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SIVB > SEC Filings for SIVB > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for SVB FINANCIAL GROUP

Form 10-Q for SVB FINANCIAL GROUP


9-May-2014

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), the extent to which capital
          may be used or required, and our capital category classification


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


         Our overall investment plans, strategies and activities, including
          venture capital/private equity funding and investments, and our
          investment of excess cash/liquidity


         The realization, timing, valuation and performance of equity or other
          investments, including the impact of changes in our valuation of our
          investments, such as FireEye and Twitter.


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


         Our intent to sell our available-for-sale securities prior to recovery
          of our cost basis, or the likelihood of such


         The impact on our interest income from mortgage prepayment levels as it
          relates to our premium amortization expense, and from changes in loan
          yields due to shifts in loan mix


         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, including loan yields,
          loan pricing, and interest margins


         Our strategic initiatives, including the expansion of operations and
          business activities in China, India, Israel, the UK and elsewhere
          domestically or internationally

The expansion and growth of our noninterest income sources


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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 realization of certain deferred tax assets, and of any benefit
          stemming from certain net operating loss carryforwards.


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

The condition and suitability of our properties

The manner in which we compete

         Our estimated potential liability associated with certain securities
          subject to rescission rights in connection with our 401(k) plan


         The effect of application of accounting pronouncements and regulatory
          requirements

The effect of lawsuits and claims

         Regulatory developments, including the nature and timing of the
          adoption and effectiveness of requirements under the Dodd-Frank Wall
          Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), new
          capital requirements and other applicable Federal, State and
          International laws and regulations, and any related impact on us


         The expected impact of the "Volcker Rule" under the Dodd-Frank Act,
          including our intention to seek the maximum extensions to the
          conformance period applicable to 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, 2013 ("2013 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 2013 Form 10-K. Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentations.
Management's Overview of First Quarter 2014 Performance Overall, we had an outstanding first quarter of 2014, which was reflective of the strength of our clients and our business. We had net income available to common stockholders of $91.3 million and diluted EPS was $1.95. This compares to diluted EPS of $0.90 in the first quarter of 2013. In the first quarter of 2014, compared to the first quarter of 2013, we experienced strong growth in net interest income as a result of outstanding loan growth with a record high average balance of $10.8 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 first quarter of 2014 were pre-tax gains of $37 million from investment activity related to our FireEye holdings. 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 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 overall.


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First quarter 2014 results (compared to the first quarter 2013, where applicable) included:

?         Continued strong growth in our lending business with record high
          average loan balances of $10.8 billion, an increase of $2.1 billion, or
          24.0 percent.


?         Average available-for-sale securities of $12.2 billion, an increase of
          $1.3 billion, or 12.5 percent. Period-end available-for-sale securities
          of $12.8 billion, an increase of $1.9 billion, or 17.7 percent.


?         Average deposit balances of $23.7 billion, an increase of $4.9 billion,
          or 26.0 percent. Period-end deposit balances were $25.5 billion, an
          increase of $6.2 billion, or 31.9 percent.


?         Average total client funds (including on-balance sheet deposits and
          off-balance sheet client investment funds) were $50.8 billion, an
          increase of $9.5 billion, or 23.0 percent. Period-end total client
          funds were $53.7 billion, an increase of $11.4 billion, or 27.0
          percent.


?         Net interest income (fully taxable equivalent basis) of $196.8 million,
          an increase of $33.2 million, or 20.3 percent, primarily due to an
          increase in interest income from loans and available-for-sale
          securities attributable to growth in average balances of $2.1 billion
          and $1.3 billion, respectively. This increase was partially offset by a
          decrease in the overall yield of our loan portfolio primarily resulting
          from the growth in our higher credit quality venture capital and
          private equity loan portfolio, and overall low market rate environment,
          as well as, the overall increased competition in the market.


?         Net interest margin of 3.13 percent, compared to 3.25 percent,
          primarily reflective of a 20 basis point decrease in the overall yield
          of our loan portfolio. The decrease was largely offset by strong growth
          in average loan balances and a higher overall yield on our
          available-for-sale securities portfolio driven by higher reinvestment
          yields and lower amortization expense.


