SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 05/10/2007 16:03:58)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2007

OR

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

For the transition period from           to            .

Commission File Number: 000-15637

SVB FINANCIAL GROUP
(Exact name of registrant as specified in its charter)

Delaware

 

91-1962278

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

3003 Tasman Drive, Santa Clara, California

 

95054-1191

(Address of principal executive offices)

 

(Zip Code)

 

(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  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  o    Non-accelerated filer  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 x

At April 30, 2007, 34,280,947 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 (UNAUDITED) AS OF MARCH 31, 2007 AND DECEMBER 31, 2006

 

3

 

 

 

 

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

 

4

 

 

 

 

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

 

5

 

 

 

 

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

 

6

 

 

 

 

 

 

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

7

 

 

 

 

 

ITEM 2.

 

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

 

21

 

 

 

 

 

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

39

 

 

 

 

 

ITEM 4.

 

CONTROLS AND PROCEDURES

 

41

 

 

 

 

 

PART II - OTHER INFORMATION

 

41

 

 

 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

41

 

 

 

 

 

ITEM 1A.

 

RISK FACTORS

 

41

 

 

 

 

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

49

 

 

 

 

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

49

 

 

 

 

 

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

49

 

 

 

 

 

ITEM 5.

 

OTHER INFORMATION

 

49

 

 

 

 

 

ITEM 6.

 

EXHIBITS

 

49

 

 

 

 

 

SIGNATURE

 

50

 

 

 

 

 

INDEX TO EXHIBITS

 

51

 

2




PART I - FINANCIAL INFORMATION

ITEM 1.  INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except par value and share data)

 

March 31,
2007

 

December 31,
2006

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

309,933

 

$

393,284

 

Securities purchased under agreement to resell and other short-term investment securities              

 

254,941

 

239,301

 

Investment securities

 

1,657,539

 

1,692,343

 

Loans, net of unearned income

 

3,358,390

 

3,482,402

 

Allowance for loan losses

 

(40,256

)

(42,747

)

Net loans

 

3,318,134

 

3,439,655

 

Premises and equipment, net of accumulated depreciation and amortization

 

37,868

 

37,306

 

Goodwill

 

21,296

 

21,296

 

Accrued interest receivable and other assets

 

248,145

 

258,267

 

Total assets

 

$

5,847,856

 

$

6,081,452

 

 

 

 

 

 

 

Liabilities, Minority Interest and Stockholders’ Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

 

$

2,863,399

 

$

3,039,528

 

Negotiable order of withdrawal (NOW)

 

32,325

 

35,983

 

Money market

 

652,741

 

668,794

 

Time

 

326,734

 

313,320

 

Total deposits

 

3,875,199

 

4,057,625

 

Short-term borrowings

 

583,901

 

683,537

 

Contingently convertible debt

 

148,673

 

148,441

 

Junior subordinated debentures

 

51,809

 

51,355

 

Other long-term debt

 

152,669

 

152,669

 

Other liabilities

 

187,147

 

193,296

 

Total liabilities

 

4,999,398

 

5,286,923

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Minority interest in capital of consolidated affiliates

 

194,993

 

166,015

 

 

 

 

 

 

 

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; 34,229,797 and 34,401,230 shares outstanding at March 31, 2007 and December 31, 2006, respectively

 

34

 

34

 

Additional paid-in capital

 

 

4,873

 

Retained earnings

 

668,486

 

641,528

 

Accumulated other comprehensive loss

 

(15,055

)

(17,921

)

Total stockholders’ equity

 

653,465

 

628,514

 

Total liabilities, minority interest and stockholders’ equity

 

$

5,847,856

 

$

6,081,452

 

 

See accompanying notes to interim consolidated financial statements (unaudited).

3




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

 

Three months ended March 31,

 

(Dollars in thousands, except per share amounts)

 

2007

 

2006

 

Interest income:

 

 

 

 

 

Loans

 

$

85,232

 

$

66,148

 

Investment securities:

 

 

 

 

 

Taxable

 

16,293

 

20,394

 

Non-taxable

 

607

 

823

 

Securities purchased under agreement to resell and other short-term investment securities          

 

3,834

 

2,040

 

Total interest income

 

105,966

 

89,405

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Deposits

 

2,188

 

2,325

 

Other borrowings

 

10,414

 

3,201

 

Total interest expense

 

12,602

 

5,526

 

Net interest income

 

93,364

 

83,879

 

Recovery of loan losses

 

