SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q/A, Received: 12/30/2005 06:13:25)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q/A

(Amendment No. 1 to Form 10-Q)

 

(Mark One)

 

ý         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2005

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

 

For the transition period from           to            .

 

Commission File Number: 000-15637

 

SVB FINANCIAL GROUP

(formerly Silicon Valley Bancshares)

(Exact name of registrant as specified in its charter)

 

Delaware

 

91-1962278

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3003 Tasman Drive, Santa Clara, California 95054 – 1191

 

http://www.svb.com/company/investor_fs.asp

(Address of principal executive offices including zip code)

 

(Registrant’s URL)

 

 

 

(408) 654-7400

Registrant’s telephone number, including area code:

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   o   No  ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ý   No  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o   No  ý

 

At April 30, 2005, 35,486,738 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 

 



 

TABLE OF CONTENTS

 

EXPLANATORY NOTE

3

 

 

 

PART I - FINANCIAL INFORMATION

4

 

 

 

ITEM 1.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4

 

 

 

 

INTERIM CONSOLIDATED BALANCE SHEETS

4

 

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF INCOME

5

 

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

6

 

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

7

 

 

 

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

26

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

45

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

51

 

 

 

PART II - OTHER INFORMATION

54

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

54

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

54

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

54

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

54

 

 

 

ITEM 5.

OTHER INFORMATION

54

 

 

 

ITEM 6.

EXHIBITS

54

 

 

 

SIGNATURES

55

 

 

 

INDEX TO EXHIBITS

56

 

2



 

Explanatory Note

 

SVB Financial Group (formerly known as Silicon Valley Bancshares) (the “Company”) has restated its interim consolidated financial statements as of and for the three-month period ended March 31, 2005, the consolidated annual financial statements for the years 2004, 2003 and 2002, interim consolidated financial information for each of the quarters within fiscal 2004 and 2003, and selected financial data for fiscal years 2004, 2003, 2002, 2001 and 2000 (the “Restatement”).  As previously disclosed, the Board of Directors decided on July 18, 2005 that the Company should restate these financial statements after concluding that the Company’s accounting for its warrant portfolio should conform to certain accounting pronouncements for derivative instruments interpreting Statement of Financial Accounting Standard  No. 133, as amended.    The restated financial statements reflect changes in the Company’s derivative equity warrant accounting and other related changes.  Additionally, in connection with the Restatement process, the Company reviewed, corrected and modified, where appropriate, certain of its accounting policies and practices which were not in accordance with generally accepted accounting principles in the U.S. (“GAAP”).  Changes made as a result of such corrections are also included in the restated financial statements and the selected financial data as applicable.  For a description of the changes made in connection with the Restatement, see Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Restatement of Financial Statements” below, and Note 3, “Restatement of Financial Statements,” to the accompanying interim consolidated financial statements contained in this report.

 

Additionally, effective as of May 31, 2005, the Company changed its name from Silicon Valley Bancshares to SVB Financial Group.  The Company’s new name is reflected in this document.

 

This Amendment No. 1 on Form 10-Q/A (the “Form 10-Q/A”) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, initially filed with the Securities and Exchange Commission (the “SEC”) on May 10, 2005 (the “Original Form 10-Q”), is being filed to reflect restatements of the Company’s Interim Consolidated Balance Sheets as of March 31, 2005, the related Interim Consolidated Statements of Income, Comprehensive Income and Cash Flows for the three month periods ended March 31, 2005 and March 31, 2004, and the notes related thereto.  For a more detailed description of these restatements, see Note 3, “Restatement of Financial Statements,” to the accompanying interim consolidated financial statements, and the section entitled “Restatement of Financial Statements” under Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in this Form 10-Q/A.

 

For the convenience of the reader, this Form 10-Q/A sets forth the Original Form 10-Q in its entirety.  However, this Form 10-Q/A only amends and restates Items 1, 2, 3 and 4 of Part I and Item 3 of Part II, in each case as a result of, and to reflect, the Restatement and related matters.  No other information in the Original Form 10-Q is amended hereby, except for the Company’s name change and certain updated risk factors in Item 3 of Part I.  The foregoing items have not been updated to reflect other events occurring after the filing of the Original Form 10-Q or to modify or update those disclosures affected by subsequent events.  In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Form 10-Q has been amended to contain currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Except for the foregoing amended information, this Form 10-Q/A continues to speak as of the date of the Original Form 10-Q and the Company has not updated the disclosure contained herein to reflect events that occurred as of a later date.  Other events occurring after the filing of the Original Form 10-Q or other disclosures necessary to reflect subsequent events have been or will be addressed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, and/or the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, all of which will be filed after the filing of this Form 10-Q/A, and any reports filed with the SEC subsequent to the date of this filing.

 

Prior to the filing of this Form 10-Q/A, the Company filed Amendment No. 1 on Form 10-K/A (the “2004 Form 10-K/A”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the “Original 10-K”) to reflect restatements of the Company’s consolidated financial statements and selected financial data as of and for the periods included in the Original 10-K. With the exception of the 2004 Form 10-K/A, the Company has not amended and does not intend to amend its previously filed Annual Reports on Form 10-K or its Quarterly Reports on Form 10-Q for the periods affected by the Restatement that ended prior to December 31, 2004. For this reason, the consolidated financial statements, report of independent registered public accounting firm and related financial information for the affected periods contained in such reports should no longer be relied upon .

 

3



 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in thousands, except par value)

 

March 31,
2005

 

December 31,
2004

 

 

 

(As Restated)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

257,606

 

$

284,208

 

Federal funds sold, securities purchased under agreement to resell and other short-term investments

 

197,426

 

343,010

 

Investment securities

 

2,129,568

 

2,074,967

 

Loans, net of unearned income

 

2,339,547

 

2,308,588

 

Allowance for loan and lease losses

 

(35,698

)

(37,613

)

Loans, net

 

2,303,849

 

2,270,975

 

Premises and equipment, net of accumulated depreciation and amortization

 

16,088

 

14,641

 

Goodwill

 

35,639

 

35,639

 

Accrued interest receivable and other assets

 

129,848

 

122,239

 

Total assets

 

$

5,070,024

 

$

5,145,679

 

 

 

 

 

 

 

Liabilities, Minority Interest, and Stockholders’ Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

 

$

2,642,591

 

$

2,649,853

 

Negotiable order of withdrawal (NOW)

 

29,320

 

32,009

 

Money market

 

1,191,474

 

1,206,078

 

Time

 

292,890

 

331,574

 

Total deposits

 

4,156,275

 

4,219,514

 

Contingently convertible debt

 

146,975

 

146,740

 

Junior subordinated debentures

 

48,706

 

49,470

 

Other borrowings

 

11,915

 

9,820

 

Other liabilities

 

94,035

 

107,502

 

Total liabilities

 

4,457,906

 

4,533,046

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Minority interest in capital of consolidated affiliates

 

85,110

 

70,685

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, $0.001 par value, 150,000,000 shares authorized; 35,406,732 and 35,970,095 shares outstanding at March 31, 2005 and December 31, 2004, respectively

 

35

 

36

 

Additional paid-in capital

 

21,088

 

45,226

 

Retained earnings

 

522,847

 

499,911

 

Unearned compensation

 

(3,995

)

(4,512

)

Accumulated other comprehensive income (loss)

 

(12,967

)

1,287

 

Total stockholders’ equity

 

527,008

 

541,948

 

Total liabilities, minority interest, and stockholders’ equity

 

$

5,070,024

 

$

5,145,679

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

4



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For the three months ended

 

(Dollars in thousands, except per share amounts)

 

March 31, 2005

 

March 31, 2004

 

 

 

(As Restated)

 

(As Restated)

 

Interest income:

 

 

 

 

 

Loans

 