?         Provision for loan losses of $0.5 million, compared to $5.8 million.
          The provision of $0.5 million for the first quarter of 2014 was
          primarily driven by net charge-offs of $19.8 million, offset by a $14.5
          million decrease in the reserve for impaired loans and a $4.8 million
          decrease related to lower reserves due to improvement in the overall
          credit quality of gross performing loans.


?         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 $50.9 million, an increase of $9.6
          million, or 23.3 percent. This increase reflects increased client
          activity and continued growth in our business, primarily from foreign
          exchange fees, credit card 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 of $37.4 million, compared to $5.1 million. The increase was
          primarily related to strong IPO and M&A activity with the largest gains
          coming from FireEye, as noted below. 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 on equity warrant assets of $25.4 million, an increase of $21.9
          million compared to $3.5 million. This increase was primarily driven by
          IPO and M&A activity, and included $15.2 million from a single warrant
          held in our client, FireEye, as noted below.


?         FireEye gains on investment securities of $113.0 million ($21.8 million
          net of noncontrolling interests), $15.2 million from gains on equity
          warrant assets and an unrealized loss on available-for-sale securities
          of $8.2 million reflected as a $4.9 million decrease (net of tax) in
          other accumulated comprehensive loss in stockholders' equity. See
          Investment Securities section for details related to FireEye activity
          during the first quarter of 2014.


?         Noninterest expense of $172.4 million, an increase of $23.4 million, or
          15.7 percent. The increase was primarily due to increases in incentive
          compensation and other employee benefits as a result of our strong
          financial performance and an increase in average FTEs, as well as
          increased professional services expenses to support continued growth in
          our business and IT infrastructure initiatives. Average FTEs increased
          by 4.8 percent to 1,735 for the three months ended March 31, 2014,
          compared to 1,655 FTEs for the comparable 2013 period.


?         Overall, our liquidity remained strong based on the attributes of our
          period-end available-for-sale securities portfolio, which totaled $12.8
          billion at March 31, 2014. 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 for the three months ended March 31, 2014 and 2013 is as follows:

                                                               Three months ended March 31,
(Dollars in thousands, except per share data and
ratios)                                                     2014            2013         % Change
Income Statement:
Diluted earnings per share                             $       1.95     $      0.90     116.7   %
Net income available to common stockholders                  91,301          40,891     123.3
Net interest income                                         196,328         163,169      20.3
Net interest margin                                            3.13 %          3.25 %     (12 ) bps
Provision for loan losses                              $        494     $     5,813     (91.5 ) %
Noninterest income                                          310,225          78,604        NM
Noninterest expense                                         172,436         149,014      15.7
Non-GAAP core fee income (1)                                 50,946          41,321      23.3
Non-GAAP noninterest income, net of noncontrolling
interests (1)                                               123,507          56,114     120.1
Non-GAAP noninterest expense, net of noncontrolling
interests (2)                                               169,115         146,154      15.7
Balance Sheet:
Average loans, net of unearned income                  $ 10,767,684     $ 8,680,917      24.0   %
Average noninterest-bearing demand deposits              16,880,520      13,386,501      26.1
Average interest-bearing deposits                         6,795,928       5,399,012      25.9
Average total deposits                                   23,676,448      18,785,513      26.0
Earnings Ratios:
Return on average assets (annualized) (3)                      1.33 %          0.74 %    79.7   %
Return on average SVBFG stockholders' equity
(annualized) (4)                                              17.63            8.89      98.3
Asset Quality Ratios:
Allowance for loan losses as a percentage of total
period-end gross loans                                         1.13 %          1.26 %     (13 ) bps
Allowance for loan losses for performing loans as a
percentage of total gross performing loans                     1.07            1.18       (11 )
Gross loan charge-offs as a percentage of average
total gross loans (annualized)                                 0.79            0.26        53
Net loan charge-offs as a percentage of average
total gross loans (annualized)                                 0.74            0.20        54
Capital Ratios:
Total risk-based capital ratio                                13.41 %         14.59 %    (118 ) bps
Tier 1 risk-based capital ratio                               12.35           13.30       (95 )
Tier 1 leverage ratio                                          7.99            8.39       (40 )
Tangible common equity to tangible assets (5)                  7.05            8.26      (121 )
Tangible common equity to risk-weighted assets (5)            12.17           13.94      (177 )
Bank total risk-based capital ratio                           11.47           13.01      (154 )
Bank tier 1 risk-based capital ratio                          10.39           11.70      (131 )
Bank tier 1 leverage ratio                                     6.72            7.35       (63 )
Bank tangible common equity to tangible assets (5)             6.20            7.62      (142 )
Bank tangible common equity to risk-weighted assets
(5)                                                           10.29           12.45      (216 )
Other Ratios:
Operating efficiency ratio (6)                                34.01 %         61.52 %   (44.7 ) %
Non-GAAP operating efficiency ratio (2)                       52.81           66.53     (20.6 )
Book value per common share (7)                        $      45.59     $     41.85       8.9
Other Statistics:
Average full-time equivalent employees                        1,735           1,655       4.8   %
Period-end full-time equivalent employees                     1,737           1,663       4.4