(407

)

(2,474

)

Net interest income after recovery of loan losses

 

93,771

 

86,353

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

Gains (losses) on investment securities, net

 

12,251

 

(61

)

Client investment fees

 

12,034

 

9,637

 

Foreign exchange fees

 

5,259

 

5,212

 

Deposit service charges

 

3,211

 

2,178

 

Letter of credit and standby letter of credit income

 

2,931

 

2,350

 

Corporate finance fees

 

2,915

 

2,438

 

Gains (losses) on derivative instruments, net

 

1,973

 

(2,985

)

Other

 

6,887

 

4,632

 

Total noninterest income

 

47,461

 

23,401

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

Compensation and benefits

 

53,360

 

44,521

 

Professional services

 

9,150

 

8,355

 

Furniture and equipment

 

5,142

 

3,704

 

Net occupancy

 

4,804

 

4,205

 

Business development and travel

 

2,915

 

2,754

 

Correspondent bank fees

 

1,549

 

1,130

 

Telephone

 

1,433

 

907

 

Data processing services

 

1,028

 

1,128

 

Reduction of provision for unfunded credit commitments

 

(1,109

)

(496

)

Other

 

3,845

 

4,480

 

Total noninterest expense

 

82,117

 

70,688

 

 

 

 

 

 

 

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

 

59,115

 

39,066

 

Minority interest in net income of consolidated affiliates

 

(10,356

)

(244

)

Income before income tax expense

 

48,759

 

38,822

 

Income tax expense

 

20,368

 

16,743

 

Net income before cumulative effect of change in accounting principle

 

28,391

 

22,079

 

Cumulative effect of change in accounting principle, net of tax (1)

 

 

192

 

Net income

 

$

28,391

 

$

22,271

 

 

 

 

 

 

 

Earnings per common share—basic, before cumulative effect of change in accounting principle     

 

$

0.82

 

$

0.63

 

Earnings per common share—diluted, before cumulative effect of change in accounting principle  

 

$

0.76

 

$

0.57

 

Earnings per common share—basic

 

$

0.82

 

$

0.63

 

Earnings per common share—diluted

 

$

0.76

 

$

0.58

 

 


(1)     Represents the cumulative effect of change in accounting principle, net of taxes, on previously recognized share-based compensation for the effect of adopting Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment .

See accompanying notes to interim consolidated financial statements (unaudited).

4




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

 

Three months ended March 31,

 

(Dollars in thousands)

 

2007

 

2006

 

 

 

 

 

 

 

Net income

 

$

28,391

 

$

22,271

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Cumulative translation (losses) gains:

 

 

 

 

 

Translation (losses) gains, net of tax

 

(108

)

22

 

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

 

 

 

 

 

Unrealized holding gains (losses), net of tax

 

2,788

 

(10,520

)

Reclassification adjustment for gains included in net income, net of tax

 

186

 

99

 

Other comprehensive income (loss), net of tax

 

2,866

 

(10,399

)

Comprehensive income

 

$

31,257

 

$

11,872

 

 

See accompanying notes to interim consolidated financial statements (unaudited).

5




SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

Three months ended March 31,

 

(Dollars in thousands)

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

28,391

 

$

22,271

 

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

 

 

 

 

 

Recovery of loan losses

 

(407

)

(2,474

)

Reduction of provision for unfunded credit commitments

 

(1,109

)

(496

)

Changes in fair values of derivatives, net

 

(482

)

(359

)

(Gains) losses on investment securities, net

 

(12,251

)

61

 

Depreciation and amortization

 

4,771

 

1,872

 

Minority interest in net income of consolidated affiliates

 

10,356

 

244

 

Tax benefit of original issue discount

 

819

 

776

 

Tax benefits of share-based compensation and other

 

321

 

3,369

 

Amortization of share-based compensation

 

3,648

 

5,938

 

Amortization of deferred warrant-related loan fees

 

(1,561

)

(1,507

)

Deferred income tax expense

 

2,533

 

4,552

 

Changes in other assets and liabilities:

 

 

 

 

 

Decrease in accrued interest receivable

 

45

 

2,505

 

(Increase) decrease in accounts receivable

 

(233

)

1,325

 

Increase in income tax receivable, net

 

(4,900

)

(11,760

)

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

 

(26,024

)

(32,370

)

Other, net

 

9,497

 

2,379

 

Net cash provided by (used for) operating activities

 

13,414

 

