Consistent growth in the top line enabled SVB Financial Group’s (SIVB) to keep its earnings streak alive. Following the impressive performance in 2013, the company reported first-quarter 2014 earnings per share of $1.95, which beat the Zacks Consensus Estimate by 20.4%. Results also showed significant improvement from 90 cents earned in the year-ago quarter.
Better-than-expected results were driven by substantial rise in revenues and further supported by drastic decline in provision for loan losses. Further, growth in loans and deposits, and improvement in profitability ratios were the quarterly tailwinds. However, higher operating expenses and deterioration in capital ratios were the negatives, while credit quality was mixed bag.
Net income available to shareholders came in at $91.3 million in the reported quarter, significantly up from $40.9 million in prior-year quarter.
Performance Details
SVB Financial’s net revenue came in at $506.5 million, reflecting a considerable increase from $241.8 million in the prior-year quarter. Further, it substantially outpaced the Zacks Consensus Estimate of $319.0 million.
Net interest income (NII) rose 20.3% year over year to $196.3 million. However, net interest margin (NIM) decreased 12 basis points (bps) from the prior-year quarter to 3.13%. The decline in NIM was largely due to a significant increase in average deposit balances, partially offset by overall lower yield on loan portfolio.
Non-GAAP non-interest income, net of noncontrolling interests was $123.5 million, reflecting a significant increase from the prior-year quarter figure of $56.1 million.
Non-GAAP non-interest expense, net of non-controlling interests increased 15.7% year over year to $169.1 million.
Operating efficiency ratio decreased to 52.81% from 66.53% in the prior-year quarter. A fall in efficiency ratio indicates improvement in profitability.
As of Mar 31, 2014, SVB Financial’s net loans came in at $10.7 billion, up 22.6% year over year, while average total deposits increased 31.9% to $25.5 billion.
Asset Quality
Asset quality was mixed in the reported quarter. The ratio of allowance for loan losses to total gross loans was 1.13%, down 13 bps from the prior-year quarter. Provision for loan losses was $0.5 million, declining 91.4% from the prior-year quarter.
However, the ratio of net charge-offs to average gross loans came in at 0.74%, up 54 bps year over year.
Profitability and Capital Ratios
SVB Financial’s capital ratios deteriorated while profitability ratios improved. As of Mar 31, 2014, Tier 1 risk-based capital ratio was 12.35%, down from 13.30% as of Mar 31, 2013.
Total risk-based capital ratio came in at 13.41% versus 14.59% as of Mar 31, 2013. Tangible equity to tangible assets ratio was 7.05% as against 8.26% as of Mar 31, 2013.
Return on average assets on annualized basis was up 59 bps year over year to 1.33%. Return on average equity came in at 17.63%, up 874 bps from the prior-year quarter.
Guidance for 2014
For 2014, management anticipates NII growth in high teens and NIM in the range of 3.10%–3.20%. Moreover, the core fee income (non-GAAP) growth rate is expected in low teens.
Further, operating expenses (non-GAAP) are likely to increase in the low double digits. Additionally, average loan growth is expected to rise in the high teens while average deposit balances will rise in the high twenties.
Net loan charge-offs are also anticipated in the range of 0.30%–0.50% of average total gross loans. Both nonperforming loans as a percentage of total gross loans and allowance for loan losses as a percentage of total gross performing loans will be consistent with 2013 levels.
Our Viewpoint
Though a low interest rate scenario remains a drag on NIM, SVB Financial’s consistent top-line growth is impressive. Going forward, we believe that that steady growth in loans and deposits will continue to support the company’s long-term growth prospects. However, we remain skeptical about rising expenses and the stringent regulatory environment.
SVB Financial currently carries a Zacks Rank #1 (Strong Buy).
Performance of Other West Banks
Among other Western regional banks, Zions Bancorp (ZION) surpassed the Zacks Consensus Estimate, driven by increased non-interest income and a nearly unchanged non-interest expense.
Westamerica Bancorp.’s (WABC) earnings was in line with the Zacks Consensus Estimate. Results benefited from a decline in expenses and lower provisions, offset by decline in the top line.
Umpqua Holdings Corp’s (UMPQ) earnings lagged the Zacks Consensus Estimate due to increased non-interest expenses and lower non-interest income.
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