$

47,456

 

$

35,508

 

Investment securities:

 

 

 

 

 

Taxable

 

20,974

 

13,494

 

Non-taxable

 

1,023

 

1,461

 

Federal funds sold, securities purchased under agreement to resell and other short-term investments

 

2,959

 

1,973

 

Total interest income

 

72,412

 

52,436

 

Interest expense:

 

 

 

 

 

Deposits

 

2,262

 

2,014

 

Other borrowings

 

795

 

726

 

Total interest expense

 

3,057

 

2,740

 

Net interest income

 

69,355

 

49,696

 

(Recovery of) provision for loan and lease losses

 

(3,814

)

645

 

Net interest income after (recovery of) provision for loan and lease losses

 

73,169

 

49,051

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

Client investment fees

 

7,396

 

6,268

 

Corporate finance fees

 

4,814

 

4,382

 

Letter of credit and standby letter of credit income

 

2,370

 

2,671

 

Deposit service charges

 

2,504

 

3,713

 

Gains (losses) on derivative instruments, net

 

4,026

 

2,565

 

Gains (losses) on investment securities, net

 

1,202

 

1,469

 

Other

 

2,828

 

2,859

 

Total noninterest income

 

25,140

 

23,927

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

Compensation and benefits

 

40,268

 

33,407

 

Professional services

 

5,070

 

3,339

 

Net occupancy

 

4,658

 

4,601

 

Furniture and equipment

 

2,719

 

2,909

 

Business development and travel

 

2,090

 

1,991

 

Correspondent bank fees

 

1,221

 

1,281

 

Data processing services

 

1,013

 

1,085

 

Telephone

 

889

 

782

 

Provision for (reduction of) unfunded credit commitments

 

(185

)

(719

)

Other

 

3,072

 

3,156

 

Total noninterest expense

 

60,815

 

51,832

 

 

 

 

 

 

 

Income before minority interest in net (income) loss of consolidated affiliates and income tax expense

 

37,494

 

21,146

 

Minority interest in net (income) loss of consolidated affiliates

 

441

 

(481

)

Income before income tax expense

 

37,935

 

20,665

 

Income tax expense

 

14,999

 

7,444

 

Net income

 

$

22,936

 

$

13,221

 

 

 

 

 

 

 

Earnings per common share — basic

 

$

0.64

 

$

0.38

 

Earnings per common share — diluted

 

$

0.59

 

$

0.36

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

5



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the three months ended

 

(Dollars in thousands)

 

March 31,
2005

 

March 31,
2004

 

 

 

(As Restated)

 

(As Restated)

 

Net income

 

$

22,936

 

$

13,221

 

Other comprehensive income, net of tax:

 

 

 

 

 

Change in unrealized gains (losses) on available-for-sale investment securities:

 

 

 

 

 

Unrealized holding gains (losses)

 

(14,051

)

6,844

 

Reclassification adjustment for gains (losses) included in net income

 

(203

)

722

 

Other comprehensive income (loss), net of tax

 

(14,254

)

7,566

 

Comprehensive income

 

$

8,682

 

$

20,787

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

6



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the three months ended

 

(Dollars in thousands)

 

March 31,
2005

 

March 31,
2004

 

 

 

(As Restated)

 

(As Restated)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

22,936

 

$

13,221

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

(Recovery of) provision for loan and lease losses

 

(3,814

)

645

 

(Gains) on investment securities, net

 

(1,202

)

(1,469

)

Changes in fair values of derivatives

 

462

 

2,295

 

Depreciation and amortization

 

2,136

 

2,038

 

Minority interest

 

(441

)

481

 

Tax benefit of stock compensation

 

3,284

 

1,860

 

Amortization of stock-based compensation

 

1,245

 

225

 

Amortization of deferred warrant related loan fees

 

(1,746

)

(1,377

)

Deferred income tax expense

 

2,806

 

 

Changes in other assets and liabilities:

 

 

 

 

 

(Increase) in accrued interest receivable

 

(1,117

)

(1,208

)

(Increase) decrease in accounts receivable

 

396

 

(296

)

(Increase) decrease in income tax receivable

 

5,568

 

(5,003

)

(Decrease) in accrued retention, incentive plans, and other compensation benefits payable

 

(25,169

)

(10,869

)

Other, net

 

6,596

 

3,435

 

Net cash provided by operating activities

 

11,940

 

3,978

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities

 

(186,992

)

(422,831

)

Proceeds from sales of investment securities

 

5,053

 

87,390

 

Proceeds from maturities and paydowns of investment securities

 

104,721

 

233,121

 

Net (increase) in loans

 

(34,781

)

(7,809

)

Proceeds from recoveries of charged-off loans

 

5,959

 

2,838

 

Purchases of premises and equipment

 

(3,583

)

(1,277

)

Net cash (used by) investing activities

 

(109,623

)

(108,568

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

(63,239

)

9,442

 

Increase in other borrowings, net

 

2,095

 

567

 

Capital contributions from minority interest participants, net of distributions

 

14,866

 

4,710

 

Proceeds from issuance of common stock

 

4,831

 

4,690

 

Repurchase of common stock

 

(33,056

)

 

Net cash (used) provided by financing activities

 

(74,503

)

19,409

 

Net (decrease) in cash and cash equivalents

 

(172,186

)

(85,181

)

Cash and cash equivalents at beginning of year

 

627,218

 

835,313

 

Cash and cash equivalents at end of period

 

$

455,032

 

$

750,132

 

Supplemental disclosures:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest paid

 

$

3,035

 

$

2,599

 

Income taxes paid

 

$

3,673

 

$

7,548

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

7



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.  Nature of Business

 

SVB Financial Group (formerly known as Silicon Valley Bancshares) (individually referred to as SVB Financial) and its subsidiaries (collectively, including SVB Financial, referred to as the Company) offer clients financial products and services through five lines of banking and financial services (see Note 10. Segment Reporting). SVB Financial is a bank holding company and a financial holding company whose principal subsidiary is Silicon Valley Bank (the Bank), a California-chartered bank founded in 1983, and headquartered in Santa Clara, California.

 

The Bank serves more than 10,000 clients across the country, through its 26 regional offices in the United States, and through two foreign subsidiaries located in London, England and Bangalore, India. The Bank has 12 offices throughout California and operates regional offices across the country in Arizona, Colorado, Georgia, Illinois, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, and Washington. The Bank serves clients in all stages of maturity ranging from emerging-growth companies to established middle market corporate companies in the technology and life science markets and the premium wine industry. The Company defines “emerging-growth” clients as companies in the start-up or early stages of their lifecycle; these companies tend to be privately held and backed by venture capital; they generally have few employees, are primarily engaged in research and development, have brought relatively few products or services to market, and have no or little revenue. By contrast, the Company defines “middle market” clients as companies that tend to be more mature; these companies may be publicly traded, and more established in the markets in which they participate. Additionally, merger, acquisition, private placement, and corporate partnering services are provided through the Company’s wholly-owned investment banking subsidiary, SVB Alliant, whose offices are in California and Massachusetts.

 

8



 

2.  Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements contain all adjustments (of a normal and recurring nature) that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company in accordance with accounting principles generally accepted in the United States of America (GAAP). Such interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three months ended March 31, 2005, are not necessarily indicative of the results for any future periods. These interim consolidated financial statements should be read in conjunction with the Company’s Amendment No. 1 to its Annual Report on Form 10-K/A for the year ended December 31, 2004 (the “2004 Form 10-K/A”), which was filed  prior to this Form 10-Q/A.

 

The consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements, as restated at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Note 2 to the Consolidated Financial Statements that are presented in the Company’s 2004 Form 10-K/A.

