Shares of SVB Financial Group ( SIVB) of Santa Clara, Calif., closed at $57.63 Tuesday, returning 21% year-to-date, following a 10% decline during 2011. SVB's main subsidiary is Silicon Valley Bank, which has been greatly expanding its overseas operations, with offices in the United Kingdom, Israel, China and India, in addition to 27 offices throughout the United States. Despite the international growth, the company focuses on lending to technology companies, providing multiple services to venture capital and private equity firms that invest in tech and biotech, and also on private banking services for high net worth individuals, in its home market in the Silicon Valley area. SVB Financial Group reported second-quarter net income available to common shareholders of $47.6 million, or $1.06 a share, increasing from $34.8 million, or 78 cents a share in the first quarter, but declining from $65.8 million, or $1.53 a share, in the second quarter of 2011, when the company booked $71.7 million in gains on investment securities. Investment securities gains totaled $25.8 million in the most recent quarter. Second-quarter net interest income totaled $151.9 million, increasing from $150.9 million the previous quarter, and $130.5 million a year earlier. The increase in net interest income reflected very strong loan growth of 9% quarter-over-quarter, and 30% year-over-year, to $7.8 billion, as of June 30. In a tough environment for banks' margins, as long-term rates have continued to decline, while the benefit of declining short-term rates has mostly been realized, SVB's net interest margin has held up reasonably well, at 3.22% during the second quarter, declining from 3.30% in the first quarter, but increasing from 3.13% in the second quarter of 2011. SVB Financial Group's second-quarter return on average assets (ROA) was 0.92%, improving from 0.69% in the first quarter. The return on average common equity was 11.21%, increasing from 8.61% the previous quarter. Coffey says that "the reason you don't see great returns right now is that they have a bloated balance sheet," since "they kept a lot of deposits off balance sheet in money market funds, and when the money market industry collapsed, those deposits came back on the balance sheet." Excess liquidity was invested in securities, which the company has been slowly selling. "Right now, average securities are 57% of earning assets," Coffey says, increasing from just 27% in 2007, and now that money market funds are healthy again, "they are moving more deposits every quarter off the balance sheet back to the money market funds." The company's outlook for all of 2012 results an increase in average loan balances "at a percentage rate in the high twenties," and increase in net interest income "at a percentage rate in the high teens," a net interest margin ranging between 3.20% and 3.30%, and continued strong asset quality, with a level of nonperforming loans to total loans "lower than 2011 levels of 0.52%." Coffey also sees continued strong credit quality for the company. "Because the IPO market is functioning again, a lot of venture capital firms have cash now, and they are able to backstop other companies, which lowers the risk profile of Silicon Valley Bancorp's loans to small companies," he says. SVB's shares trade for 1.5 times their reported June 30 book value of $38.63, and for 15.5 times the consensus 2013 earnings estimate of $3.70 a share. The consensus 2012 EPS estimate is $3.59. Coffey rates SVB Financial Group "Outperform," with a price target of $68, and said in July after the company reported its second-quarter results that "the stock is currently priced well below its two-year median based on forward earnings (16x vs. 19x) and tangible book (149% vs. 158%)," and that stock is "priced on forward expectations of limited economic growth and systemic risk as opposed to fundamentals." At that time, the analyst said "the company's balance sheet growth should continue albeit at a pace slower than the 12% annualized rate through 1H-2012. Improvement in the mix of earning assets, specifically increasing loans and declining cash and equivalents, should result in steadily rising spread income." SIVB data by YCharts
Interested in more on SVB Financial Group? See TheStreet Ratings' report card for this stock.