(3,674

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of available-for-sale securities

 

(13,155

)

(1,002

)

Proceeds from sales of available-for-sale securities

 

1,933

 

644

 

Proceeds from maturities and pay downs of available-for-sale securities

 

79,442

 

94,117

 

Purchases of nonmarketable securities (cost and equity method accounting)

 

(7,433

)

(5,976

)

Proceeds from sales of nonmarketable securities (cost and equity method accounting)

 

4,783

 

265

 

Proceeds from nonmarketable securities (cost and equity method accounting)

 

2,075

 

5,110

 

Purchases of nonmarketable securities (investment fair value accounting)

 

(16,698

)

(19,971

)

Proceeds from sales of nonmarketable securities (investment fair value accounting)

 

3,934

 

3,580

 

Net decrease in loans

 

119,601

 

88,270

 

Proceeds from recoveries of charged-off loans

 

2,266

 

3,031

 

Purchases of premises and equipment

 

(4,068

)

(3,694

)

Net cash provided by investing activities

 

172,680

 

164,374

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net decrease in deposits

 

(161,418

)

(99,664

)

(Decrease) increase in short-term borrowings

 

(99,636

)

12,703

 

Capital contributions from minority interest participants, net of distributions

 

18,622

 

18,665

 

Stock compensation related tax benefits

 

1,841

 

3,156

 

Proceeds from issuance of common stock

 

5,907

 

17,616

 

Repurchases of common stock

 

(19,121

)

(25,279

)

Net cash used for financing activities

 

(253,805

)

(72,803

)

Net (decrease) increase in cash and cash equivalents

 

(67,711

)

87,897

 

Cash and cash equivalents at beginning of year

 

632,585

 

462,098

 

Cash and cash equivalents at end of period

 

$

564,874

 

$

549,995

 

 

See accompanying notes to interim consolidated financial statements (unaudited).

6




SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.                  Description of Business

SVB Financial Group (“SVB Financial” or the “Parent”) is a bank holding company and financial holding company, incorporated in the state of Delaware in March 1999.  SVB Financial and its subsidiaries (which we refer to collectively as “we”, “our”, “us” or the “Company” in this Form 10-Q) offer a diversity of banking and financial products and services to support our clients throughout their life cycles.

 We offer commercial banking products and services through our banking subsidiary, Silicon Valley Bank (the “Bank”), which is a California-chartered bank founded in 1983 and a member of the Federal Reserve System. Through its subsidiaries, the Bank also offers brokerage, investment advisory and asset management services.  We also offer non-banking financial products and services, such as investment banking, funds management, private equity investment and equity valuation, through our other subsidiaries and divisions.

We primarily focus on serving our corporate clients in the following niches:  technology, life sciences, private equity and premium wine.  Our corporate clients range in size and stage of maturity, from “emerging growth” companies to more “mature” companies.  Our emerging growth clients tend to be privately held and funded by venture capital, and may have generally fewer employees, be primarily engaged in research and development, market relatively few products or services and/or have little or no revenue.  Our more mature companies tend to be more established and may be publicly traded.  Additionally, we focus on cultivating strong relationships with firms within the venture capital and private equity community worldwide, many of which are also our clients and may invest in our corporate clients.

We are headquartered in Santa Clara, California, and operate through 27 offices in the United States and three internationally in the United Kingdom, India and China.

For reporting purposes, SVB Financial Group has four operating segments in which we report our financial information:  Commercial Banking, SVB Capital, SVB Alliant, and Other Business Services. Financial information and results of operations for our operating segments are set forth in Note 11. “Segment Reporting” below and in Item 2 of Part I of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operating Segment Results.”

Our Commercial Banking segment is comprised of our commercial banking and financial products and services of the Bank and its subsidiaries, through which we offer lending, deposit, cash management, global trade, brokerage and investment advisory products and services to our commercial clients, including private equity firms.  Our SVB Capital segment consists of our private equity division which focuses primarily on funds management, as well as developing strategic business relationships with the private equity community.  Funds managed or sponsored by SVB Capital also invest in portfolio companies and other funds.  Our SVB Alliant segment is comprised of our investment banking subsidiaries, which provide advisory services in the areas of mergers and acquisitions, corporate finance, strategic alliances and private placements.  Finally, our Other Business Services segment is comprised of all other businesses, such as SVB Private Client Services (private banking), SVB Global (global expansion) and SVB Analytics (equity valuation and management).

