DBRS Comments on the Q2 2009 Earnings of SVB Financial Group – Senior at BBB (high)

DBRS has today commented on the Q2 2009 financial results of SVB Financial Group (SVB or the Company). DBRS rates the Company’s Issuer & Senior Debt at BBB (high) with a Stable trend. SVB reported net income available to common stockholders of $7.8 million for the second quarter, up from a net loss of $11.8 million in the previous quarter, but down from $21.0 million in Q2 2008. On a sequential quarter basis, lower credit costs and lower aggregate losses on venture capital/private equity investments more than offset higher FDIC assessments and margin compression. DBRS notes that deposit growth remains robust, but the loan portfolio actually shrunk during the quarter as clients deleverage to cope with the recession. Positively, management believes results should continue to show modest improvement the remainder of the year as the economic environment appears to be improving.

Credit performed to management’s expectations in the current quarter. Provisions declined materially to $21.4 million from $43.5 million in the first quarter, which drove the majority of the improved quarterly results. SVB announced that an independent asset management firm has assumed management of HRJ’s private equity and real estate fund of funds business. While management does not expect any material impact on net income or provisioning needs over the short-term related to the HRJ deal, nonperforming loans (NPLs) should come down significantly (HRJ represents approximately $43 million of NPLs) and the Company could recover some of its charge-offs over the long run. With lower levels, albeit slightly improved relative to Q1 2009, of venture capital funding, early stage clients remain under the most pressure. Early stage clients accounted for approximately $12 million of charge-offs, or 55% of the $21.9 million in gross charge-offs. Gross charge-offs were down considerably from the first quarter. Positively, SVB announced it expects an $11.5 million recovery in Q3 2009 stemming from a hardware loan that was charged off in Q1 2009. Overall, the Company expects that net loan charge-offs should be around a manageable 1.4% the next two quarters.

Deposit growth remains robust with average total deposits increasing 6.4% to $8.4 billion during the quarter. With clients deleveraging causing the loan portfolio to decline, the new funds were used to purchase agency securities to increase earning assets. Growth in earning assets contributed to stable net interest income despite margin compression of 26 basis points (bps) to 3.71% during the quarter.

Capital remains solid as evidenced by a healthy tangible common equity to tangible assets ratio of 6.94%. With the asset growth coming in the form of low risk agency securities, SVB’s tangible common equity to risk-weighted assets improved 37 bps to 10.54%. The Company did not indicate when it would repay TARP money as it waits to see further improvements in the operating environment before repaying the U.S. Treasury.

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

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.