 

The preparation of interim consolidated financial statements in conformity with GAAP in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Prior to fourth quarter of 2004, the Company aggregated its allowance for loan and lease losses and its liability for unfunded credit commitments and reflected the aggregate allowance in its allowance for loan and lease losses (ALLL) balance. Commencing in the fourth quarter of 2004, the Company reflected its allowance for loan and lease losses in its ALLL balance and its liability for unfunded credit commitments in other liabilities. These reclassifications were also made to prior periods’ balance sheets to conform to current period’s presentations. Additionally, the Company reclassified expense related to the ALLL to provision for loan losses and expense related to changes in the liability for unfunded credit commitments into noninterest expense for all periods presented. Such reclassifications had no effect on our results of operations or stockholders’ equity.

 

Federal Funds Sold, Securities Purchased under Agreement to Resell and Other Short-Term Investments

 

Federal funds sold, securities purchased under agreement to resell and other short-term investments as reported in the interim consolidated balance sheets include interest-bearing deposits in other financial institutions of $23.7 million and $11.4 million at March 31, 2005 and December 31, 2004, respectively.

 

Stock-Based Compensation
 

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations, to account for its employee stock options rather than the alternative fair value accounting allowed by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” APB No. 25 provides that the compensation expense relative to the Company’s employee stock options be measured based on the intrinsic value of the stock option. SFAS No. 123 as amended by SFAS No. 148 requires those companies that continue to follow APB No. 25 to provide pro forma disclosure of the impact of applying the fair value method of SFAS No. 123.

 

The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation.”

 

The Company records compensation expense for the cost of restricted stock and restricted stock units by amortizing the grant date fair value of such grants over their vesting period.

 

Compensation expense related to the Employee Stock Purchase Plan (ESPP), used in determining the proforma net income and basic and diluted earnings per share amounts, is calculated in accordance with the provisions of FASB Technical Bulletin No. 97-1, “Accounting under Statement 123 for certain Employee Stock Purchase Plans with a look-back option.”

 

If compensation cost related to both the Company’s stock option awards to employees and directors and to the ESPP had been determined under the fair value method prescribed under SFAS No. 123, the Company’s net income, basic earnings per share, and diluted earnings per share would have been the pro forma amounts shown below for the three months ended March 31, 2005 and March 31, 2004:

 

9



 

 

 

For the three months ended
March 31,

 

(Dollars in thousands, except per share amounts)

 

2005

 

2004

 

 

 

(As Restated)

 

(As Restated)

 

Net income, as reported

 

$

22,936

 

$

13,221

 

Add: Stock-based compensation expense, net of tax reported in the net income

 

662

 

144

 

Less:

Total stock-based employee compensation expense determined under fair value based method, net of tax

 

(5,318

)

(5,488

)

Net income, pro forma

 

$

18,280

 

$

7,877

 

 

 

 

 

 

 

Earnings per common share – basic:

 

 

 

 

 

As reported

 

$

0.64

 

$

0.38

 

Pro forma

 

0.51

 

0.23

 

Earnings per diluted share – diluted:

 

 

 

 

 

As reported

 

$

0.59

 

$

0.36

 

Pro forma

 

0.48

 

0.22

 

 

Refer to the Company’s 2004 Form 10-K/A under “Part II. Item 8. Consolidated Financial Statements and Supplementary Data — Note 19 to the Consolidated Financial Statements — Employee Benefit Plans” for assumptions used in calculating the pro forma amounts above.

 

Recent Accounting Pronouncements
 

In December 2004, the FASB issued SFAS No. 123, revised 2004, “Share-Based Payment” (SFAS No. 123(R)) which is a revision of SFAS No. 123 and supersedes APB No. 25.  SFAS No. 123(R) requires the Company to measure the cost of employee services received in exchange for an award of equity instruments using a fair value method, and record such expense in the Company’s consolidated financial statements for interim or annual reporting periods beginning after June 15, 2005. On April 14, 2005 the U.S. Securities and Exchange Commission (the SEC) provided issuers with an election to defer the adoption date of SFAS No. 123(R) from the first interim or annual reporting period beginning after June 15, 2005 to the first annual reporting period beginning after June 15, 2005. The Company elected to defer the effective date of SFAS No. 123(R) until fiscal 2006.

 

The adoption of SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. The adoption of SFAS No. 123(R) will have a material impact on the Company’s consolidated results of operations, financial position, and statement of cash flows as such expense will then be reported in its consolidated financial statements rather than on a pro forma basis in the notes to the consolidated financial statements. The Company expects that the pro forma expense calculated under SFAS No. 123 (above) will approximate the expense to be recognized under SFAS No. 123(R).

 

3.   Restatement of Financial Statements

 

As described in the “Explanatory Note” of this report and in the 2004 Form 10-K/A filed with the SEC prior to the filing of this Form 10-Q/A, the Company has restated its interim consolidated financial statements as of and for the three-month period ended March 31, 2005, the consolidated annual financial statements for the years 2004, 2003 and 2002, interim consolidated financial information for each of the quarters within fiscal 2004 and 2003, and selected financial data for fiscal years 2004, 2003, 2002, 2001 and 2000, for purposes of correcting mis-applications of GAAP (the “Restatement”).  This note should be read in conjunction with Note 3, “Restatement of Financial Statements” in the Notes to the Company’s consolidated financial statements included in Item 8 of Part II, “Consolidated Financial Statements and Supplementary Data,” of the 2004 Form 10-K/A, which provides further information on the nature and impact of the Restatement.

 

The primary restatement adjustments recorded due to the misapplication of GAAP are described below.

 

Derivative equity warrant assets with net share settlement provisions were not accounted for as derivatives in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities ,” as amended (SFAS No. 133).

 

Derivative equity warrant assets with net share settlement provisions were not accounted for as derivatives in accordance with the provisions of SFAS No. 133, as amended.  This misapplication of GAAP resulted in a change to the Company’s interest income, provision for loan and lease losses, noninterest income and net income for the years ended December 31, 2004, 2003 and 2002 and for all quarterly periods during the years ended December 31, 2004 and 2003.  The total impact, including all adjustments, increased (decreased) income before income tax expense by $(1.2) million, $6.1 million and $5.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.

 

The Company often obtains derivative equity warrant assets to purchase an interest in a client’s stock in connection with providing credit facilities and, less frequently, for providing other services.  In general, the derivative equity warrant assets that it holds entitle the Company to buy a specific number of shares of stock at a specific price over a specific time period.  Certain warrants obtained by the Company include contingent provisions, which set the underlying number of shares or strike price based upon certain future events.  For example, the number of shares exercisable for some warrants is contingent upon the related lending facility, such as the extent of utilization of the facility, including draw frequency or amount.  Or, in some cases, the underlying strike price of some warrants may be contingent upon resolution of an event such as the share price of a subsequent future round of equity financing of the issuer.

 

Previously, the Company recorded these equity warrant assets on its balance sheet at a nominal value until the date they became marketable, the date of expiration, or the date the issuer was acquired or completed an initial public offering.  However, the Company determined that its accounting treatment of equity warrant assets in its private and public client companies should conform to a 2001 interpretation of SFAS No. 133 as amended.  In April 2001, the FASB issued Statement 133 Derivative Implementation Group Issue No. A17, “Contracts That Provide for Net Share Settlement,” as revised (DIG A17), which was effective with the first financial quarter, after the cleared guidance was posted to the FASB website and remains effective for all subsequent periods.

 

As a result, the Company’s accounting for equity warrant assets with net share settlement provisions has been revised beginning as of the third quarter of 2001. The net share settlement provision contained in each of the Company’s warrant agreements allows it to realize value without a capital investment.  Under such a provision, the client company delivers to the Company, upon its exercise of the warrant, the amount of shares with a current fair value equal to the net gain of the warrant agreement (sometimes described as a “cashless” exercise).  Because the Company’s warrant agreements contain such net share settlement provisions, its warrants are required to be accounted for as derivative instruments under SFAS No. 133, as amended.

