DBRS Comments on the Q4 2008 Earnings of SVB Financial Group – Senior at BBB (high)

DBRS has today commented on the Q4 2008 earnings of SVB Financial Group (SVB or the Company), given the continued unsettled conditions in the financial markets and a recessionary economy. DBRS rates SVB’s Issuer & Senior Debt at BBB (high) with a Stable trend. The deteriorating economy finally negatively affected performance in the fourth quarter after the Company had successfully navigated the difficult operating environment through the first nine months of 2008. SVB still managed to report a modest profit of $2.9 million, but this was down from net income of $27 million in Q3 2008 and $34.3 million a year ago. On a sequential-quarter basis, a significant increase in loan loss provisioning from deteriorating asset quality and lower non-interest income compressed earnings despite robust deposit growth, lower expenses and higher net interest income. Given the recessionary economy, declining valuations and lower venture capital funding, DBRS expects continued earnings pressure, but not to the extent seen in the fourth quarter. While venture capital (VC) funding fell precipitously during the quarter, DBRS notes that plenty of committed funds remain on the sidelines looking for investment opportunities.

During the quarter, both non-performing loans (NPLs) and gross charge-offs jumped dramatically. This, combined with a deteriorating economy, caused SVB to increase its provision for loan losses to $67.3 million from $13.7 million in Q3 2008, an increase of almost 400%. As indicated earlier by SVB, a major culprit in the asset quality decline was a large warehouse loan to HRJ Capital Holdings, L.L.C. (HRJ) that went to non-accrual status during the quarter. The Company did receive a $10 million paydown since the problem surfaced in December, but this still leaves a large remaining exposure of approximately $59 million. Private client services also contributed to the increase in NPLs. Warehouse loans allow a private equity or VC firm to borrow money for investments before securing investor commitments as opposed to capital calls, where the funds have already been raised. DBRS notes that SVB only has one other warehouse loan in its portfolio, which totals $30 million and is performing as expected. Gross charge-offs totaled $25.5 million and came primarily from a software client, from HRJ and from early-stage clients. Overall, net charge-offs (NCOs) were an annualized 1.71% in the fourth quarter compared with 0.47% in Q3 2008. The Company expects NCOs to be approximately 1.3% in 2009, excluding any charge-offs related to currently impaired loans. Meanwhile, NPLs should continue to rise as a result of the worsening economic outlook.

Positively, SVB was extremely successful in attracting off-balance-sheet funds onto its balance sheet, resulting in average deposit growth of 17.7% during the quarter, and period-end balances grew significantly more. While the stickiness of these deposits has yet to be determined, the deposit growth has improved funding at the Company, which had come under pressure from very strong loan growth that had previously outpaced deposit growth. As a result of strong deposit and loan growth, net interest income grew 1.9% despite net interest margin compression of 31 basis points in the quarter to 5.42%.

In light of the $235 million preferred shares investment by the U.S. Treasury, DBRS notes that holding company liquidity and regulatory capital ratios have been enhanced. The investment also provides an additional capital cushion to absorb future credit costs and fund organic growth opportunities. However, the tangible common equity-to-tangible assets ratio did decline to 7.53%, mainly as a result of the extraordinary deposit inflow.

Given the Company’s leading market position within its niche industries, growing core fee income and relatively healthy balance sheet, DBRS expects SVB to continue generating operating results and to maintain the credit fundamentals expected of banks in its rating range.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.