2.                  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements reflect all adjustments (of a normal and recurring nature) that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of results to be expected for any future periods. These interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K”).

The consolidated balance sheet at December 31, 2006 has been derived from the audited consolidated financial statements 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 Part II, Item 8. Consolidated Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies presented in our 2006 Form 10-K.

7




The preparation of interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentations.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS No. 157 on our consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 expands the use of fair value accounting but does not affect existing standards, which require assets or liabilities to be carried at fair value. Under SFAS No. 159, a company may elect to use fair value to measure certain financial assets and financial liabilities, on an instrument-by-instrument basis.  If the fair value option is elected, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS No. 159, changes in fair value are recognized in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 with earlier adoption permitted.  We have elected not to early adopt and are currently assessing the impact of SFAS No. 159 on our consolidated financial position and results of operations.

3.                  Earnings Per Share (EPS)

The following is a reconciliation of basic EPS to diluted EPS for the three months ended March 31, 2007 and 2006:

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

 

Net Income

 

Weighted
Average
Shares

 

Per Share
Amount

 

Three Months Ended March 31, 2007:

 

 

 

 

 

 

 

Income available to common stockholders—basic

 

$

28,391

 

34,422

 

$

0.82

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options

 

 

1,328

 

 

 

Restricted stock awards and units

 

 

93

 

 

 

Convertible debt

 

 

1,320

 

 

 

Total effect of dilutive securities

 

 

2,741

 

 

 

Income available to common stockholders and assumed conversions—diluted

 

$

28,391

 

37,163

 

$

0.76

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2006:

 

 

 

 

 

 

 

Income available to common stockholders—basic

 

$

22,271

 

35,086

 

$

0.63

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options

 

 

1,791

 

 

 

Restricted stock awards and units

 

 

108

 

 

 

Convertible debt

 

 

1,462

 

 

 

Total effect of dilutive securities

 

 

3,361

 

 

 

Income available to common stockholders and assumed conversions—diluted

 

$

22,271

 

38,447

 

$

0.58

 

 

Stock options and warrants with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation:

 

Three months ended March 31,

 

(Shares in thousands)

 

2007

 

2006

 

 

 

 

 

 

 

Stock options

 

890

 

678

 

Restricted stock awards and units

 

 

4

 

Warrants (Note 9 “Derivative Financial Instruments”)

 

4,455

 

4,457

 

Ending balance

 

5,345

 

5,139

 

 

8




In September 2004, the Emerging Issues Task Force (“EITF”) reached final consensus on EITF 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share (“EITF 04-8”) whereby contingently convertible debt should be treated as convertible debt and included in the calculation of diluted EPS. The potential dilutive effect of our contingently convertible debt using the treasury stock method was approximately 1.3 million shares and 1.5 million shares for the three months ended March 31, 2007 and 2006, respectively. We included the dilutive effect of the $150.0 million zero-coupon, convertible subordinated notes in our diluted EPS calculation using the treasury stock method, in accordance with the provisions of EITF No. 90-19, Convertible Bonds With Issuer Option to Settle in Cash Upon Conversion (“EITF 90-19”) and SFAS No. 128, Earnings Per Share .

4.                  Share-Based Compensation

For the three months ended March 31, 2007 and 2006, we recorded share-based compensation expense of $3.8 million and $5.9 million, respectively, resulting in the recognition of $0.7 million and $1.3 million, respectively, in related tax benefits.

Unrecognized Compensation Expense

At March 31, 2007, unrecognized share-based compensation expense was as follows:

(Dollars in thousands)

 

Unrecognized
Expense

 

Average Expected
Recognition Period—
in Years

 

Stock option awards

 

$

12,134

 

0.99

 

Restricted stock awards and units

 

4,141

 

2.43

 

Employee stock purchase plan

 

244

 

0.25

 

Total unrecognized share-based compensation expense

 

$

16,519

 

 

 

Share-Based Payment Award Activity

The table below provides stock option information related to the 1989 Stock Option Plan, the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the three months ended March 31, 2007:

 

Shares

 

Weighted-
Average
Exercise
Price

 

Weighted-Average
Remaining
Contractual
Life in Years

 

Aggregate Intrinsic
Value of In-
The-Money Options

 

Outstanding at December 31, 2006

 

4,673,139

 

$

31.74

 

 

 

 

 

Granted

 

4,750

 

47.47

 

 

 

 

 

Exercised

 

(240,630

)

24.73

 

 

 

 

 

Forfeited

 

(29,648

)

41.20

 

 

 

 

 

Expired

 

(1,538

)

48.74

 

 

 

 

 

Outstanding at March 31, 2007

 

4,406,073

 

32.07

 

3.86

 

$

73,852,388

 

Vested and expected to vest at March 31, 2007

 

4,278,172

 

31.70

 

3.83

 

73,188,436

 

Exercisable at March 31, 2007

 

3,075,143

 

$

28.29

 

3.69

 

$

62,535,009

 

 

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value at March 31, 2007. This value is based on our closing stock price of $48.59 at March 31, 2007. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $5.5 million and $21.5 million, respectively.

