SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 12/30/2005 06:13:32)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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 June 30, 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

 

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

incorporation or organization)

 

 

 

 

 

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 December 23, 2005, 34,910,915 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 

 



 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3

 

 

 

 

INTERIM CONSOLIDATED BALANCE SHEETS

3

 

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF INCOME

4

 

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

5

 

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

6

 

 

 

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7

 

 

 

ITEM 2.

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

26

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

49

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

50

 

 

 

PART II - OTHER INFORMATION

53

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

53

 

 

 

ITEM 1A.

RISK FACTORS

53

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

58

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

58

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

59

 

 

 

ITEM 5.

OTHER INFORMATION

59

 

 

 

ITEM 6.

EXHIBITS

59

 

 

 

SIGNATURES

60

 

 

 

INDEX TO EXHIBITS

61

 

2



 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands, except par value)

 

2005

 

2004

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

259,824

 

$

284,208

 

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

 

278,421

 

343,010

 

Investment securities

 

2,201,016

 

2,074,967

 

Loans, net of unearned income

 

2,423,965

 

2,308,588

 

Allowance for loan and lease losses

 

(36,372

)

(37,613

)

Loans, net

 

2,387,593

 

2,270,975

 

Premises and equipment, net of accumulated depreciation and amortization

 

18,782

 

14,641

 

Goodwill

 

35,639

 

35,639

 

Accrued interest receivable and other assets

 

126,551

 

122,239

 

Total assets

 

$

5,307,826

 

$

5,145,679

 

 

 

 

 

 

 

Liabilities, Minority Interest, and Stockholders’ Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

 

$

2,728,646

 

$

2,649,853

 

Negotiable order of withdrawal (NOW)

 

38,446

 

32,009

 

Money market

 

1,315,850

 

1,206,078

 

Time

 

290,177

 

331,574

 

Total deposits

 

4,373,119

 

4,219,514

 

Contingently convertible debt

 

147,195

 

146,740

 

Junior subordinated debentures

 

50,304

 

49,470

 

Other borrowings

 

11,418

 

9,820

 

Other liabilities

 

94,780

 

107,502

 

Total liabilities

 

4,676,816

 

4,533,046

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Minority interest in capital of consolidated affiliates

 

98,080

 

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; 35,097,064 and 35,970,095 shares outstanding at June 30, 2005 and December 31, 2004, respectively

 

35

 

36

 

Additional paid-in capital

 

5,263

 

45,226

 

Retained earnings

 

539,035

 

499,911

 

Unearned compensation

 

(9,171

)

(4,512

)

Accumulated other comprehensive income (loss)

 

(2,232

)

1,287

 

Total stockholders’ equity

 

532,930

 

541,948

 

Total liabilities, minority interest, and stockholders’ equity

 

$

5,307,826

 

$

5,145,679

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

3



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For the three months ended

 

For the six months ended

 

(Dollars in thousands, except per share amounts)

 

June 30, 2005

 

June 30, 2004

 

June 30, 2005

 

June 30, 2004

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans

 

$

51,306

 

$

35,614

 

$

98,762

 

$

71,122

 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

21,191

 

17,578

 

42,165

 

31,072

 

Non-taxable

 

947

 

1,290

 

1,970

 

2,751

 

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

 

2,025

 

1,717

 

4,984

 

3,690

 

Total interest income

 

75,469

 

56,199

 

147,881

 

108,635

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

2,848

 

2,124

 

5,110

 

4,138

 

Other borrowings

 

931

 

712

 

1,726

 

1,438

 

Total interest expense

 

3,779

 

2,836

 

6,836

 

5,576

 

Net interest income

 

71,690

 

53,363

 

141,045

 

103,059

 

(Recovery of) provision for loan and lease losses

 

814

 

(6,175

)

(3,000

)

(5,530

)

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

 

70,876

 

59,538

 

144,045

 

108,589

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Client investment fees

 

7,805

 

6,399

 

15,201

 

12,667

 

Letter of credit and standby letter of credit income

 

2,423

 

2,343

 

4,793

 

5,014

 

Corporate finance fees

 

6,935

 

10,759

 

11,749

 

15,141

 

Deposit service charges

 

2,378

 

3,695

 

4,882

 

7,408

 

Gains on derivative instruments, net

 

10,115

 

3,593

 

14,141

 

6,158

 

Gains (losses) on investment securities, net

 

(1,631

)