 

Under the revised accounting treatment, equity warrant assets in the Company’s private and public client companies, which include net share settlement provisions are recorded at fair value and are classified as derivative assets, a component of other assets on the Company’s balance sheet at the time they are obtained. The grant date fair values of these equity warrant assets are deemed to be loan fees and, as such, are required to be recognized as an adjustment of loan yield through interest income, as prescribed by SFAS No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Indirect Costs of Leases” (SFAS No. 91).  Similar to other loan fees, the yield adjustment related to the grant date fair value of equity warrant assets, received directly in connection with the issuance of a credit facility, is recognized over the life of the related credit facility in interest income.  Any changes in value of the warrant derivative assets subsequent to the grant date fair value are recognized in gains (losses) on derivative instruments, net in the Company’s consolidated statements of income.  If the warrant is in the money, the Company exercises these equity warrants for shares when a portfolio company completes an initial public offering on a publicly reported market or is acquired by a publicly traded company.  On the date a warrant is exercised and exchanged for equity securities, it is marked to market as a derivative asset with the resulting change in value recognized in gains (losses) on derivative instruments, net, in noninterest income, a component of consolidated net income.  As of the exercise date, the basis or value in the equity securities is reclassified from Other Assets to the Investment Securities line item on the balance sheet.  The equity securities are classified as available-for-sale securities under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Instruments” (SFAS No. 115).  In accordance with the provisions of SFAS No. 115, changes in fair value of securities designated as available for sale are excluded from net income and reported in accumulated other comprehensive income after applicable taxes, which is a separate component of stockholders’ equity.

 

The initial implementation of the 2001 interpretation of SFAS No. 133, as amended, caused us to recognize the fair value of the equity warrant assets on the Company’s consolidated balance sheet as of the beginning of the third quarter of 2001.   The Company recorded as unearned loan fees the estimated grant date fair value of the equity warrant assets that, as of July 1, 2001, would not yet have been amortized to interest income had this accounting policy been in place since the equity warrant assets were first received. The unearned loan fees recorded as of July 1, 2001 were amortized, as a loan yield adjustment, over the remaining life of the related credit facilities.  In accordance with the implementation provisions of SFAS No. 133 as amended, the fair value of the equity warrant asset portfolio, less the amount recorded as unearned loan fees at July 1, 2001, is reported as a cumulative effect of a change in accounting principle.

 

Initial non-refundable corporate finance fees were not reported in accordance with the provisions of Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB No. 104).

 

Initial non-refundable corporate finance fees were not reported in accordance with the provisions of SAB No. 104. This misapplication of GAAP resulted in a change to the Company’s consolidated noninterest income and net income for the years ended December 31, 2004, 2003 and 2002.

 

The Company is engaged by clients to provide merger and acquisition advisory services. The income from these engagements is typically comprised of an initial non-refundable fee due upon execution of the engagement letter and a contingent fee due upon a merger or acquisition event, if any. The engagement letters generally do not include a termination date. Corporate finance fees on mergers and acquisitions advisory services, a component of noninterest income, have been restated to defer the recognition of the initial upfront non-refundable retainer until the completion of all contractual obligations pursuant to the terms of the engagement letters or upon receipt or notification of an engagement termination letter.  Therefore, the change in accounting resulted in a net increase (decrease) in corporate finance fees of $0.1 million, $(0.9) million and $(1.2) million for the years ended December 31, 2004, 2003 and 2002, respectively, and a corresponding change in deferred revenue for the same periods, which has been or will be recognized in future periods.

 

Non-refundable loan fees and costs associated with our lending products and fees associated with letters of credit were not reported in accordance with the provisions of SFAS No. 91.

 

Non-refundable loan fees and costs associated with the Company’s lending products were not reported in accordance with the provisions of SFAS No. 91.  This misapplication of GAAP resulted in a change to its interest income and net income for the years ended December 31, 2004, 2003 and 2002.

 

Through the Company’s lending products and services, it extends loans and other credit facilities to its commercial clients, most often secured by the assets of its clients. The Company often obtains loan fees and incurs capitalizable costs in relation to the extension of these credit facilities to its clients. Net loan fee income, a component of interest income, has been restated to revise revenue recognition in accordance with the appropriate straight-line or interest method, as prescribed by SFAS No. 91. In addition, the Company inappropriately recognized non-refundable loan fees it receives for factoring loans immediately rather than deferring and amortizing fees over the term of the facility granted.  In addition, the Company reclassified certain letters of credit fee income from loan interest income to noninterest income, as the probability of the commitment being exercised was deemed to be remote.  The Company did not properly defer direct loan origination costs associated with originating certain loan products.  Therefore, the Company restated its recognition of net loan fee income by reducing loan interest income by $2.5 million, $4.7 million and $3.0 million for the years ended December 31, 2004, 2003 and 2002 , respectively.   These amounts were deferred and are recognized into income using the appropriate loan fee recognition methodology over the lives of the corresponding loans.  In addition, we reclassified certain letters of credit fee income of $7.6 million, $7.0 million and $8.4 million for the years ended December 31, 2004, 2003 and 2002, respectively, from loan interest income to non-interest income, as the probability of the commitment being exercised was deemed to be remote.

 

Certain investment securities that were readily convertible to known amounts of cash and present insignificant risk of changes in value with original or purchased maturity dates of 90 days or less, were not reported as cash equivalents in accordance with the provisions of SFAS No. 95, Statement of Cash Flows (SFAS No. 95).

 

Certain investment securities that were readily convertible to known amounts of cash and present insignificant risk of changes in value with original or purchased maturity dates of 90 days or less, were not reported as cash equivalents in accordance with the provisions of SFAS No. 95. This reclassification did not result in any change to the Company’s revenue or net income for the years ended December 31, 2004, 2003 and 2002 or for any quarterly period during the years ended December 31, 2004 and 2003.

 

A reclassification has been made to the Company’s consolidated balance sheets of money market mutual fund investments and commercial paper investments from Investment securities to the Federal funds sold, securities purchased under agreement to resell and other short-term investment securities line item. These investment securities were deemed to meet the definition of cash equivalents as they are readily convertible to known amounts of cash and present insignificant risk of changes in value with original or purchased maturity dates of 90 days or less. Cash equivalents are required to be reflected separately from investment securities pursuant to SFAS No. 95.   Therefore, the Company reclassified these investment securities to Federal funds sold, securities purchased under agreement to resell and other short-term investment securities in the amounts of $181.3 million and $40.3 million as of December 31, 2004 and 2003, respectively.

 

Current federal income taxes receivable and current federal income taxes payable were not reflected net on the Company’s balances sheets in accordance with the provisions of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts (FIN No. 39).

 

Current federal income taxes receivable and current federal income taxes payable were not reflected net on the Company’s balance sheets. This misapplication of GAAP resulted in a change to the Company’s Other assets and Other liabilities as of December 31, 2004 and 2003. Current federal income taxes receivable and current federal income taxes payable should be netted as the Company has the legal right of offset, as defined by FIN No. 39. Therefore, Other assets and Other liabilities have been restated to reflect the net current federal income taxes receivable or net current federal income taxes payable at each of these period ends. This correction of the accounting resulted in a decrease to both Other assets and Other liabilities of $22.5 million and $24.6 million as of December 31, 2004 and 2003, respectively.

 

Impact of the Restatement of Financial Statements.

 

The cumulative impact of the restatement, including all adjustments, increased the Company’s opening retained earnings by $11.7 million at January 1, 2002.  Net income for 2003 and 2002 increased by, $1.1 million and $1.1 million, respectively, and decreased in 2004 by $1.5 million.