(1) See "Results of Operations-Noninterest Income" for a description and reconciliation of non-GAAP core fee income and 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, 2014 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 2013 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.


Table of Contents

                                                                         2014 Compared to 2013
                                                            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                           $    1,133         $     (216 )       $      917
Available-for-sale securities (taxable)                         5,998              2,670              8,668
Available-for-sale securities (non-taxable)                       (30 )               26                 (4 )
Loans, net of unearned income                                  28,845             (4,417 )           24,428
Increase (decrease) in interest income, net                    35,946             (1,937 )           34,009
Interest expense:
NOW deposits                                                       14                  5                 19
Money market deposits                                             999                (82 )              917
Money market deposits in foreign offices                           18                  -                 18
Time deposits                                                     (10 )              (63 )              (73 )
Sweep deposits in foreign offices                                 (28 )                -                (28 )
Total increase (decrease) in deposits expense                     993               (140 )              853
Short-term borrowings                                             (28 )                -                (28 )
5.375% Senior Notes                                                 -                  7                  7
Junior Subordinated Debentures                                      -                  7                  7
6.05% Subordinated Notes                                           (5 )               17                 12
Total (decrease) increase in borrowings expense                   (33 )               31                 (2 )
Increase (decrease) in interest expense, net                      960               (109 )              851
Increase (decrease) in net interest income                 $   34,986         $   (1,828 )       $   33,158


Net Interest Income (Fully Taxable Equivalent Basis)
Three months ended March 31, 2014 and 2013

Net interest income increased by $33.2 million to $196.8 million for the three months ended March 31, 2014, compared to $163.6 million for the comparable 2013 period. Overall, we saw an increase in our net interest income primarily due to higher average loan and available-for-sale securities balances and higher overall yield on our on available-for-sale securities portfolio, primarily from higher reinvestment yields and lower premium amortization expense. These increases were partially offset by lower overall loan yield.
The main factors affecting interest income and interest expense for the three months ended March 31, 2014, compared to the comparable 2013 period are discussed below:
Interest income for the three months ended March 31, 2014 increased by $34.0 million primarily due to:

            A $24.5 million increase in interest income on loans to $148.2
             million for the three months ended March 31, 2014, compared to
             $123.7 million for the comparable 2013 period. This increase was
             reflective of an increase in average loan balances of $2.1 billion,
             partially offset by a decrease in our overall yield on our loan
             portfolio. The decrease in the overall loan yield was primarily due
             to a shift in the mix of our loan portfolio with higher growth in
             our lower-yielding venture capital/private equity loan portfolio,
             lower rates on existing and new capital call lines as a result of
             increased competition and a generally low market rate environment.

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