755

 

(429

)

2,224

 

Other

 

2,108

 

2,924

 

4,936

 

5,783

 

Total noninterest income

 

30,133

 

30,468

 

55,273

 

54,395

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

44,280

 

40,673

 

84,548

 

74,080

 

Professional services

 

5,653

 

4,876

 

10,723

 

8,215

 

Net occupancy

 

4,215

 

4,665

 

8,873

 

9,266

 

Furniture and equipment

 

3,300

 

3,450

 

6,019

 

6,359

 

Business development and travel

 

2,702

 

2,180

 

4,792

 

4,171

 

Correspondent bank fees

 

1,475

 

1,243

 

2,696

 

2,524

 

Data processing services

 

952

 

789

 

1,965

 

1,874

 

Telephone

 

1,061

 

902

 

1,950

 

1,684

 

Provision for (reduction of) unfunded credit commitments

 

(1,074

)

3,101

 

(1,259

)

2,382

 

Other

 

3,761

 

4,470

 

6,833

 

7,626

 

Total noninterest expense

 

66,325

 

66,349

 

127,140

 

118,181

 

 

 

 

 

 

 

 

 

 

 

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

 

34,684

 

23,657

 

72,178

 

44,803

 

Minority interest in net (income) loss of consolidated affiliates

 

372

 

(67

)

813

 

(548

)

Income before income tax expense

 

35,056

 

23,590

 

72,991

 

44,255

 

Income tax expense

 

14,160

 

9,129

 

29,159

 

16,573

 

Net income

 

$

20, 896

 

$

14,461

 

$

43,832

 

$

27,682

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share — basic

 

$

0.60

 

$

0.41

 

$

1.24

 

$

0.79

 

Earnings per common share — diluted

 

$

0.54

 

$

0.39

 

$

1.13

 

$

0.75

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

4



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the three months ended

 

For the six months ended

 

(Dollars in thousands)

 

June 30,
2005

 

June 30,
2004

 

June 30,
2005

 

June 30,
2004

 

 

 

 

 

(As Restated)

 

 

 

(As
Restated)

 

Net income

 

$

20,896

 

$

14,461

 

$

43,832

 

$

27,682

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Cumulative translation gains (losses):

 

 

 

 

 

 

 

 

 

Translation gain (loss), net

 

(32

)

 

(32

)

 

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

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses), net

 

11,854

 

(23,847

)

(2,197

)

(17,003

)

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

 

(1,087

)

(12

)

(1,290

)

710

 

Other comprehensive income (loss), net of tax

 

10,735

 

(23,859

)

(3,519

)

(16,293

)

Comprehensive income (loss)

 

$

31,631

 

$

(9,398

)

$

40,313

 

$

11,389

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

5



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the six months ended

 

(Dollars in thousands)

 

June 30,
2005

 

June 30
2004

 

 

 

 

 

(As Restated)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

43,832

 

$

27,682

 

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

 

 

 

 

 

(Recovery of) provision for loan and lease losses

 

(3,000

)

(5,530

)

(Gains) losses on investment securities, net

 

429

 

(2,224

)

Changes in fair values of derivatives

 

1,601

 

3,460

 

Depreciation and amortization

 

4,173

 

4,323

 

Minority interest

 

(813

)

548

 

Tax benefit of stock compensation

 

7,198

 

3,507

 

Amortization of stock-based compensation

 

3,441

 

773

 

Amortization of deferred warrant related loan fees

 

(3,504

)

(2,610

)

Deferred income tax expense (benefit)

 

1,310

 

(112

)

Changes in other assets and liabilities:

 

 

 

 

 

(Increase) in accrued interest receivable

 

(4,624

)

(2,224

)

(Increase) decrease in accounts receivable

 

867

 

(7,557

)

(Increase) in income tax receivable

 

(6,442

)

(735

)

Increase (decrease) in accrued retention, incentive plans, other compensation benefits payable

 

(14,037

)

2,333

 

Other, net

 

12,445

 

5,550

 

Net cash provided by operating activities

 

42,876

 

27,184

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities

 

(349,232

)

(1,023,375

)

Proceeds from sales of investment securities

 

210,120

 

141,134

 

Proceeds from maturities and pay downs of investment securities

 

7,902

 

390,989

 

Net (increase) in loans

 

(123,415

)

(133,376

)

Proceeds from recoveries of charged-off loans

 

7,829

 