 

The Company also recorded various other adjusting entries as part of the Restatement.

 

The impact of the restatement on the Company’s interim consolidated balance sheet, statements of income, comprehensive income and condensed cash flows is shown in the accompanying tables.

 

10



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEET

(Unaudited)

 

 

 

March  31,

 

 

 

2005

 

(Dollars in thousands, except par value)

 

As Previously
Reported

 

Adjustments

 

As Restated

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

252,659

 

$

4,947

 

$

257,606

 

Federal funds sold, securities purchased under agreement to resell and other short-term investments

 

144,048

 

53,378

 

197,426

 

Investment securities

 

2,188,182

 

(58,614

)

2,129,568

 

Loans, net of unearned income

 

2,344,022

 

(4,475

)

2,339,547

 

Allowance for loan and lease losses

 

(35,698

)

 

(35,698

)

Net loans

 

2,308,324

 

(4,475

)

2,303,849

 

Premises and equipment, net of accumulated depreciation and amortization

 

16,476

 

(388

)

16,088

 

Goodwill

 

35,639

 

 

35,639

 

Accrued interest receivable and other assets

 

102,308

 

27,540

 

129,848

 

Total assets

 

$

5,047,636

 

$

22,388

 

$

5,070,024

 

 

 

 

 

 

 

 

 

Liabilities, Minority Interest, and Stockholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

2,642,591

 

$

 

$

2,642,591

 

NOW

 

29,320

 

 

29,320

 

Money market

 

1,191,474

 

 

1,191,474

 

Time

 

292,890

 

 

292,890

 

Total deposits

 

4,156,275

 

 

4,156,275

 

Contingently convertible debt

 

146,975

 

 

146,975

 

Junior subordinated debentures

 

50,272

 

(1,566

)

48,706

 

Other borrowings

 

11,915

 

 

11,915

 

Other liabilities

 

80,409

 

13,626

 

94,035

 

Total liabilities

 

4,445,846

 

12,060

 

4,457,906

 

Commitments and contingencies

 

 

 

 

 

 

 

Minority interest in capital of consolidated affiliates

 

84,924

 

186

 

85,110

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding

 

 

 

 

Common stock, $0.001 par value, 150,000,000 shares authorized; 35,406,732 shares outstanding

 

35

 

 

35

 

Additional paid-in capital

 

20,079

 

1,009

 

21,088

 

Retained earnings

 

511,659

 

11,188

 

522,847

 

Unearned compensation

 

(3,995

)

 

(3,995

)

Accumulated other comprehensive income

 

(10,912

)

(2,055

)

(12,967

)

Total stockholders’ equity

 

516,866

 

10,142

 

527,008

 

Total liabilities, minority interest, and stockholders’ equity

 

$

5,047,636

 

$

22,388

 

$

5,070,024

 

 

11



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

 

 

 

For the Three Months ended March 31, 2005

 

(Dollars in thousands, except per share amounts)

 

As Previously
Reported

 

Adjustments

 

As Restated

 

Interest Income:

 

 

 

 

 

 

 

Loans

 

$

48,029

 

$

(573

)

$

47,456

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

21,736

 

(762

)

20,974

 

Non-Taxable

 

1,023

 

 

1,023

 

Federal funds sold, securities purchased under agreement to resell and other short-term investments

 

2,197

 

762

 

2,959

 

Total interest income

 

72,985

 

(573

)

72,412

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

2,262

 

 

2,262

 

Other borrowings

 

795

 

 

795

 

Total interest expense

 

3,057

 

 

3,057

 

 

 

 

 

 

 

 

 

Net interest income

 

69,928

 

(573

)

69,355

 

(Recovery of) provision for loan and lease losses

 

(3,843

)

29

 

(3,814

)

Net interest income after (recovery of) provision for loan and lease losses

 

73,771

 

(602

)

73,169

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Client investment fees

 

7,396

 

 

7,396

 

Corporate finance fees

 

4,748

 

66

 

4,814

 

Letter of credit and standby letter of credit income

 

4,693

 

(2,323

)

2,370

 

Deposit service charges

 

2,504

 

 

2,504

 

Income from client warrants

 

1,723

 

(1,723

)

 

Gains (losses) on derivative instruments, net

 

 

4,026

 

4,026

 

Gains (losses) on investment securities, net

 

1,599

 

(397

)

1,202

 

Other

 

3,512

 

(684

)

2,828

 

Total noninterest income

 

26,175

 

(1,035

)

25,140

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Compensation and benefits

 

40,154

 

114

 

40,268

 

Professional services

 

5,070

 

 

5,070

 

Net occupancy

 

4,580

 

78

 

4,658

 

Furniture and equipment

 

2,719

 

 

2,719

 

Business development and travel

 

2,090

 

 

2,090

 

Correspondent bank fees

 

1,221

 

 

1,221

 

Data processing services

 

1,013

 

 

1,013

 

Telephone

 

889

 

 

889

 

Provision for (reduction of) unfunded credit commitments

 

(185

)

 

(185

)

Other

 

3,072

 

 

3,072

 

Total noninterest expense

 

60,623

 

192

 

60,815

 

Income before minority interest in net (income) losses of consolidated affiliates and income tax expense

 

39,323

 

(1,829

)

37,494

 

Minority interest in net (income) losses of consolidated affiliates

 

616

 

(175

)

441

 

Income (loss) before income tax expense

 

39,939

 

(2,004

)

37,935

 

Income tax expense (benefit)

 

15,789

 

(790

)

14,999

 

Net income

 

$

24,150

 

$

(1,214

)

$

22,936

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share-basic

 

$

0.68

 

$

(0.04

)

$

0.64

 

Earnings per common share-diluted

 

$

0.62

 

$

(0.03

)

$

0.59

 

 

12



 

SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)

 

 

 

Three Months Ended March 31, 2004

 

 

 

As Previously

 

 

 

 

 

(Dollars in thousands, except per share amounts)

 

Reported

 

Adjustments

 

As Restated

 

Interest Income:

 

 

 

 

 

 

 

Loans

 

$

36,632

 

$

(1,124

)

$

35,508

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

14,023

 

(529

)

13,494

 

Non-Taxable

 

1,461

 

 

1,461

 

Federal funds sold, securities purchased under agreement to resell and other short-term investments

 

1,444

 

529

 

1,973

 

Total interest income

 

53,560

 

(1,124

)

52,436

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

2,014

 

 

2,014

 

Other borrowings

 

726

 

 

726

 

Total interest expense

 

2,740

 

 

2,740

 

 

 

 

 

 

 

 

 

Net interest income

 

50,820

 

(1,124

)

49,696

 

(Recovery of) provision for loan and leases losses

 

736

 

(91

)

645

 

Net interest income after (recovery of) provision for loan and lease losses

 

50,084

 

(1,033

)

49,051

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Client investment fees

 

6,268

 

 

6,268

 

Corporate finance fees

 

4,087

 

295

 

4,382

 

Letter of credit and standby letter of credit income

 

3,729

 

(1,058

)

2,671

 

Deposit service charges

 

3,713

 

 

3,713

 

Income from client warrants

 

2,908

 

(2,908

)

 

Gains (losses) on derivative instruments, net

 

 

2,565

 

2,565

 

Gains (losses) on investment securities, net

 

1,322

 

147

 

1,469

 

Other

 

2,859

 

 

2,859

 

Total noninterest income

 

24,886

 

(959

)

23,927

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Compensation and benefits

 

34,103

 

(696

)

33,407

 

Professional services

 

3,339

 

 

3,339

 

Net occupancy

 

4,523

 

78

 

4,601

 

Furniture and equipment

 

2,909

 

 

2,909

 

Business development and travel

 

1,991

 

 

1,991

 

Correspondent bank fees

 

