SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 12/30/2005 06:13:38)

 

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 September 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 ý   No o

 

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

28

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

51

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

53

 

 

 

PART II - OTHER INFORMATION

56

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

56

 

 

 

ITEM 1A.

RISK FACTORS

56

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

61

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

61

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

61

 

 

 

ITEM 5.

OTHER INFORMATION

61

 

 

 

ITEM 6.

EXHIBITS

61

 

 

 

SIGNATURES

62

 

 

INDEX TO EXHIBITS

63

 

2



 

                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)

 

September 30,
2005

 

December 31,
2004

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

241,263

 

$

284,208

 

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

 

177,428

 

343,010

 

Investment securities

 

2,155,694

 

2,074,967

 

Loans, net of unearned income

 

2,638,731

 

2,308,588

 

Allowance for loan and lease losses

 

(34,863

)

(37,613

)

Loans, net

 

2,603,868

 

2,270,975

 

Premises and equipment, net of accumulated depreciation and amortization

 

23,148

 

14,641

 

Goodwill

 

35,638

 

35,639

 

Accrued interest receivable and other assets

 

132,027

 

122,239

 

Total assets

 

$

5,369,066

 

$

5,145,679

 

 

 

 

 

 

 

Liabilities, Minority Interest, and Stockholders’ Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

 

$

2,696,661

 

$

2,649,853

 

Negotiable order of withdrawal (NOW)

 

35,650

 

32,009

 

Money market

 

1,264,102

 

1,206,078

 

Time

 

295,726

 

331,574

 

Total deposits

 

4,292,139

 

4,219,514

 

Federal funds purchased and securities sold under agreement to repurchase

 

119,164

 

 

Contingently convertible debt

 

147,413

 

146,740

 

Junior subordinated debentures

 

48,818

 

49,470

 

Other borrowings

 

2,396

 

9,820

 

Other liabilities

 

103,973

 

107,502

 

Total liabilities

 

4,713,903

 

4,533,046

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Minority interest in capital of consolidated affiliates

 

109,316

 

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; 35,122,829 and 35,970,095 shares outstanding at September 30, 2005 and December 31, 2004, respectively

 

35

 

36

 

Additional paid-in capital

 

6,028

 

45,226

 

Retained earnings

 

562,067

 

499,911

 

Unearned compensation

 

(7,443

)

(4,512

)

Accumulated other comprehensive income (loss)

 

(14,840

)

1,287

 

Total stockholders’ equity

 

545,847

 

541,948

 

Total liabilities, minority interest, and stockholders’ equity

 

$

5,369,066

 

$

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 nine months ended

 

(Dollars in thousands, except per share amounts)

 

September 30,
2005

 

September 30,
2004

 

September 30,
2005

 

September 30,
2004

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans

 

$

57,825

 

$

40,692

 

$

156,587

 

$

111,814

 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

21,976

 

19,187

 

64,141

 

50,259

 

Non-taxable

 

872

 

1,144

 

2,842

 

3,895

 

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

 

2,284

 

1,923

 

7,268

 

5,613

 

Total interest income

 

82,957

 

62,946

 

230,838

 

171,581

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

3,141

 

2,138

 

8,251

 

6,276

 

Other borrowings

 

1,752

 

762

 

3,478

 

2,200

 

Total interest expense

 

4,893

 

2,900

 

11,729

 

8,476

 

Net interest income

 

78,064

 

60,046

 

219,109

 

163,105

 

(Recovery of) provision for loan and lease losses

 

1,427

 

(1,390

)

(1,573

)

(6,920

)

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

 

76,637

 

61,436

 

220,682

 

170,025

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Client investment fees

 

8,700

 

6,955

 

23,901

 

19,622

 

Letter of credit and standby letter of credit income

 

4,429

 

2,280

 

9,222

 

7,294

 

Corporate finance fees

 

2,990

 

3,020

 

14,739

 

18,161

 

Deposit service charges

 

2,435

 

3,187

 

7,317

 

10,595

 

Gains (losses) on derivative instruments, net

 

1,236

 

2,388

 

15,377

 

8,546

 

Gains (losses) on investment securities, net

 

1,301

 

(189

)

872

 

2,035

 

Other

 

3,502

 

3,304

 

8,438

 

9,087

 

Total noninterest income

 

24,593

 