7,263

 

Purchases of premises and equipment

 

(8,245

)

(3,252

)

Net cash (used by) investing activities

 

(255,041

)

(620,617

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

153,605

 

338,525

 

Increase in other borrowings, net

 

1,598

 

25,000

 

Capital contributions from minority interest participants, net of distributions

 

28,208

 

17,400

 

Proceeds from issuance of common stock

 

12,921

 

11,756

 

Repurchase of common stock

 

(73,140

)

 

Net cash provided by financing activities

 

123,192

 

392,681

 

Net (decrease) in cash and cash equivalents

 

(88,973

)

(200,752

)

Cash and cash equivalents at beginning of year

 

627,218

 

835,313

 

Cash and cash equivalents at end of period

 

$

538,245

 

$

634,561

 

Supplemental disclosures:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest paid

 

$

6,799

 

$

5,512

 

Income taxes paid

 

$

27,043

 

$

13,920

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

6



 

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.   The Company is headquartered in Santa Clara, California.  As of May 31, 2005, the Company changed its name from Silicon Valley Bancshares to SVB Financial Group.

 

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 corporate 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 life cycle. These companies tend to be privately held and backed by venture capital investors. 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.

 

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 and six months ended June 30, 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 (“2004 Form 10-K/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.

 

7



 

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 consolidated balance sheets include interest-bearing deposits in other financial institutions of $23.1 million and $11.4 million at June 30, 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 pro forma 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 and six months ended June 30, 2005 and June 30, 2004:

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands, except per share amounts)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

(As restated)

 

 

 

(As restated)

 

Net income, as reported

 

$

20,896

 

$

14,461

 

$

43,832

 

$

27,682

 

 

 

 

 

 

 

 

 

 

 

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

 

1,257

 

301

 

1,919

 

445

 

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

 

(5,591

)

(8,686

)

(10,909

)

(14,174

)

Net income, pro forma

 

$

16,562

 

$

6,076

 

$

34,842

 

$

13,953

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share – basic:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.60

 

$

0.41

 

$

1.24

 

$

0.79

 

Pro forma

 

0.48

 

0.17

 

0.99

 

0.40

 

Earnings per diluted share – diluted:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.54

 

$

0.39

 

$

1.13

 

$

0.75

 

Pro forma

 

0.45

 

0.17

 

0.93

 

0.39

 

 

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

 

8



 

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).

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which replaces APB No. 20 “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 also changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for the Company beginning January 1, 2006. The Company does not expect the adoption of SFAS No. 154 to have a material impact on its results of operations or financial condition.

 

3.   Restatement of Financial Statements

 

As described in the Company’s 2004 Form 10-K/A and its Amendment No. 1 on Form 10-Q/A for the three months ended March 31, 2005 (“Q1 Form 10-Q/A”), both of which were filed with the SEC prior to the filing of this report on Form 10-Q, 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 misapplications 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, 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 Non Refundable 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.

 

9



 

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 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 and fees associated with letters of credit 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 balance 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 STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended June 30, 2004

 

 

 

As Previously

 

 

 

 

 

(Dollars in thousands, except per share amounts)

 

Reported

 

Adjustments

 

As Restated

 

 

 

 

 

 

 

 

 

Interest Income:

 

 

 

 

 

 

 

Loans

 

$

37,280

 

$

(1,666

)

$

35,614

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

17,989

 

(411

)

17,578

 

Non-Taxable

 

1,290

 

 

1,290

 

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

 

1,306

 

411

 

1,717

 

Total interest income

 

57,865

 

(1,666

)

56,199

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

2,124

 

 

2,124

 

Other borrowings

 

712

 

 

712

 

Total interest expense

 

2,836

 

 

2,836

 

Net interest income

 

55,029

 

(1,666

)

53,363

 

(Recovery of) provision for loan and lease losses

 

(5,860

)

(315

)

(6,175

)

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

 

60,889

 

(1,351

)

59,538

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Client investment fees

 

6,399

 

 

6,399

 

Letter of credit and standby letter of credit income

 

3,805

 

(1,462

)

2,343

 

Corporate finance fees

 

10,897

 

(138

)

10,759

 

Deposit service charges

 

3,695

 

 

3,695

 

Income from client warrants

 

3,310

 

(3,310

)

 

Gains (losses) on derivative instruments, net

 

 

3,593

 

3,593

 