1,281

 

 

1,281

 

Data processing services

 

1,085

 

 

1,085

 

Telephone

 

782

 

 

782

 

Provision for (reduction of) unfunded credit commitments

 

(719

)

 

(719

)

Other

 

3,156

 

 

3,156

 

Total noninterest expense

 

52,450

 

(618

)

51,832

 

Income before minority interest in net (income) losses of consolidated affiliates and income tax expense

 

22,520

 

(1,374

)

21,146

 

Minority interest in net (income) losses of consolidated affiliates

 

(481

)

 

(481

)

Income (loss) before income tax expense

 

22,039

 

(1,374

)

20,665

 

Income tax expense (benefit)

 

8,029

 

(585

)

7,444

 

Net income

 

$

14,010

 

$

(789

)

$

13,221

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share-basic

 

$

0.40

 

$

(0.02

)

$

0.38

 

Earnings per common share-diluted

 

$

0.38

 

$

(0.02

)

$

0.36

 

 

13



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months ended March 31, 2005

 

(Dollars in thousands)

 

As Previously
Reported

 

Adjustments

 

As Restated

 

Net income

 

$

24,150

 

$

(1,214

)

$

22,936

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Cumulative translation gain:

 

422

 

(422

)

0

 

Change in unrealized gains on available-for-sale investment securities:

 

 

 

 

 

 

 

Unrealized holding gains (losses), net of tax

 

(13,738

)

(313

)

(14,051

)

Reclassification adjustment for gains (losses) included in net income, net of tax

 

(1,945

)

1,742

 

(203

)

Other comprehensive income (loss), net of tax

 

(15,261

)

1,007

 

(14,254

)

Comprehensive income (loss)

 

$

8,889

 

$

(207

)

$

8,682

 

 

 

 

For the Three Months ended March 31, 2004

 

(Dollars in thousands)

 

As Previously
Reported

 

Adjustments

 

As Restated

 

Net income

 

$

14,010

 

$

(789

)

$

13,221

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Change in unrealized gains on available-for-sale investment securities:

 

 

 

 

 

 

 

Unrealized holding gains (losses)

 

8,246

 

(1,402

)

6,844

 

Reclassification adjustment for gains (losses) included in net income, net of tax

 

(2,484

)

3,206

 

722

 

Other comprehensive income (loss), net of tax

 

5,762

 

1,804

 

7,566

 

Comprehensive income (loss)

 

$

19,772

 

$

1,015

 

$

20,787

 

 

14



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months ended March 31,
2005

 

(Dollars in thousands)

 

As Previously
Reported

 

Adjustments

 

As Restated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net cash (used) provided by operating activities

 

10,782

 

1,158

 

11,940

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Net cash (used) provided by investing activities

 

14,057

 

(123,680

)

(109,623

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net cash (used) provided by financing activities

 

(74,502

)

(1

)

(74,503

)

Foreign exchange effect on cash and cash equivalents

 

422

 

(422

)

 

Net increase (decrease) in cash and cash equivalents

 

(49,241

)

(122,945

)

(172,186

)

Cash and cash equivalents at beginning of period

 

445,948

 

181,270

 

627,218

 

Cash and cash equivalents at end of period

 

$

396,707

 

$

58,325

 

$

455,032

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest paid

 

$

3,035

 

$

 

$

3,035

 

Income taxes paid

 

$

3,673

 

$

 

$

3,673

 

 

 

 

For the Three Months ended March 31,
2004

 

(Dollars in thousands)

 

As
Previously
Reported

 

Adjustments

 

As Restated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net cash (used) provided by operating activities

 

2,912

 

1,066

 

3,978

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Net cash (used) provided by investing activities

 

(126,990

)

18,422

 

(108,568

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net cash (used) provided by financing activities

 

19,501

 

(92

)

19,409

 

Foreign exchange effect on cash and cash equivalents

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(104,577

)

19,396

 

(85,181

)

Cash and cash equivalents at beginning of period

 

794,996

 

40,317

 

835,313

 

Cash and cash equivalents at end of period

 

$

690,419

 

$

59,713

 

$

750,132

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest paid

 

$

2,599

 

$

 

$

2,599

 

Income taxes paid

 

$

7,548

 

$

 

$

7,548

 

 

Notes 2, 4, 5, 6, 7, 8 and 10  to the consolidated financial statements have also been restated.

 

15



 

4.  Earnings Per Share (EPS)

 

The following is a reconciliation of basic EPS to diluted EPS for the three months ended March 31, 2005 and March 31, 2004: (Dollars and shares in thousands, except per share amounts)

 

 

 

For the three months ended March 31, 2005

 

 

 

Net
Income

 

Weighted
Average
Shares

 

Per Share
Amount

 

 

 

(As Restated)

 

(As Restated)

 

(As Restated)

 

Basic EPS:

 

 

 

 

 

 

 

Income available to common stockholders

 

$

22,936

 

35,632

 

$

0.64

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options, restricted stock and convertible debt

 

 

3, 134

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

Income available to common stockholders and assumed conversions

 

$

22,936

 

38,766

 

$

0.59

 

 

 

 

For the three months ended March 31, 2004

 

 

 

Net
Income

 

Weighted
Average
Shares

 

Per Share
Amount

 

 

 

(As Restated)

 

(As Restated)

 

(As Restated)

 

Basic EPS:

 

 

 

 

 

 

 

Income available to common stockholders

 

$

13,221

 

34,881

 

$

0.38

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options, restricted stock and convertible debt

 

 

1,890

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

Income available to common stockholders and assumed conversions

 

$

13,221

 

36,771

 

$

0.36

 

 

In September 2004, the EITF reached final consensus on EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”, requiring that contingently convertible securities should be treated as convertible securities and included in the calculation of diluted earnings per common share.  The diluted earnings per common share for the three months ended March 31, 2005 and 2004, have been restated to reflect the December 31, 2004 adoption of EITF Issue 04-8.  The potentially dilutive effect of the contingently convertible debt using the treasury stock method was 1,029,417 shares as of March 31, 2005.  The Company included the dilutive effect of the $150.0 million zero-coupon, convertible subordinated notes due June 15, 2008 in its fully diluted earnings per share (EPS) calculation using the treasury stock method, in accordance with the provisions of Emerging Issue Task Force (EITF) issue No. 90-19, “Convertible Bonds With Issuer Option to Settle in Cash Upon Conversion” and Statement of Financial Accounting Standard (SFAS) No. 128, “Earnings Per Share.” However, the exposure draft of SFAS No. 128R, if adopted in its proposed form, will require the Company to change its accounting for the calculation of EPS on its contingently convertible debt to the “if-converted method.” The “if-converted” treatment of the contingently convertible debt would have decreased EPS by $0.05 per diluted common share, or 8.5% for the three months ended March 31, 2005.

 

16



 

5.  Investment Securities

 

The detailed composition of the Company’s investment securities is presented as follows:

 

(Dollars in thousands)

 

March 31,
2005

 

December 31,
2004

 

 

 

(As Restated)

 

 

 

Available-for-sale securities, at fair value

 

$

1,969,265

 

$

1,926,685

 

Marketable securities (investment company fair value accounting)

 

473

 

480

 

Non-marketable securities (investment company fair value accounting):

 

 

 

 

 

Venture capital fund investments(1)

 

59,606

 

52,547

 

Other private equity investments(2)

 

18,743

 

15,720

 

Other investments(3)

 

12,329

 

11,247

 

Non-marketable securities (equity method accounting):

 

 

 

 

 

Other investments(4)

 

3,089

 

2,388

 

Low income housing credit funds

 

13,473

 

14,070

 

Non-marketable securities (cost method accounting):

 

 

 

 

 

Fund investments

 

28,102

 

27,409

 

Federal Home Loan Bank stock (5)

 

12,798

 

12,798

 

Federal Reserve Bank stock (5)

 

7,954

 

7,967

 

Other private equity investments

 

3,736

 

3,656

 

Total investment securities

 

$

2,129,568

 

$

2,074,967

 

 


(1)                Includes $48.4 million and $45.3 million related to SVB Strategic Investors Fund, LP, at March 31, 2005, and December 31, 2004, respectively. The Company has a controlling ownership interest of 12.6% and 11.1% in the fund at March 31, 2005 and December 31, 2004, respectively. It also included $11.2 million and $7.3 million related to SVB Strategic Investors Fund II, LP, at March 31, 2005 and December 31, 2004, respectively. The Company has a controlling interest of 9.5% and 14.4% in the fund at March 31, 2005 and December 31, 2004, respectively.

