
Fair Value Measurements
We use fair value measurements to record fair value for certain financial instruments and to determine fair value disclosures. Our available-for-sale securities, derivative instruments, marketable securities and certain non-marketable and other securities are financial instruments recorded at fair value on a recurring basis. We disclose our method and approach for fair value measurements of assets and liabilities in Note 2-"Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" under Part II, Item 8 in this report.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the "exit price") in an orderly transaction between market participants at the measurement date. ASC 820, Fair Value Measurements and Disclosures, establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the significant inputs to the valuation methodology used for measurement are observable or unobservable and the significance of the level of the input to the entire measurement. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The three levels for measuring fair value are defined in Note 2-"Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" under Part II, Item 8 in this report.
It is our practice to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon valuation techniques that use relevant inputs derived from primarily market-based or independently-sourced market parameters, including interest rate yield curves, prepayment speeds, option volatilities and currency rates. Substantially all of our financial instruments use the foregoing methodologies, collectively Level 1 and Level 2 measurements, to determine fair value adjustments recorded to our financial statements. However, in certain cases, when market observable inputs for valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument, and the significance of those inputs in the entire measurement.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. For inactive markets, there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring and provide more weighting to price quotes that are based upon orderly transactions. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement. Accordingly, the degree of judgment exercised by management in determining fair value is greater for financial assets and liabilities . . .

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