20,945

 

79,866

 

75,340

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

37,796

 

36,461

 

122,344

 

110,541

 

Professional services

 

6,336

 

4,967

 

17,059

 

13,182

 

Net occupancy

 

3,633

 

4,590

 

12,506

 

13,856

 

Furniture and equipment

 

3,278

 

3,067

 

9,297

 

9,426

 

Business development and travel

 

2,748

 

2,654

 

7,540

 

6,825

 

Correspondent bank fees

 

1,429

 

1,407

 

4,125

 

3,931

 

Data processing services

 

1,098

 

735

 

3,063

 

2,609

 

Telephone

 

894

 

856

 

2,844

 

2,540

 

Provision for (reduction of) unfunded credit commitments

 

1,508

 

(1,856

)

249

 

526

 

Other

 

3,263

 

5,582

 

10,096

 

13,208

 

Total noninterest expense

 

61,983

 

58,463

 

189,123

 

176,644

 

 

 

 

 

 

 

 

 

 

 

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

 

39,247

 

23,918

 

111,425

 

68,721

 

Minority interest in net (income) loss of consolidated affiliates

 

(1,281

)

(2

)

(468

)

(550

)

Income before income tax expense

 

37,966

 

23,916

 

110,957

 

68,171

 

Income tax expense

 

14,907

 

8,525

 

44,066

 

25,098

 

Net income

 

$

23,059

 

$

15,391

 

$

66,891

 

$

43,073

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share — basic

 

$

0.66

 

$

0.44

 

$

1.90

 

$

1.23

 

Earnings per common share — diluted

 

$

0.60

 

$

0.41

 

$

1.73

 

$

1.16

 

 

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 nine months ended

 

(Dollars in thousands)

 

September
30,
2005

 

September
30,
2004

 

September
30,
2005

 

September
30,
2004

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Net income

 

$

23,059

 

$

15,391

 

$

66,891

 

$

43,073

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Cumulative translation gains (losses):

 

 

 

 

 

 

 

 

 

Translation gains (losses), net of tax

 

(25

)

 

(57

)

 

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

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses), net of tax

 

(12,684

)

14,137

 

(14,881

)

(2,866

)

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

 

101

 

144

 

(1,189

)

854

 

Other comprehensive income (loss), net of tax

 

(12,608

)

14,281

 

(16,127

)

(2,012

)

Comprehensive income (loss)

 

$

10,451

 

$

29,672

 

$

50,764

 

$

41,061

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

5



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the nine months ended

 

(Dollars in thousands)

 

September 30,
2005

 

September 30
2004

 

 

 

 

 

(As Restated)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

66,891

 

$

43,073

 

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

 

 

 

 

 

(Recovery of) provision for loan and lease losses

 

(1,573

)

(6,920

)

(Gains) on investment securities, net

 

(872

)

(2,035

)

Changes in fair values of derivatives

 

4,612

 

4,857

 

Depreciation and amortization

 

5,958

 

6,341

 

Impairment of goodwill

 

 

1,910

 

Minority interest

 

468

 

550

 

Tax benefits of stock compensation

 

9,263

 

6,078

 

Amortization of stock-based compensation

 

5,438

 

1,386

 

Amortization of deferred warrant-related loan fees

 

(4,796

)

(3,995

)

Deferred income tax expense

 

435

 

2,378

 

Changes in other assets and liabilities:

 

 

 

 

 

(Increase) in accrued interest receivable

 

(7,413

)

(2,689

)

(Increase) decrease in accounts receivable

 

6,722

 

(9,339

)

(Increase) in income tax receivable

 

(2,375

)

(1,485

)

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

 

(9,388

)

7,224

 

Other, net

 

10,684

 

15,110

 

Net cash provided by operating activities

 

84,054

 

62,444

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities

 

(483,321

)

(1,304,779

)

Proceeds from sales of investment securities

 

355,000

 

146,809

 

Proceeds from maturities and pay-downs of investment securities

 

22,646

 

648,423

 

Net (increase) in loans

 

(342,314

)

(253,392

)

Proceeds from recoveries of charged-off loans

 

9,330

 

10,414

 

Purchases of premises and equipment

 

(14,465

)

(5,814

)

Net cash (used by) investing activities

 

(453,124

)

(758,339

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

72,625

 

370,774

 

