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SIVB > SEC Filings for SIVB > Form 10-Q on 8-Aug-2014All Recent SEC Filings

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Form 10-Q for SVB FINANCIAL GROUP


8-Aug-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.


         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

Our ability and intent to hold our held-to-maturity securities until maturity

         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 and client investment fund 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, Hong Kong, India, Israel, the UK and
          elsewhere domestically or internationally


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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 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

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.
Factors that could cause actual results to differ from the expectations stated in the forward-looking statements include, but are not limited to, factors discussed elsewhere in this Quarterly Report on Form 10-Q, under "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 on February 27, 2014, and other documents we file 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, except as applicable by law. 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 Second Quarter 2014 Performance Overall, we had a strong second quarter in 2014, which was reflective of the positive business environment for our clients and our unique business model and expertise in supporting innovation companies and their investors, which have enabled us to deliver solid organic growth. We had net income available to common stockholders of $50.8 million and diluted EPS was $1.04. This compares to net income of $48.6 million and diluted EPS of $1.06 in the second quarter of 2013. In the second quarter of 2014, compared to the second quarter of 2013, we experienced strong growth in net interest income as a result of the increase in average investments of $4.8 billion, and loan growth of $2.1 billion, driven by our outstanding deposit growth, with record high average deposits of $27.2 billion. In addition, overall credit quality improved resulting in lower loan reserves, we saw continued growth in income from core fees as well as gains on equity warrant assets, and our liquidity and capital ratios continued to remain strong overall. Net gains on investment securities of $41.6 million, excluding FireEye losses of $98.9, was also strong


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in the second quarter 2014. Our total client funds, which consist of on-balance sheet deposits and off-balance sheet client investment funds, increased, reflecting growth from our existing and new clients. Our noninterest expense increased $30.2 million primarily from increases in compensation expense mainly driven by increased incentive compensation, due to our strong performance, as well as an increase in average FTEs.
Second quarter 2014 results (compared to the second quarter 2013, where applicable) included:

?         Continued strong growth in our lending business with record high
          average loan balances of $11.1 billion, an increase of $2.1 billion, or
          22.8 percent.


?         Average investment securities, excluding non-marketable and other
          securities, of $15.2 billion, an increase of $4.8 billion, or 45.7
          percent. Period-end investment securities, excluding non-marketable and
          other securities, of $17.1 billion, an increase of $7.1 billion, or
          70.6 percent.


?         Average deposit balances of $27.2 billion, an increase of $8.6 billion,
          or 46.0 percent. Period-end deposit balances were $28.4 billion, an
          increase of $9.7 billion, or 51.7 percent.


?         Average total client funds (including on-balance sheet deposits and
          off-balance sheet client investment funds) were $57.3 billion, an
          increase of $15.5 billion, or 37.1 percent. Period-end total client
          funds were $58.7 billion, an increase of $16.0 billion, or 37.6
          percent.


?         Net interest income (fully taxable equivalent basis) of $205.4 million,
          an increase of $34.9 million, or 20.5 percent, primarily due to an
          increase in interest income from loans and fixed income investment
          securities, attributable to growth in average loan and investment
          balances of $2.1 billion and $4.8 billion, respectively, driven by the
          strong average deposit growth mentioned above. This increase was
          partially offset by a decrease in the overall yield of our loan
          portfolio primarily resulting from the growth in our venture capital
          and private equity loan portfolio which, on average, have lower yields.
          The overall low market rate environment and increased price competition
          also impacted interest income.


?         Net interest margin of 2.79 percent, compared to 3.40 percent,
          primarily reflective of a 51 basis point decrease in the overall yield
          of our loan portfolio. This decrease was primarily attributable to the
          change in mix of our interest earning assets. Loans represented 38
          percent of earning assets in the second quarter of 2014 compared to 45
          percent in the second quarter of 2013.


?         Provision for loan losses of $1.9 million, compared to $18.6 million.
          The provision of $1.9 million was primarily driven by $5.3 million from
          period-end loan growth and $4.8 million in net charge-offs, offset by a
          reserve release of $6.0 million due to the improvement of the credit
          quality of our overall loan portfolio and a $2.1 million decrease in
          the reserve for impaired loans resulting from a decrease in impaired
          loan balances from repayments and charge-offs.