(2)                Includes $18.7 million and $15.7 million related to Silicon Valley BancVentures, LP, at March 31, 2005, and December 31, 2004, respectively. The Company has a controlling ownership interest of 10.7% in the fund for both periods ended March 31, 2005 and December 31, 2004.

(3)                Includes $9.3 million and $9.0 million related to Partners for Growth, LP, at March 31, 2005 and December 31, 2004, respectively. The Company has a majority ownership interest of 53.2% in the fund for both periods ended March 31, 2005 and December 31, 2004.  It also included $3.0 million and $2.3 million related to Gold Hill Venture Lending 03, LP, as of March 31, 2005 and December 31, 2004, respectively.  The Company has a direct ownership interest of 4.8% in the fund for both periods ended March 31, 2005 and December 31, 2004.

(4)                Includes $3.1 million and $2.4 million related to Gold Hill Venture Lending Partners 03, LLC, the general partner of Gold Hill Venture Lending 03, LP, as of March 31, 2005 and December 31, 2004, respectively. The Company has a majority interest of 90.7% in Gold Hill Venture Lending Partners 03, LLC.  Gold Hill Venture Lending Partners 03, LLC has an ownership interest of 5.0% in the fund for both periods ended March 31, 2005 and December 31, 2004.

(5)                Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock are restricted, as the Company is required to hold shares of FHLB and FRB stock under the Bank’s borrowing agreements.

 

The following table presents the components of gains and losses on investment securities, for the three months ended March 31, 2005 and March 31, 2004.

 

17



 

(Dollars in thousands)

 

March 31,
2005

 

March 31,
2004

 

 

 

(As Restated)

 

(As Restated)

 

Gross gains on investment securities:

 

 

 

 

 

Available-for-sale securities, at fair value

 

$

50

 

$

1,233

 

Non-marketable securities

 

 

 

 

 

Venture capital fund investments

 

3,646

 

1,293

 

Other private equity investments

 

405

 

1,494

 

Total gross gains on investment securities

 

4,101

 

4,020

 

 

 

 

 

 

 

Gross losses on investment securities:

 

 

 

 

 

Available-for-sale securities, at fair value

 

(397

)

(3

)

Non-marketable securities

 

 

 

 

 

Venture capital fund investments

 

(2,102

)

(1,341

)

Other private equity investments

 

(400

)

(1,207

)

Total gross losses on investment securities

 

(2,899

)

(2,551

)

Net gains (losses) on investment securities

 

$

1,202

 

$

1,469

 

 

6.  Loans and Allowance for Loan and Lease Losses

 

The detailed composition of loans, net of unearned income of $18.1 million and $18.4 million, for the periods ended March 31, 2005, and December 31, 2004 is presented in the following table:

 

(Dollars in thousands)

 

March 31,
2005

 

December 31,
2004

 

 

 

(As Restated)

 

 

 

Commercial loans

 

$

1,944,089

 

$

1,927,271

 

 

 

 

 

 

 

Vineyard development

 

89,887

 

80,960

 

Commercial real estate

 

22,152

 

18,562

 

Total real estate construction

 

112,039

 

99,522

 

 

 

 

 

 

 

Real estate term — consumer

 

27,671

 

27,124

 

Real estate term — commercial

 

19,604

 

16,720

 

Total real estate term

 

47,275

 

43,844

 

 

 

 

 

 

 

Consumer and other

 

236,144

 

237,951

 

Total loans, net of unearned income

 

$

2,339,547

 

$

2,308,588

 

 

The activity in the allowance for loan and lease losses for the three months ended March 31, 2005 and March 31, 2004 was as follows:

 

 

 

(As Restated)

 

 

 

Three months ended March 31,

 

(Dollars in thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Beginning balance

 

$

37,613

 

$

49,862

 

(Recovery of) provision for loan and lease losses

 

(3,814

)

645

 

Loans charged off

 

(4,060

)

(3,964

)

Recoveries

 

5,959

 

2,838

 

Ending balance

 

$

35,698

 

$

49,381

 

 

The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $13.4 million and $14.0 million at March 31, 2005 and March 31, 2004, respectively. Allocations of the allowance for loan and lease losses specific to impaired loans totaled $3.8 million at March 31, 2005, and $4.7 million at March 31, 2004. Average impaired loans for the three months ended 2005 and 2004 totaled $13.8 million and $14.4 million, respectively.

 

18



 

7.               Borrowings

 

The following table represents the outstanding borrowings at March 31, 2005 and December 31, 2004:

 

(Dollars in thousands)

 

Maturity

 

March 31,
2005

 

December 31,
2004

 

 

 

 

 

(As Restated)

 

 

 

 

 

 

 

 

 

 

 

0% Short-term borrowings(1)

 

September 28, 2005

 

$

9,192

 

$

9,120

 

Other borrowings

 

Overdraft

 

1,523

 

 

Revolving line of credit — venture debt fund

 

Due on Demand

 

1,200

 

700

 

Total other borrowings

 

 

 

$

11,915

 

$

9,820

 

 

 

 

 

 

 

 

 

Contingently convertible debt

 

June 15, 2008

 

$

146,975

 

$

146,740

 

Junior subordinated debentures

 

October 15, 2033

 

48,706

 

49,470

 

 


(1)           Relates to the acquisition of SVB Alliant (Alliant Partners) in 2001 and are payable to the former owners, who have been employed by the Company.  These notes were discounted over their respective terms, based on market interest rates as of September 28, 2001.

 

Interest expense related to other borrowings was $0.8 million and $0.7 million for the three months ended March 31, 2005 and 2004, respectively.  The weighted average interest rates associated with the Company’s borrowings outstanding for the three months ended March 31, 2005 and the year ended December 31, 2004 was 1.57% and 1.36%, respectively.

 

Contingently Convertible Debt

 

On May 20, 2003, the Company issued $150.0 million of zero-coupon, convertible subordinated notes at face value, due June 15, 2008, to qualified institutional buyers pursuant to Rule 144A under the Securities Act and outside the United States to non-US persons pursuant to Regulation S under the Securities Act. The notes are convertible into the Company’s common stock at a conversion price of $33.6277 per share and are subordinated to all present and future senior debt of the Company. Holders of the notes may convert their notes only if: (i) the price of the Company’s common stock issuable upon conversion of a note reaches a specified threshold, (ii) specified corporate transactions occur, or (iii) the trading price for the notes falls below certain thresholds. At the initial conversion price, each $1,000 principal amount of notes will be convertible into approximately 29.7374 shares of the Company’s common stock. This represents 4,460,610 shares of the Company’s common stock. On August 14, 2003, the Company filed a shelf registration statement with the Securities and Exchange Commission, with respect to the resale of the notes and the common stock issuable upon the conversion of the notes. The fair value of the convertible subordinated notes at March 31, 2005, was $196.5 million, based on quoted market prices. The Company intends to settle the principal amount of $150.0 million (accreted value) in cash. Based on the terms of the notes, if, at any time before June 15, 2007, the per share stock price on the last trading day of the immediately preceding fiscal quarter was 110% or more of the then current conversion price, the notes would become convertible. As of March 31, 2005, t he Company was unaware of any note holders exercising their conversion option.