Gains (losses) on investment securities, net

 

478

 

277

 

755

 

Other

 

2,924

 

 

2,924

 

Total noninterest income

 

31,508

 

(1,040

)

30,468

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Compensation and benefits

 

41,153

 

(480

)

40,673

 

Professional services

 

4,876

 

 

4,876

 

Net occupancy

 

4,587

 

78

 

4,665

 

Furniture and equipment

 

3,450

 

 

3,450

 

Business development and travel

 

2,180

 

 

2,180

 

Correspondent bank fees

 

1,243

 

 

1,243

 

Data processing services

 

789

 

 

789

 

Telephone

 

902

 

 

902

 

Provision for (reduction of) unfunded credit commitments

 

3,101

 

 

3,101

 

Other

 

4,470

 

 

4,470

 

Total noninterest expense

 

66,751

 

(402

)

66,349

 

 

 

 

 

 

 

 

 

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

 

25,646

 

(1,989

)

23,657

 

Minority interest in net (income) losses of consolidated affiliates

 

(67

)

 

(67

)

Income (loss) before income tax expense

 

25,579

 

(1,989

)

23,590

 

Income tax expense (benefit)

 

9,871

 

(742

)

9, 129

 

Net income

 

$

15,708

 

$

(1,247

)

$

14,461

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share-basic

 

$

0.45

 

$

(0.04

)

$

0.41

 

Earnings per common share-diluted

 

$

0.43

 

$

(0.04

)

$

0.39

 

 

11



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For the Six Months ended June 30, 2004

 

 

 

As Previously

 

 

 

 

 

(Dollars in thousands, except per share amounts)

 

Reported

 

Adjustments

 

As Restated

 

Interest Income:

 

 

 

 

 

 

 

Loans

 

$

73,912

 

$

(2,790

)

$

71,122

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

32,012

 

(940

)

31,072

 

Non-Taxable

 

2,751

 

 

2,751

 

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

 

2,750

 

940

 

3,690

 

Total interest income

 

111,425

 

(2,790

)

108,635

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

4,138

 

 

4,138

 

Other borrowings

 

1,438

 

 

1,438

 

Total interest expense

 

5,576

 

 

5,576

 

Net interest income

 

105,849

 

(2,790

)

103,059

 

(Recovery of) provision for loan and lease losses

 

(2,742

)

(2,788

)

(5,530

)

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

 

108,591

 

(2

)

108,589

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Client investment fees

 

12,667

 

 

12,667

 

Letter of credit and standby letter of credit income

 

14,984

 

157

 

15,141

 

Corporate finance fees

 

7,534

 

(2,520

)

5,014

 

Deposit service charges

 

7,408

 

 

7,408

 

Income from client warrants

 

6,218

 

(6,218

)

 

Gains (losses) on derivative instruments, net

 

 

6,158

 

6,158

 

Gains (losses) on investment securities, net

 

1,800

 

424

 

2,224

 

Other

 

5,783

 

 

5,783

 

Total noninterest income

 

56,394

 

(1,999

)

54,395

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Compensation and benefits

 

75,256

 

(1,176

)

74,080

 

Professional services

 

9,110

 

156

 

9,266

 

Net occupancy

 

8,215

 

 

8,215

 

Furniture and equipment

 

6,359

 

 

6,359

 

Business development and travel

 

4,171

 

 

4,171

 

Correspondent bank fees

 

2,524

 

 

2,524

 

Data processing services

 

1,874

 

 

1,874

 

Telephone

 

1,684

 

 

1,684

 

Provision for (reduction of) unfunded credit commitments

 

 

2,382

 

2,382

 

Other

 

7,626

 

 

7,626

 

Total noninterest expense

 

116,819

 

1,362

 

118,181

 

 

 

 

 

 

 

 

 

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

 

48,166

 

(3,363

)

44,803

 

Minority interest in net (income) losses of consolidated affiliates

 

(548

)

 

(548

)

Income (loss) before income tax expense

 

47,618

 

(3,363

)

44,255

 

Income tax expense (benefit)

 

17,900

 

(1,327

)

16,573

 

Net income

 

$

29,718

 

$

(2,036

)

$

27,682

 

 

 

 

 

 

 

 

 

Earnings per common share-basic

 

$

0.85

 

$

(0.06

)

$

0.79

 

Earnings per common share-diluted

 

$

0.81

 

$

(0.06

)

$

0.75

 

