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SVB Financial Group Deposits a Positive Third Quarter

By Jordan Wathen – Oct 24, 2016 at 6:21PM

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Growing deposits, loan balances, and steady credit-quality metrics laid the groundwork for a solid third-quarter earnings report.

Image source: SVB Financial Group.

SVB Financial Group (SIVB -60.41%), the holding company of Silicon Valley Bank, pleased investors with its third-quarter earnings and forecasts for 2017. The bank reported rising diluted earnings per share, helped by a year-over-year decline in charge-offs and an increase in gains from its portfolio of investment securities.

SVB Financial Group results: The raw numbers


Q3 2015

Q3 2016

Growth (YOY)

Diluted earnings per share




Average loans

$14.9 billion

$18.6 billion


Net charge-offs




Net interest margin




Tangible book value per share




Data source: SVB Financial Group.

What happened this quarter

  • Private equity and venture capital clients were a boon for loan growth. Loans to financial borrowers grew by about 62% over the year-ago period. Although these loans yield less than loans to its non-financial corporate clients, they yield more than its securities portfolio, helping drive earnings growth without corresponding growth in the balance sheet.
  • Non-performing loans (NPLs) declined as a percentage of the loan book. This quarter, NPLs tallied to 0.55% of total gross loans, down from 0.75% in the year-ago period. Similarly, net charge-offs declined to 0.48% of gross loans from 0.75% a year ago, but were up marginally from 0.43% last quarter.
  • Period-end deposits, often used as a barometer for the health of Silicon Valley as a whole, grew 3.1% year over year, and 1.6% quarter over quarter. This is especially good to see given that deposits slipped in the second quarter of 2016.
  • Gains from the company's securities and derivatives portfolios buoyed earnings this quarter. Gains tallied to $42.9 million, an increase of about 48% over the year-ago period. The bank highlighted the IPO of Acacia Communications as a driver of warrant gains this quarter, as its IPO resulted in $10.3 million of unrealized gains alone. Gains or losses are primarily driven by interest-rate fluctuations and changes in the valuation of its equity and warrant securities, and can be highly volatile from quarter to quarter.

Looking forward

The company issued preliminary guidance for 2017 in its third-quarter report, making several forecasts that largely reflect management's expectations of normalization in venture capital (VC) and private equity activity in 2017. 

SVB's GAAP projections include:

  1. Average loan balance growth in the high teens
  2. Average deposit balance growth in the mid- to high-single digits
  3. Net interest income growth in the low double digits (assuming no federal reserve rate increases)
  4. Net loan charge-offs between 0.30% and 0.50% of average total gross loans

In prepared remarks on the conference call, SVB Financial Group CEO Greg Becker noted that forecasts about average deposit growth assume "diminishing effects from the recent VC market recalibration," referring to a general slowdown in VC investments in smaller private companies in 2016.

Becker also pointed out that its forecast of growing net interest income "assumes continued growth in high-quality but lower-yielding loans and a smaller investment securities portfolio compared to 2016." In other words, the bank expects that its balance sheet mix will continue to shift toward lower-yielding loans and away from even lower-yielding securities.

As with most financials, rate increases by the Federal Reserve are a positive for earnings going forward. On the conference call, SVB's CFO suggested that a quarter-point increase in rates would add $25 million to $28 million of net income -- about $0.48 to $0.53 per diluted share -- on an annualized basis.

Investors rewarded the bank holding company's earnings report by sending shares higher. Through Monday morning, shares have traded up by about 9% from the earnings release after the market close on Thursday.

SVB Financial provides credit and banking services to The Motley Fool. Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends SVB Financial Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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