Increase (decrease) in other borrowings, net

 

111,761

 

(8,333

)

Capital contributions from minority interest participants, net of distributions

 

38,163

 

23,445

 

Proceeds from issuance of common stock

 

15,655

 

15,142

 

Repurchase of common stock

 

(77,661

)

 

Net cash provided by financing activities

 

160,543

 

401,028

 

Net (decrease) in cash and cash equivalents

 

(208,527

)

(294,867

)

Cash and cash equivalents at beginning of year

 

627,218

 

835,313

 

Cash and cash equivalents at end of period

 

$

418,691

 

$

540,446

 

Supplemental disclosures:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest paid

 

$

11,661

 

$

5,517

 

Income taxes paid

 

$

36,761

 

$

19,973

 

Noncash items during the period:

 

 

 

 

 

Increase in deferred rent liability and accounts receivable related to landlord non-cash incentives

 

$

 

$

6,992

 

Increase in deferred rent liability and deferred rent asset related to rent abatement for lease of the headquarters property

 

$

 

$

2,288

 

 

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.

 

7



 

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 nine months ended September 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.

 

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 investment securities as reported in the interim consolidated balance sheets include interest-bearing deposits in other financial institutions of $19.8 million and $11.4 million at September 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 Employees 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 Employee Stock Purchase Plan 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 nine months ended September 30, 2005 and 2004:

 

8



 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

(Dollars in thousands, except per share amounts)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Net income, as reported

 

$

23,059

 

$

15,391

 

$

66,891

 

$

43,073

 

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

 

1,235

 

431

 

3,154

 

876

 

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

 

(5,472

)

(1,841

)

(16,381

)

(16,015

)

Net income, pro forma

 

$

18,822

 

$

13,981

 

$

53,664

 

$

27,934

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share – basic:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.66

 

$

0.44

 

$

1.90

 

$

1.23

 

Pro forma

 

0.54

 

0.40

 

1.53

 

0.80

 

Earnings per common share – diluted:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.60

 

$

0.41

 

$

1.73

 

$

1.16

 

Pro forma

 

0.50

 

0.39

 

1.43

 

0.78

 

 

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).

 

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.

 

9



 

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, “Accounting For NonRefundable Fees and Costs Associated with Originating or Acquiring Loans and Indirect Costs of Leases” (SFAS No. 91) as such, are required to be recognized as an adjustment of loan yield through interest income, as prescribed by 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.

 

10



 

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 Bulleting 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.

 

11



 

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.

 

12



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

 

 

 

Three Months Ended September 30, 2004

 

 

 

As Previously

 

 

 

 

 

(Dollars in thousands, except per share amounts)

 

Reported

 

Adjustments

 

As Restated

 

Interest Income:

 

 

 

 

 

 

 

Loans

 

$

41,639

 

(947

)

$

40,692

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

19,763

 

(576

)

19,187

 

Non-Taxable

 

1,144

 

 

1,144

 

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

 

1,347

 

576

 

1,923

 

Total interest income

 

63,893

 

(947

)

62,946

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

2,138

 

 

2,138

 

Other borrowings

 

762

 

 

762

 

Total interest expense

 

2,900

 

 

2,900

 

 

 

 

 

 

 

 

 

Net interest income

 

60,993

 

(947

)

60,046

 

(Recovery of) provision for loan and lease losses

 

(1,395

)

5

 

(1,390

)

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

 

62,388

 

(952

)

61,436

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Client investment fees

 

6,955

 

 

6,955

 

Corporate finance fees

 

3,197

 

(177

)

3,020

 

Letter of credit and standby letter of credit income

 

3,874

 

(1,594

)

2,280

 

Deposit service charges

 

3,187

 

 

3,187

 

Income from client warrants

 

1,152

 

(1,152

)

0

 

Gains (losses) on derivative instruments, net

 

 

2,388

 

2,388

 

Gains (losses) on investment securities, net

 

133

 

(322

)

(189

)

Other

 

3,304

 

 

 

3,304

 

Total noninterest income

 

21,802

 

(857

)

20,945

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Compensation and benefits

 

36,926

 

(465

)

36,461

 

Net occupancy

 

4,512

 

78

 

4,590

 

Professional services

 

4,967

 

 

4,967

 

Furniture and equipment

 

3,067

 

 