 

12



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months ended June 30,
2004

 

(Dollars in thousands)

 

As
Previously
Reported

 

Adjustments

 

As Restated

 

Net income

 

$

15,708

 

$

(1,247

)

$

14,461

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Unrealized holding gains (losses), net of tax

 

(25,952

)

2,105

 

(23,847

)

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

 

(1,979

)

1,967

 

(12

)

Other comprehensive income (loss), net of tax

 

(27,931

)

4,072

 

(23,859

)

Comprehensive income (loss)

 

$

(12,223

)

$

2,825

 

$

(9,398

)

 

 

 

For the Six Months ended June 30, 2004

 

(Dollars in thousands)

 

As
Previously
Reported

 

Adjustments

 

As Restated

 

Net income

 

$

29,718

 

$

(2,036

)

$

27,682

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Unrealized holding gains (losses), net of tax

 

(17,511

)

508

 

(17,003

)

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

 

(4,658

)

5,368

 

710

 

Other comprehensive income (loss), net of tax

 

(22,169

)

5,876

 

(16,293

)

Comprehensive income (loss)

 

$

7,549

 

$

3,840

 

$

11,389

 

 

13



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Six Months ended June 30, 2004

 

(Dollars in thousands)

 

As
Previously
Reported

 

Adjustments

 

As Restated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net cash (used) provided by operating activities

 

$

19,442

 

$

7,742

 

$

27,184

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Net cash (used) provided by investing activities

 

(668,813

)

48,196

 

(620,617

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Net cash (used) provided by financing activities

 

399,009

 

(6,328

)

392,681

 

Foreign exchange effect on cash and cash equivalents

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(250,362

)

49,610

 

(200,752

)

Cash and cash equivalents at beginning of period

 

794,996

 

40,317

 

835,313

 

Cash and cash equivalents at end of period

 

$

544,634

 

$

89,927

 

$

634,561

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest paid

 

$

5,512

 

$

 

$

5,512

 

Income taxes paid

 

$

13,920

 

$

 

$

13,920

 

 

14



 

4.  Earnings Per Share (EPS)

 

The following is a reconciliation of basic EPS to diluted EPS for the three months and six months ended June 30, 2005 and June 30, 2004.

 

 

 

For the three months ended
June 30,

 

For the six months ended
June 30,

 

(Dollars and shares in thousands,

 

Net

 

Weighted
Average

 

Per Share

 

Net

 

Weighted
Average

 

Per Share

 

except per share amounts)

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

 

2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

 

$

20,896

 

35,010

 

$

0.60

 

$

43,832

 

35,339

 

$

1.24

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options, restricted stock and convertible debt

 

 

3,464

 

 

 

 

3,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders and assumed conversions

 

$

20,896

 

38,474

 

$

0.54

 

$

43,832

 

38,627

 

$

1.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2004: (As Restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

 

$

14,461

 

35,049

 

$

0.41

 

$

27,682

 

34,965

 

$

0.79

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options, restricted stock and convertible debt

 

 

2,078

 

 

 

 

1,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders and assumed conversions

 

$

14,461

 

37,127

 

$

0.39

 

$

27,682

 

36,948

 

$

0.75

 

 

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 and six months ended June 30, 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 1,152,143 shares as of June 30, 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 $0.04 per diluted common share, or 7.4 percent and $0.08 per diluted common share or 7.1 percent, for the three and six months ended June 30, 2005, respectively.

 

15



 

5.  Investment Securities

 

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

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

$

2,016,012

 

$

1,926,685

 

Marketable securities (investment company fair value accounting)

 

344

 

480

 

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

 

 

 

 

 

Venture capital fund investments(1)

 

66,428

 

52,547

 

Other private equity investments(2)

 

20,018

 

15,720

 

Other investments(3)

 

24,161

 

11,247

 

Non-marketable securities (equity method accounting):

 

 

 

 

 

Other investments (4)

 

3,590

 

2,388

 

Low income housing tax credit funds

 

12,876

 

14,070

 

Non-marketable securities (cost method accounting):

 

 

 

 

 

Fund investments

 

28,059

 

27,409

 

Federal Home Loan Bank stock (5)

 

17,512

 

12,798

 

Federal Reserve Bank stock (5)

 

8,220

 

7,967

 

Other private equity investments

 

3,796

 

3,656

 

Total investment securities

 

$

2,201,016

 

$

2,074,967

 

 


(1)   Includes $52.1 million and $45.3 million related to SVB Strategic Investors Fund, LP, at June 30, 2005, and December 31, 2004, respectively. The Company has a controlling ownership interest of 12.6% and 11.1% in the fund at June 30, 2005 and December 31, 2004, respectively. It also includes $14.3 million and $7.3 million related to SVB Strategic Investors Fund II, LP, at June 30, 2005 and December 31, 2004, respectively. The Company has a controlling interest of 8.6% and 14.4 % in the fund at June 30, 2005 and December 31, 2004, respectively.

