DBRS Comments on SVB Financial Group’s Q4 2009 Earnings – Senior at BBB (high)

DBRS has today commented on the Q4 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 $6.0 million for the fourth quarter, down from $20.6 million in the previous quarter, but up from a net loss applicable to common stockholders of $0.6 million in Q4 2008.

DBRS notes that the Company fully repaid TARP during the quarter, which resulted in an $11.4 million charge. Excluding this charge, net income available to common stockholders would have been $17.5 million. On a sequential quarter basis (excluding TARP), higher incremental provisions for loan losses of $9.3 million more than offset net interest income improvement and higher fees net of noncontrolling interests. The increase in the provision expense this quarter is a bit misleading as the Company benefited from a large $11.4 million recovery in Q3 2009. SVB also benefited from warrant and securities gains this quarter pointing to stabilizing valuations. Deposit growth remained very robust and investment securities purchases increased net interest income, despite the continued decline in the loan portfolio, as well as further contraction in net interest margin (NIM). Overall, DBRS views the results as solid and anticipates that the Company will continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

Credit quality improved in the fourth quarter. Indeed, gross charge-offs, nonperforming loans (NPLs) and classified loans all declined significantly from the third quarter. As a result of the improving credit picture, SVB was able to bring down its allowance for loan losses, yet still improve its coverage of NPLs to 137.52% from 120.15%. Gross charge-offs of $33.1 million, or 2.98% of average total gross loans (annualized), decreased from $46.5 million, or 4.03% in the third quarter. The gross charge-offs were primarily from software and hardware clients. Larger loan relationships contributed to significant credit losses in 2009 and loans over $20 million represent 20.9% of the loan portfolio presenting some concentration risk. DBRS notes that only one large loan is currently on nonaccrual, but the Company believes it will ultimately collect on the credit. Management expects the allowance for loan losses to remain around the current level of 1.58% of gross loans and for NPLs to continue trending downward in 2010.

Average total deposits increased another 10.9% to $9.9 billion with the bulk of the increase coming from noninterest bearing deposits. With the loan portfolio declining, SVB has invested excess funding into lower risk, shorter duration securities. In the quarter, helped by deposit growth, average securities grew by 31% to $3.3 billion. The incremental interest income from securities more than offset declining loan balances and NIM compression of 13 bps to 3.57%, resulting in net interest income growth of $5.3 million. Management expects the margin to range between 3.6% and 4% in 2010.

Positively, SVB repaid its $235 million in TARP funds during the quarter and raised net proceeds of $292.1 million of common equity. As a result, the Company has ample capital to take advantage of growth opportunities. The common equity raise helped bolster SVB’s tangible common equity to tangible assets ratio to a robust 8.78%. Solid capital and liquidity continue to underpin the rating.

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.