Bank of the Tech Stars: a Great Stock to Own

NEW YORK ( TheStreet) -- SVB Financial ( SIVB) has been on a loan-growth tear, which sets the company apart during a time of major challenge for the banking industry.

JPMorgan Chase analyst Steven Alexopoulos on Tuesday said that "in the backdrop of a slowing economy and the fiscal cliff, as people and companies continue to innovate, we see SIVB as one of the few banks positioned to post strong loan growth, with a 3-year avg loan compounded annual growth rate of 20.3% (vs. peers at 0.3%) likely to remain intact."

That's an amazingly strong loan growth rate during a sluggish economic recovery, and "with loan growth being one of the very few remaining tools left in the industry's toolkit to combat the net interest margin, or NIM storm, SIVB is also well positioned from a NIM perspective," according to Alexopoulos.

SVB Financial is the holding company for Silicon Valley Bank, which has offices in the United Kingdom, Israel, China and India, in addition to 27 offices throughout the United States.

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 had $21.6 billion in total assets as of Sept. 30. The company reported third-quarter net income available to common shareholders of $42.3 million, or 94 cents a share, declining from $47.6 million, or $1.06 a share, in the second quarter, but increasing from $37.6 million, or 86 cents a share, during the third quarter of 2011.

Earnings were down sequentially because SVB in the second quarter booked "pre-tax gains of $5.0 million from the sale of certain available-for-sale securities and pre-tax gains of $4.2 million from the sale of certain assets related to our equity management services business." Excluding the gains, second-quarter earnings would have been $42.1 million, or 94 cents a share.

The company's total loans grew 5% sequentially and 29% year-over-year, to $8.2 billion, as of Sept. 30.

Third-quarter net interest income was $154.4 million, increasing from $151.9 million the previous quarter, and $135.5 million, a year earlier. The net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- was a tax-adjusted 3.12%, narrowing from 3.22% in the second quarter, but down only slightly from 3.13% in the third quarter of 2011. The company said that the narrowing of the margin was "primarily due to a decrease in the overall yield of our loan and available-for-sale securities portfolios," and that "the decrease in yields was partially offset by growth in average loan balances, which has resulted in a favorable change in our mix of interest-earning assets."

Third-quarter noninterest income declined to $69.1 million, from $80.4 million the previous quarter, and $95.6 million a year earlier, reflecting higher gains on securities and derivatives in the prior periods.

SVB Financial's third-quarter return on average assets was 0.77% and its return on average common equity was 9.44%.

Alexopoulos rates SVB Financial "Overweight," with a $68 price target, implying 25% upside over the stock's closing price of $54.33 on Monday.

After meeting with SVB Financial CFO Michael Descheneaux, The analyst said that "the key message we walked away with is that not only is SVB Financial well positioned as a niche growth story within the regional banks, but more specifically, its growth model may actually prove to be uniquely positioned for these uncertain times at hand given its leverage to the innovation sector."

"The key to SIVB's loan growth will be staying with innovation companies as they grow," Alexopoulos said. "With SIVB being one of the very few early stage lenders in the country, the company has a significant growth opportunity in staying with these companies as they become larger."

Alexopoulos went on to say that "SIVB currently has 50-60% share of early stage companies but only 15% share of later stage companies and less than 10% share of global companies, representing a significant opportunity. On global growth, this represents a longer-term opportunity."

When discussing the risk of an investment in SVB Financial's stock, Alexopoulos said that "while items such as the fiscal cliff could result in a further slowdown in economic growth, a larger risk for the company is some type of event (such as the Lehman bankruptcy) that causes investors and companies to pull back on acquisitions and investment. Although it's hard to argue that a slowing economic backdrop is a good thing for SIVB's core clients, so long as companies continue to innovate to solve modern day problems and these innovations provide a good return to investors, then the momentum within the food chain of the innovation cycle should continue, providing SIVB with an opportunity to post well above peer growth."

SVB Financial's stock returned 14% year-to-date through Monday's close, following a 10% decline during 2011. The shares trade for 1.4 times their reported Sept. 30 book value of $40.10, and for 15 times the consensus 2013 earnings estimate of $3.60 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $3.79.

SIVB Chart SIVB data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.