 

Concurrent with the issuance of the convertible notes, the Company entered into a convertible note hedge and a warrant transaction with respect to its common stock, with the objective of decreasing its exposure to potential dilution from conversion of the notes (see Note 8. Derivative Financial Instruments - Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock).

 

7.0% Junior Subordinated Debentures

 

On October 30, 2003, the Company issued $51.5 million in 7.0% junior subordinated debentures to a special-purpose trust, SVB Capital II. The Company’s distributions to SVB Capital II are cumulative and are payable quarterly at a fixed rate of 7.0% per annum of the face value of the junior subordinated debentures. The junior subordinated debentures are mandatorily redeemable upon the maturity of the debentures on October 15, 2033, or to the extent the Company redeems any debentures earlier. The Company may redeem the debentures prior to maturity in whole or in part, at its option, at any time on or after October 30, 2008. In addition, the Company may redeem the debentures, in whole but not in part, prior to October 30, 2008 upon the occurrence of certain events. Issuance costs of $2.2 million related to the junior subordinated debentures were deferred and are being amortized over the period until mandatory redemption of the debentures in October 2033. Also see Note 8. Derivative Financial Instruments below. The fair value of the 7.0% junior subordinated debentures was estimated to be $49.9 million as of March 31, 2005 and $50.2 million as of December 31, 2004.  The Company has guaranteed the trust preferred securities issued by SVB Capital II.

 

19



 

Available Lines of Credit
 

As of March 31, 2005, the Company had available $306.0 million in federal funds and lines of credit, all of which was unused. In addition to the available federal funds lines, the Company has reverse repurchase agreement lines available with multiple securities dealers. Reverse repurchase lines allow the Company to finance short-term borrowings using various fixed income securities as collateral. At March 31, 2005, the Company had not borrowed against any of its reverse repurchase lines.

 

8.   Derivative Financial Instruments

 

The Company designates a derivative as held for hedging purposes or as non-hedging when it enters into a derivative contract. The designation may change based upon management’s reassessment or changing circumstances. Derivative instruments that the Company obtains or uses include interest rate swaps, forward contracts, options and warrants.  A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined future date, rate or price. An option or warrant contract is an agreement that conveys to the purchaser the right, but not the obligation, to buy or sell a quantity of a financial instrument (including another derivative financial instrument), index, currency or commodity at a predetermined rate or price during a period or at a time in the future. Option or warrant agreements can be transacted on organized exchanges or directly between parties. The Company records period end gross positive fair value of derivative assets in other assets and gross negative fair values of derivative instruments in other liabilities.

 

The total notional or contractual amounts, credit risk amount and estimated net fair value for derivatives were:

 

 

 

(As Restated)

 

 

 

At March 31, 2005

 

 

 

Notional or
contractual
amount

 

Credit risk
Amount (1)

 

Estimated net
fair value

 

 

 

(Dollars in thousands)

 

Fair Value Hedge

 

 

 

 

 

 

 

Interest rate swap

 

$

50,000

 

$

0

 

$

(783

)

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

Foreign exchange spot and forwards

 

479,490

 

5,398

 

846

 

Foreign currency options

 

17,250

 

23

 

0

 

Equity warrant assets

 

n/a

 

28,824

 

28,824

 

 

 

 

(As Restated)

 

 

 

At December 31, 2004

 

 

 

(Dollars in thousands)

 

Fair Value Hedge

 

 

 

 

 

 

 

Interest rate swap

 

$

50,000

 

$

49

 

$

49

 

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

Foreign exchange spot and forwards

 

525,434

 

10,011

 

(431

)

Foreign currency options

 

13,460

 

47

 

0

 

Equity warrant assets

 

n/a

 

28,928

 

28,928

 

 


(1)   Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by any such counterparties.

 

Fair Value Hedges

 

Derivative instruments that the Company holds as part of its interest rate risk management may include interest rate swaps, caps and floors, and forward contracts. On October 30, 2003, the Company entered into an interest rate swap agreement with a notional amount of $50.0 million. This agreement hedges against the risk of changes in fair values associated with the majority of the Company’s 7.0% fixed rate, junior subordinated debentures. For information on the Company’s junior subordinated debentures, see Note 7 - Borrowings.

 

The terms of this fair value hedge agreement provide for a swap of the Company’s 7.0% fixed rate payment for a variable rate based on London Inter-Bank Offer Rate (LIBOR) plus a spread. Because the swap meets the criteria for the short-cut treatment, the benefit or expense is recorded in the period incurred. This derivative agreement provided income of $0.4 million and $0.6 million in

 

20



 

the first three months of 2005 and 2004, respectively. The swap agreement mirrors the terms of the junior subordinated debentures and therefore is callable by the counterparty anytime on or after October 30, 2008. The Company assumes no ineffectiveness as the swap agreement meets the short-cut method requirements under SFAS No. 133 for fair value hedges of debt instruments. As a result, changes in the fair value of the swap are offset by changes in the fair value of the junior subordinated debentures, and no net gain or loss is recognized in earnings. Changes in the fair value of the derivative agreement and the junior subordinated debentures are primarily dependent on changes in market interest rates.

 

Derivatives

 

The Company enters into various derivatives primarily to provide derivative products or services to customers.  These derivatives are not linked to specific assets and liabilities on the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting.

 

The Company enters into foreign exchange forward contracts and non-deliverable foreign exchange forward contracts with clients involved in international trade finance activities, either as the purchaser or seller of foreign currency at a future date, depending upon the client’s need. For each of the foreign exchange forward contracts and non-deliverable foreign exchange forward contracts entered into with its clients, the Company enters into an opposite way foreign exchange forward contract and non-deliverable foreign exchange forward contract with a correspondent bank, which mitigates the risk of fluctuations in foreign currency exchange rates. These contracts are short-term in nature, typically expiring within one year. The Company has not experienced nonperformance by counterparties and therefore has not incurred related losses. Further, the Company anticipates performance by all counterparties to such agreements. Period end fair value of foreign currency forward contracts is included in other assets and other liabilities as of March 31, 2005 and December 31, 2004.  The change in fair value of these contracts is recorded in the line item gains (losses) on  derivative instruments, net in noninterest income, a component of consolidated net income.

 

The Company enters into foreign currency option contracts with clients involved in international trade finance activities, either as the purchaser or seller of foreign currency options, depending upon the client’s need. For each of the currency option contracts entered into with its clients, the Company enters into an opposite way foreign currency option contract with a correspondent bank, which mitigates the risk of fluctuations in foreign currency exchange rates. These contracts typically expire in less than one year. The Company has not experienced nonperformance by counterparties and therefore has not incurred related losses. Further, the Company anticipates performance by all counterparties. The change in fair value of these contracts is recorded in gains (losses) on  derivatives, net in noninterest income, a component of consolidated net income.

 

The Company enters into foreign exchange forward contracts with correspondent banks to economically hedge the risk of fluctuations in the foreign exchange exposure risk related to certain foreign currency denominated loans. These contracts are short term in nature, typically expiring within one year. The Company has not experienced nonperformance by counterparties and therefore has not incurred related losses. Further, the Company anticipates performance by all counterparties to such foreign exchange forward contracts.   The change in fair value of these contracts is recorded in gains (losses) on derivatives, net in noninterest income, a component of consolidated net income.

 

The Company obtains derivative equity warrant assets to purchase an equity position in a client company’s stock in consideration for providing credit facilities and less frequently for providing other services. The purpose of obtaining warrants from client companies is intended to increase future revenue. Period end date fair value is recorded in th