3,067

 

Business development and travel

 

2,654

 

 

2,654

 

Correspondent bank fees

 

1,407

 

 

1,407

 

Data processing services

 

735

 

 

735

 

Telephone

 

856

 

 

856

 

Provision for (reduction of) unfunded credit commitments

 

(1,856

)

 

(1,856

)

Other

 

5,582

 

 

5,582

 

Total noninterest expense

 

58,850

 

(387

)

58,463

 

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

 

25,340

 

(1,422

)

23,918

 

Minority interest in net (income) losses of consolidated affiliates

 

(2

)

 

(2

)

Income (loss) before income tax expense

 

25,338

 

(1,422

)

23,916

 

Income tax expense (benefit)

 

9,235

 

(710

)

8,525

 

Net income

 

$

16,103

 

(712

)

$

15,391

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share-basic

 

$

0.46

 

$

(0.02

)

$

0.44

 

Earnings per common share-diluted

 

$

0.43

 

$

(0.02

)

$

0.41

 

 

13



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

 

 

 

For the Nine Months ended September 30,
2004

 

(Dollars in thousands, except per share amounts)

 

As Previously
Reported

 

Adjustments

 

As Restated

 

Interest Income:

 

 

 

 

 

 

 

Loans

 

$

115,551

 

$

(3,737

)

$

111,814

 

Investment securities:

 

 

 

 

 

 

 

Taxable

 

51,775

 

(1,516

)

50,259

 

Non-Taxable

 

3,895

 

 

3,895

 

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

 

4,097

 

1,516

 

5,613

 

Total interest income

 

175,318

 

(3,737

)

171,581

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

6,276

 

 

6,276

 

Other borrowings

 

2,200

 

 

2,200

 

Total interest expense

 

8,476

 

 

8,476

 

 

 

 

 

 

 

 

 

Net interest income

 

166,842

 

(3,737

)

163,105

 

(Recovery of) provision for loan and lease losses

 

(5,274

)

(1,646

)

(6,920

)

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

 

172,116

 

(2,091

)

170,025

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Client investment fees

 

19,622

 

 

19,622

 

Corporate finance fees

 

18,181

 

(20

)

18,161

 

Letter of credit and standby letter of credit income

 

11,408

 

(4,114

)

7,294

 

Deposit service charges

 

10,595

 

 

10,595

 

Income from client warrants

 

7,370

 

(7,370

)

 

Gains (losses) on derivative instruments, net

 

 

8,546

 

8,546

 

Gains (losses) on investment securities, net

 

1,933

 

102

 

2,035

 

Other

 

9,087

 

 

9,087

 

Total noninterest income

 

78,196

 

(2,856

)

75,340

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Compensation and benefits

 

112,182

 

(1,641

)

110,541

 

Net occupancy

 

13,622

 

234

 

13,856

 

Professional services

 

13,182

 

 

13,182

 

Furniture and equipment

 

9,426

 

 

9,426

 

Business development and travel

 

6,825

 

 

6,825

 

Correspondent bank fees

 

3,931

 

 

3,931

 

Data processing services

 

2,609

 

 

2,609

 

Telephone

 

2,540

 

 

2,540

 

Provision for (reduction of) unfunded credit commitments

 

(719

)

1,245

 

526

 

Other

 

13,208

 

 

13,208

 

Total noninterest expense

 

176,806

 

(162

)

176,644

 

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

 

73,506

 

(4,785

)

68,721

 

Minority interest in net (income) losses of consolidated affiliates

 

(550

)

 

(550

)

Income (loss) before income tax expense

 

72,956

 

(4,785

)

68,171

 

Income tax expense (benefit)

 

27,135

 

(2,037

)

25,098

 

Net income

 

$

45,821

 

$

(2,748

)

$

43,073

 

 

 

 

 

 

 

 

 

Earnings per common share-basic

 

$

1.31

 

$

(0.08

)

$

1.23

 

Earnings per common share-diluted

 

$

1.24

 

$

(0.08

)

$

1.16

 

 

14



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months ended September
30, 2004

 

(Dollars in thousands)

 

As
Previously
Reported

 

Adjustments

 

As Restated

 

Net income

 

$

16,103

 

$

(712

)

$

15,391

 

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

 

16,591

 

(2,454

)

14,137

 

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

 

(677

)