(2)   Includes $20.0 million and $15.7 million related to Silicon Valley BancVentures, LP, at June 30, 2005, and December 31, 2004, respectively. The Company has a controlling ownership interest of 10.7% in the fund for both the periods ended June 30, 2005 and December 31, 2004.

(3)   Includes $20.7 million and $9.0 million related to Partners For Growth, LP, at June 30, 2005 and December 31, 2004, respectively. The Company has a majority ownership interest of slightly above 50.0% and 53.2% in the fund at June 30, 2005 and December 31, 2004, respectively. It also included $3.4 million and $2.3 million related to Gold Hill Venture Lending 03, LP, a venture debt fund, as of June 30, 2005 and December 31, 2005, respectively.  The Company has a direct ownership interest of 4.8% in the fund for both periods ended June 30, 2005 and December 31, 2004.

(4)   Includes $3.6 million and $2.4 million related to Gold Hill Venture Lending Partners 03, LLC, the general partner of Gold Hill Venture Lending 03, LP, at June 30, 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 June 30, 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 agreement.

 

16



 

The following table presents the components of gains and losses on investment securities, for the three months and six months ended June 30, 2005 and June 30, 2004.

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Gross gains on investment securities:

 

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

$

71

 

$

15

 

$

123

 

$

1,213

 

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

 

 

 

 

 

 

 

 

 

Venture capital fund investments

 

1,256

 

1,199

 

4,902

 

2,642

 

Other private equity investments

 

540

 

757

 

945

 

2,101

 

Other investments

 

22

 

 

22

 

 

Non-marketable securities (cost method accounting):

 

 

 

 

 

 

 

 

 

Venture capital fund investments

 

527

 

119

 

527

 

119

 

Other private equity investments

 

50

 

755

 

48

 

790

 

Total gross gains on investment securities

 

2,466

 

2,845

 

6,567

 

6,865

 

Gross losses on investment securities:

 

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

(1,929

)

(36

)

(2,355

)

(3

)

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

 

 

 

 

 

 

 

 

 

Venture capital fund investments

 

(1,453

)

(848

)

(1,453

)

(2,189

)

Other private equity investments

 

(51

)

(155

)

(51

)

(1,362

)

Other investments

 

 

 

 

 

 

Non-marketable securities (cost method accounting):

 

 

 

 

 

 

 

 

 

Venture capital fund investments

 

(643

)

(937

)

(2,745

)

(937

)

Other private equity investments

 

(21

)

(114

)

(392

)

(150

)

Total gross losses on investment securities

 

(4,097

)

(2,090

)

(6,996

)

(4,641

)

Net gains (losses) on investment securities

 

$

(1,631

)

$

755

 

$

(429

)

$

2,224

 

 

17



 

6.  Loans and Allowance for Loan and Lease Losses

 

The detailed composition of loans, net of unearned income of $20.3 million and $18.4 million, for the periods ended June 30, 2005, and December 31, 2004, respectively, is presented in the following table:

 

 

 

June 30,

 

December 31,

 

(Dollars in thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Commercial loans

 

$

2,034,263

 

$

1,927,271

 

 

 

 

 

 

 

Vineyard development

 

88,019

 

80,960

 

Commercial real estate

 

20,253

 

18,562

 

Total real estate construction

 

108,272

 

99,522

 

 

 

 

 

 

 

Real estate term — consumer

 

31,306

 

27,124

 

Real estate term — commercial

 

19,378

 

16,720

 

Total real estate term

 

50,684

 

43,844

 

 

 

 

 

 

 

Consumer and other

 

230,746

 

237,951

 

Total loans, net of unearned income

 

$

2,423,965

 

$

2,308,588

 

 

The activity in the allowance for loan and lease losses for the three months and six months ended June 30, 2005 and 2004 was as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

(Dollars in thousands)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)