?         Foreign exchange, credit card and lending related fees of $34.1
          million, an increase of $8.2 million, or 31.6 percent reflective of
          increased client activity and transaction volumes.


?         Net losses on investment securities of $57.3 million, compared to net
          gains of $40.6 million. Non-GAAP net losses on investment securities,
          net of noncontrolling interests of $22.1 million, compared to net gains
          of $9.5 million (See non-GAAP reconciliation under the section "Results
          of Operations-Noninterest Income-Gains on Investment Securities, Net")
          , primarily resulting from our FireEye related investments.
          Specifically, we had losses on investment securities related to FireEye
          of $98.9 million ($30.4 million net of noncontrolling interests). See
          "Results of Operations-Noninterest Income-Gains on Investment
          Securities, Net" for details about our FireEye related investments
          during the three and six months ended June 30, 2014.


?         Net gains on equity warrant assets of $12.3 million, an increase of
          $5.1 million, or 71.5 percent, compared to $7.2 million. This increase
          was primarily driven by the increase in the number of equity warrant
          assets held as well as gains due to increases in valuations across the
          equity warrant asset portfolio.


?         Noninterest expense of $173.4 million, an increase of $30.2 million, or
          21.0 percent. The increase was primarily due to increases in incentive
          compensation and ESOP and other employee benefits as a result of our
          strong financial performance and an increase in average FTEs. Average
          FTEs increased by 6.7 percent to 1,768 for the three months ended June
          30, 2014, compared to 1,657 FTEs for the comparable 2013 period.


?         The issuance and sale through a registered public offering of 4,485,000
          shares of common stock at an offering price of $101.00 per share, which
          resulted in net proceeds of $434.9 million to support the continued
          growth of our balance sheet.


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A summary of our performance for the three and six months ended June 30, 2014 and 2013 is as follows:

                                         Three months ended June 30,                      Six months ended June 30,
(Dollars in thousands, except
per share data and ratios)           2014            2013         % Change           2014            2013         % Change
Income Statement:
Diluted earnings per share      $       1.04     $      1.06      (1.9 ) %      $       2.96     $      1.96      51.0   %
Net income available to
common stockholders                   50,797          48,584       4.6               142,098          89,475      58.8
Net interest income                  204,965         170,081      20.5               401,293         333,250      20.4
Net interest margin                     2.79 %          3.40 %     (61 ) bps            2.95 %          3.32 %     (37 ) bps
Provision for loan losses       $      1,947     $    18,572     (89.5 ) %      $      2,441     $    24,385     (90.0 ) %
Noninterest income                    14,210          98,239     (85.5 )             324,435         176,843      83.5
Noninterest expense                  173,446         143,292      21.0               345,882         292,306      18.3
Non-GAAP core fee income (1)          49,993          41,957      19.2               100,939          83,278      21.2
Non-GAAP noninterest income,
net of noncontrolling
interests (1)                         49,535          67,488     (26.6 )             173,042         123,602      40.0
Non-GAAP noninterest expense,
net of noncontrolling
interests (2)                        168,179         140,425      19.8               337,294         286,579      17.7
Balance Sheet:
Average loans, net of
unearned income                 $ 11,080,602     $ 9,022,173      22.8   %      $ 10,925,007     $ 8,852,488      23.4   %
Average noninterest-bearing
demand deposits                   19,472,542      13,257,481      46.9            18,183,692      13,321,635      36.5
Average interest-bearing
deposits                           7,704,583       5,356,689      43.8             7,252,765       5,377,733      34.9
Average total deposits            27,177,125      18,614,170      46.0            25,436,457      18,699,368      36.0
Earnings Ratios:
Return on average assets
(annualized) (3)                        0.64 %          0.88 %   (27.3 ) %              0.96 %          0.81 %    18.5   %
Return on average SVBFG
stockholders' equity
(annualized) (4)                        8.50           10.12     (16.0 )               12.74            9.52      33.8
Asset Quality Ratios:
Allowance for loan losses as
a percentage of total
period-end gross loans                  1.06 %          1.23 %     (17 ) bps            1.06 %          1.23 %     (17 ) bps
Allowance for loan losses for
performing loans as a
percentage of total gross
performing loans                        1.02            1.13       (11 )                1.02            1.13       (11 )
Gross loan charge-offs as a
percentage of average total
gross loans (annualized)                0.23            0.68       (45 )                0.50            0.47         3
Net loan charge-offs as a
percentage of average total
gross loans (annualized)                0.17            0.49       (32 )                0.45            0.35        10
Capital Ratios:
Total risk-based capital
ratio                                  15.36 %         14.03 %     133   bps           15.36 %         14.03 %     133   bps
Tier 1 risk-based capital
ratio                                  14.42           12.84       158                 14.42           12.84       158
Tier 1 leverage ratio                   8.74            8.78        (4 )                8.74            8.78        (4 )
Tangible common equity to
tangible assets (5)                     8.03            8.34       (31 )                8.03            8.34       (31 )
Tangible common equity to
risk-weighted assets (5)               14.52           12.73       179                 14.52           12.73       179
Bank total risk-based capital
ratio                                  13.41           12.42        99                 13.41           12.42        99
Bank tier 1 risk-based
capital ratio                          12.45           11.20       125                 12.45           11.20       125
Bank tier 1 leverage ratio              7.51            7.66       (15 )                7.51            7.66       (15 )
Bank tangible common equity
to tangible assets (5)                  7.22            7.60       (38 )                7.22            7.60       (38 )
Bank tangible common equity
to risk-weighted assets (5)            12.65           11.18       147                 12.65           11.18       147
Other Ratios:
Operating efficiency ratio
(6)                                    78.98 %         53.32 %    48.1   %             47.60 %         57.21 %   (16.8 ) %
Non-GAAP operating efficiency
ratio (2)                              65.97           59.01      11.8                 58.64           62.62      (6.4 )
Book value per common share
(7)                             $      52.78     $     40.65      29.8          $      52.78     $     40.65      29.8
Other Statistics:
Average full-time equivalent
employees                              1,768           1,657       6.7   %             1,751           1,656       5.7   %
Period-end full-time
equivalent employees                   1,786           1,657       7.8                 1,786           1,657       7.8

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


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(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 and year-to-date average assets.

(4) Ratio represents annualized consolidated net income available to common stockholders divided by quarterly and year-to-date 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.

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 six months ended June 30, 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, fixed income investment portfolio (available-for-sale and held-to-maturity securities), 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 periods 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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                                                  2014 Compared to 2013                                 2014 Compared to 2013
                                   Three months ended June 30, increase (decrease) due    Six months ended June 30, increase (decrease) due
                                                      to change in                                          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              $    1,644         $      (435 )       $    1,209     $    2,804         $      (678 )       $    2,126
Fixed income investment
portfolio (taxable)                    21,781              (3,014 )           18,767         28,076                (641 )           27,435
Fixed income investment
portfolio (non-taxable)                   (14 )                (7 )              (21 )          (48 )                23                (25 )
Loans, net of unearned income          28,165             (12,270 )           15,895         56,897             (16,574 )           40,323
Increase (decrease) in interest
income, net                            51,576             (15,726 )           35,850         87,729             (17,870 )           69,859
Interest expense:
NOW deposits                               17                  16                 33             31                  21                 52
Money market deposits                   1,229                (220 )            1,009          2,204                (278 )            1,926
Money market deposits in foreign
offices                                    14                  (8 )                6             32                  (8 )               24
Time deposits                             (29 )               (48 )              (77 )          (30 )              (120 )             (150 )
Sweep deposits in foreign
offices                                    21                  (9 )               12             (7 )                (9 )              (16 )
Total increase (decrease) in
deposits expense                        1,252                (269 )              983          2,230                (394 )            1,836
Short-term borrowings                     (43 )                 -                (43 )          (71 )                 -                (71 )
5.375% Senior Notes                         -                   7                  7              6                   8                 14
. . .
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