The table below provides information for restricted stock awards and restricted stock units granted under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the three months ended March 31, 2007:

 

Shares

 

Weighted-Average
Grant Date Fair Value

 

Nonvested at December 31, 2006

 

215,926

 

$

40.03

 

Granted

 

2,585

 

47.20

 

Vested

 

(3,783

)

47.98

 

Forfeited

 

(2,971

)

47.63

 

Nonvested at March 31, 2007

 

211,757

 

$

39.87

 

 

9




5.      Securities Purchased under Agreement to Resell and Other Short-Term Investment Securities

The following table details the securities purchased under agreement to resell and other short-term investment securities at March 31, 2007 and December 31, 2006, respectively:

(Dollars in thousands)

 

March 31, 2007

 

December 31, 2006

 

Interest-earning deposits

 

$

41,330

 

$

34,357

 

Securities purchased under agreement to resell

 

81,292

 

40,734

 

Other short-term investment securities

 

132,319

 

164,210

 

Total securities purchased under agreement to resell and other short-term investment securities

 

$

254,941

 

$

239,301

 

 

6.                  Invest ment Securities

The detailed composition of our investment securities at March 31, 2007 and December 31, 2006 is presented as follows:

(Dollars in thousands)

 

March 31, 2007

 

December 31, 2006

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

$

1,386,715

 

$

1,445,455

 

Marketable securities (investment company fair value accounting)

 

155

 

 

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

 

 

 

 

 

Private equity fund investments (1)

 

149,130

 

126,475

 

Other private equity investments (2)

 

33,680

 

32,913

 

Other investments (3)

 

14,789

 

15,394

 

Non-marketable securities (equity method accounting):

 

 

 

 

 

Other investments (4)

 

15,518

 

15,710

 

Low income housing tax credit funds

 

21,867

 

22,664

 

Non-marketable securities (cost method accounting):

 

 

 

 

 

Private equity fund investments

 

27,555

 

27,771

 

Other private equity investments

 

8,130

 

5,961

 

Total investment securities

 

$

1,657,539

 

$

1,692,343

 

 


(1)        Includes $69.6 million and $66.0 million related to SVB Strategic Investors Fund, LP at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007 we have a controlling ownership interest of 12.6% in the fund. Also includes $61.6 million and $47.7 million related to SVB Strategic Investors Fund II, LP at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007 we have a controlling interest of 8.6% in the fund. Additionally, it includes $17.9 million and $12.8 million related to SVB Strategic Investors Fund III, LP at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007 we have a controlling interest of 6.2% in the fund.

(2)        Includes $27.8 million and $29.4 million related to Silicon Valley BancVentures, LP at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007 we have a controlling ownership interest of 10.7% in the fund.  Additionally, it includes $5.9 million and $3.5 million related to SVB Capital Partners II, LP at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007 we have a direct ownership interest of 0.3% and an indirect ownership interest of 5.1% in the fund through our ownership of SVB Strategic Investors Fund II, LP.

(3)        Includes $14.8 million and $15.4 million related to Partners for Growth, LP at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007 we have a majority ownership interest of approximately 50.0% in the fund.

(4)       Includes $6.7 million and $6.9 million related to Gold Hill Venture Lending Partners 03, LLC, the general partner of Gold Hill Venture Lending 03, LP and its parallel funds at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007 we have a majority interest of 90.7% in Gold Hill Venture Lending Partners 03, LLC. At March 31, 2007 we have an indirect ownership interest of 4.5% in Gold Hill Venture Lending 03, LP and its parallel funds through Gold Hill Venture Lending Partners 03, LLC. It also includes $6.6 million related to our direct investment in Gold Hill Venture Lending 03, LP for each of the periods ended at March 31, 2007 and December 31, 2006. At March 31, 2007 we have a direct ownership interest of 4.8% in the fund. Additionally, it includes $2.2 million to Partners for Growth II, LP for each of the periods ended March 31, 2007 and December 31, 2006. At March 31, 2007 we have an ownership interest of 24.2% in the fund.