821

 

144

 

Other comprehensive income (loss), net of tax

 

15,914

 

(1,633

)

14,281

 

Comprehensive income (loss)

 

$

32,017

 

$

(2,345

)

$

29,672

 

 

 

 

For the Nine Months ended September
30, 2004

 

(Dollars in thousands)

 

As
Previously
Reported

 

Adjustments

 

As Restated

 

Net income

 

$

45,821

 

$

(2,748

)

$

43,073

 

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

 

(1,345

)

(1,521

)

(2,866

)

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

 

(4,910

)

5,764

 

854

 

Other comprehensive income (loss), net of tax

 

(6,255

)

4,243

 

(2,012

)

Comprehensive income (loss)

 

$

39,566

 

$

1,495

 

$

41,061

 

 

15



 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONDENSED STATEMENT OF CASH FLOW

(Unaudited)

 

 

 

For the Nine Months ended September 30,
2004

 

(Dollars in thousands)

 

As
Previously
Reported

 

Adjustments

 

As Restated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net cash (used) provided by operating activities

 

51,329

 

11,115

 

62,444

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Net cash (used) provided by investing activities

 

(807,796

)

49,457

 

(758,339

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Net cash (used) provided by financing activities

 

410,901

 

(9,873

)

401,028

 

Foreign exchange effect on cash and cash equivalents

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(345,566

)

50,699

 

(294,867

)

Cash and cash equivalents at beginning of period

 

794,996

 

40,317

 

835,313

 

Cash and cash equivalents at end of period

 

$

449,430

 

$

91,016

 

$

540,446

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest paid

 

$

5,517

 

$

 

$

5,517

 

Income taxes paid

 

$

19,973

 

$

 

$

19,973

 

Noncash items during the period:

 

 

 

 

 

 

 

Increase in deferred rent liability and accounts receivable related to landlord non-cash incentives

 

$

 

$

6,992

 

$

6,992

 

Increase in deferred rent liability and deferred rent asset related to rent abatement for lease of the headquarters property

 

$

 

$

2,288

 

$

2,288

 

 

16



 

4.  Earnings Per Share (EPS)

 

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

 

 

 

For the three months ended
September 30, 2005

 

For the nine months ended
September 30, 2004

 

(Dollars and shares in thousands,
except per share amounts)

 

Net
Income

 

Weighted Average
Shares

 

Per Share
Amount

 

Net
Income

 

Weighted Average
Shares

 

Per Share
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

 

$

23,059

 

34,838

 

$

0.66

 

$

66,891

 

35,179

 

$

1.90

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options, restricted stock and convertible debt

 

 

3,617

 

 

 

 

3,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders and assumed conversions

 

$

23,059

 

38,455

 

$

0.60

 

$

66,891

 

38,569

 

$

1.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2004: (As Restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders

 

$

15,391

 

35,303

 

$

0.44

 

$

43,073

 

35,079

 

$

1.23

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options, restricted stock and convertible debt

 

 

2,221

 

 

 

 

2,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common stockholders and assumed conversions

 

$

15,391

 

37,524

 

$

0.41

 

$

43,073

 

37,137

 

$

1.16

 

 

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 nine months ended September 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 1,242,237 shares as of September 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 $0.13 per diluted common share, or 7.7 percent for the three and nine months ended September 30, 2005.

 

17



 

5.  Investment Securities

 

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

 

(Dollars in thousands)

 

September 30,
2005

 

December 31,
2004

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

$

1,953,712

 

$

1,926,685

 

Marketable securities (investment company fair value accounting)

 

9

 

480

 

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

 

 

 

 

 

Venture capital fund investments(1)

 

71,959

 

52,547

 

Other private equity investments(2)

 

24,836

 

15,720

 

Other investments(3)

 

30,411

 

11,247

 

Non-marketable securities (equity method accounting):

 

 

 

 

 

Other investments (4)

 

4,126

 

2,388

 

Low income housing tax credit funds

 

12,279

 

14,070

 

Non-marketable securities (cost method accounting):

 

 

 

 

 

Fund investments

 

28,291

 

27,409

 

Federal Home Loan Bank stock (5)

 

17,948

 

12,798

 

Federal Reserve Bank stock (5)

 

8,220

 

7,967

 

Other private equity investments

 

3,903

 

3,656

 

Total investment securities

 

$

2,155,694

 

$

2,074,967

 

 


(1)           Includes $54.8 million and $45.3 million related to SVB Strategic Investors Fund, LP at September 30, 2005 and December 31, 2004, respectively. The Company has a controlling ownership interest of 12.6% and 11.1% in the fund at September 30, 2005 and December 31, 2004, respectively. Also includes $17.1 million and $7.3 million related to SVB Strategic Investors Fund II, LP, at September 30, 2005 and December 31, 2004, respectively. The Company has a controlling interest of 8.6% and 14.4% in the fund at September 30, 2005 and December 31, 2004.

(2)           Includes $23.8 million and $15.7 million related to Silicon Valley BancVentures, LP at September 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 at September 30, 2005 and December 31, 2004. Also includes $1.0 million related to Partners for Growth, LP as of September 30, 2005, which the Company has a majority ownership interest of 50.0% in the fund.

(3)           Includes $26.5 million and $9.0 million related to Partners For Growth, LP at September 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 September 30, 2005 and December 31, 2004 respectively. It also included $3.9 million and $2.3 million related to Gold Hill Venture Lending 03, LP, as of September 30, 2005 and December 31, 2004, respectively.  The Company has a direct ownership interest of 4.8% in the fund for both periods ended September 30, 2005 and December 31, 2004.

(4)           Includes $4.1 million and $2.4 million related to Gold Hill Venture Lending Partners 03, LLC, the general partners of Gold Hill Venture Lending 03, LP, as of September 30, 2005. 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 September 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 Silicon Valley Bank’s borrowing agreement.

 

18



 

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

 

 

 

For the three months ended

 

For the nine months ended

 

(Dollars in thousands)

 

September 30,
2005

 

September 30,
2004

 

September 30,
2005

 

September 30,
2004

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Gross gains on investment securities:

 

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

$

173

 

$

417

 

$

173

 

$

1,533

 

Marketable securities (investment company fair value accounting)

 

1,602

 

159

 

1,602

 

159

 

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

 

 

 

 

 

 

 

 

 

Venture capital fund investments

 

2,219

 

1,594

 

7,121

 

4,235

 

Other private equity investments

 

6

 

422

 

973

 

2,523

 

Non-marketable securities (cost method accounting):

 

 

 

 

 

 

 

 

 

Venture capital fund investments

 

289

 

85

 

816

 

204

 

Other private equity investments

 

 

 

171

 

888

 

Total gross gains on investment securities

 

4,289

 

2,677

 

10,856

 

9,542

 

Gross losses on investment securities:

 

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

0

 

(172

)

(2,274

)

(160

)

Marketable securities (investment company accounting)

 

 

(207

)

0

 

(207

)

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

 

 

 

 

 

 

 

 

 

Venture capital fund investments

 

(1,450

)

(1,005

)

(2,903

)

(3,194

)

Other private equity investments

 

(479

)

(573

)

(530

)

(1,935

)

Other investments

 

(425

)

(286

)

(425

)

(286

)

Non-marketable securities (cost method accounting):

 

 

 

 

 

 

 

 

 

Venture capital fund investments

 

(634

)

(378

)

(3,379

)

(1,315

)

Other private equity investments

 

 

(245

)

(473

)

(410

)

Total gross losses on investment securities

 

(2,988

)

(2,866

)

(9,984

)

(7,507

)

Net gains (losses) on investment securities

 

$

1,301

 

$

(189

)

$

872

 

$

2,035

 

 

19



 

6.   Loans and Allowance for Loan and Lease Losses

 

The detailed composition of loans, net of unearned income of $20.0 million and $18.4 million for the periods ended September 30 2005 and December 31, 2004, respectively, is presented in the following table:

 

(Dollars in thousands)

 

September 30,
2005

 

December 31,
2004

 

 

 

 

 

 

 

Commercial loans

 

$

2,220,752

 

$

1,927,271

 

 

 

 

 

 

 

Vineyard development

 

97,475

 

80,960

 

Commercial real estate

 

20,247

 

18,562

 

Total real estate construction

 

117,722

 

99,522

 

 

 

 

 

 

 

Real estate term — consumer

 

35,942

 

27,124

 

Real estate term — commercial

 

10,656

 

16,720

 

Total real estate term

 

46,598

 

43,844

 

 

 

 

 

 

 

Consumer and other

 

253,659

 

237,951

 

Total loans, net of unearned income

 

$

2,638,731

 

$

2,308,588

 

 

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

 

 

 

Three months ended September 30,

 

Nine months ended
September 30,

 

(Dollars in thousands)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Beginning balance

 

$

36,372

 

$

44,880

 

$

37,613

 

$

49,862

 

(Recovery of) provision for  loan and lease losses

 

1,427

 

(1,390

)

(1,573

)

(6,920

)

Loans charged off

 

(4,437

)

(3,205

)

(10,507

)

(9,920

)

Recoveries

 

1,501

 

3,151

 

9,330

 

10,414

 

Ending balance

 

$

34,863

 

$

43,436

 

$

34,863

 

$

43,436

 

 

The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $13.5 million and $15.0 million at September 30, 2005 and September 30, 2004, respectively. Allocations of the allowance for loan and lease losses specific to impaired loans totaled $1.4 million at September 30, 2005, and $4.5 million at September 30, 2004. Average impaired loans for the third quarter of 2005 and 2004 totaled $14.5 million and $13.6 million, respectively.

 

7.  Borrowings

 

The following table represents the outstanding borrowings at September 30, 2005 and December 31, 2004:

 

(Dollars in thousands)

 

Maturity

 

September 30,
2005

 

December 31,
2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0% Short-term borrowings(1)

 

September 28, 2005

 

$

 

$

9,120

 

Other borrowings

 

Overdraft

 

606

 

 

Revolving line of credit – venture debt fund

 

Due on Demand

 

1,790

 

700

 

Total other borrowings

 

 

 

$

2,396

 

$

9,820

 

 

 

 

 

 

 

 

 

Federal funds purchased and securities sold under agreement to repurchase

 

Less than One Month

 

$

119,164

 

$

 

Contingently convertible debt

 

June 15, 2008

 

147,413

 

146,740

 

Junior subordinated debentures

 

October 15, 2033

 

48,818

 

49,470

 

 


(1)           Relates to the acquisition of SVB Alliant (Alliant Partners) in 2001 and were payable to the former owners, who were employed by the Company.  These notes were retired according to their terms during third quarter 2005.

 

Interest expense related to other borrowings was $1.8 million and $0.8 million for the three months ended September 30, 2005 and 2004, and $3.5 million and $2.2 million for the nine months ended September 30, 2005 and 2004, respectively. The weighted average

 

20



 

interest rates associated with the Company’s borrowings outstanding for the three and nine months ended September 30, 2005 were 2.35% and 1.94%, 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 SEC, 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 debt at September 30, 2005 was $213.0 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. The per share closing price of $48.64 of the Company’s common stock on September 30, 2005, the last trading day of third quarter of 2005, was 110% or more than the then current conversion price of $33.6277. Accordingly, during the third quarter of 2005, our note holders held the right, at their option, to convert their notes, in whole or in part, into shares of the Company’s common stock, subject to certain limitations, at the conversion price of $33.6277. The Company received conversion notice relating to the notes in an aggregate principal amount of $12,000 during the third quarter of 2005.

 

Concurrent with the issuance of the convertible notes, the Company entered into a convertible note hedge at a cost of $39.3 million and a warrant transaction providing proceeds of $17.4 million 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 $51.9 million as of September 30, 2005 and $50.2 million as of December 31, 2004.  The Company has guaranteed the trust preferred securities issued by SVB Capital II.

 

Available Lines of Credit

 

As of September 30, 2005, the Company had available $410.0 million in federal funds and lines of credit, all of which were 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 September 30, 2005, the Company borrowed $119.2 million against its reverse repurchase lines.

 

21



 

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, and 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 values of derivative instruments in other assets and gross negative fair value of derivative liabilities are recorded in other liabilities.

 

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

 

 

 

At September 30, 2005

 

 

 

Notional or
contractual
amount

 

Credit risk
Amount (1)

 

Estimated net
fair value

 

 

 

 

 

 

 

Asset (liability)

 

 

 

(Dollars in thousands)

 

Fair Value Hedge

 

 

 

 

 

 

 

Interest rate swap

 

$

50,000

 

$

 

$

(706

)

 

 

 

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

Foreign exchange spot and forwards

 

537,905