10




The following table breaks out our unrealized losses on our available-for-sale investment securities portfolio into categories of less than 12 months, or 12 months or longer at March 31, 2007:

 

March 31, 2007

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

(Dollars in thousands)

 

Fair Value of
Investments

 

Unrealized
Losses

 

Fair Value of
Investments (1)

 

Unrealized
Losses (1)

 

Fair Value of
Investments

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

9,915

 

$

(1

)

$

9,966

 

$

(28

)

$

19,881

 

$

(29

)

U.S. agencies and corporations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

37,715

 

(45

)

567,997

 

(11,686

)

605,712

 

(11,731

)

Mortgage-backed securities

 

20,236

 

(166

)

381,230

 

(10,187

)

401,466

 

(10,353

)

U.S. agency debentures

 

9,966

 

(34

)

186,986

 

(2,995

)

196,952

 

(3,029

)

Commercial mortgage-backed securities

 

 

 

69,789

 

(1,386

)

69,789

 

(1,386

)

Marketable equity securities

 

1,719

 

(294

)

 

 

1,719

 

(294

)

Total temporarily impaired securities

 

$

79,551

 

$

(540

)

$

1,215,968

 

$

(26,282

)

$

1,295,519

 

$

(26,822

)


(1)              As of March 31, 2007, we identified a total of 153 investments that were in unrealized loss positions, of which 133 investments totaling $1,216.0 million with unrealized losses of $26.3 million had fair values less than their adjusted cost for a period of time greater than 12 months.  A U.S. Treasury note totaling $10.0 million with an unrealized loss of $28.0 thousand was purchased in July 2005.  Securities classified as collateralized mortgage obligations totaling $568.0 million with unrealized losses of $11.7 million were originally purchased between May 2002 and December 2005.  Securities classified as mortgage-backed securities totaling $381.2 million with unrealized losses of $10.2 million were originally purchased between August 2002 and April 2005.  Securities classified as U.S. agency debentures totaling $187.0 million with unrealized losses of $3.0 million were originally purchased between June 2003 and July 2005.  Securities classified as commercial mortgage-backed securities totaling $69.8 million with unrealized losses of $1.4 million were originally purchased between April 2005 and July 2005. All investments with unrealized losses for a period of time greater than 12 months are either rated AAA by Moody’s or S&P or are issued by the U.S. Treasury or a government sponsored enterprise.  Because these securities are of superior credit quality, the unrealized losses are due solely to increases in market interest rates and we expect to recover the impairment prior to or at maturity, we deem these impairments to be temporary.  We have the intent and ability to hold the securities until the market value recovers or until maturity.  Market valuations and impairment analyses on assets in the investment portfolio are reviewed and monitored on an ongoing basis.

The following table breaks out our unrealized losses on our available-for-sale investment securities portfolio into categories of less than 12 months, or 12 months or longer as of December 31, 2006:

 

December 31, 2006

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

(Dollars in thousands)

 

Fair Value of
Investments

 

Unrealized
Losses

 

Fair Value of
Investments

 

Unrealized
Losses

 

Fair Value of
Investments

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

 

$

 

$

9,931

 

$

(56

)

$

9,931

 

$

(56

)

U.S. agencies and corporations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

13,170

 

(16

)

616,507

 

(14,657

)

629,677

 

(14,673

)

Mortgage-backed securities

 

17,380

 

(164

)

392,053

 

(11,563

)

409,433

 

(11,727

)

U.S. agency debentures

 

9,925

 

(75

)

220,898

 

(4,086

)

230,823

 

(4,161

)

Commercial mortgage-backed securities

 

 

 

69,375

 

(1,799

)

69,375

 

(1,799

)

Total temporarily impaired securities

 

$

40,475

 

$

(255

)

$

1,308,764

 

$

(32,161

)

$

1,349,239

 

$

(32,416

)

 

11




The following table presents the components of gains and losses on investment securities for the three months ended March 31, 2007 and 2006:

 

Three months ended March 31,

 

(Dollars in thousands)

 

2007

 

2006

 

 

 

 

 

 

 

Gross gains on investment securities:

 

 

 

 

 

Available-for-sale securities, at fair value

 

$

318

 

$

170

 

Marketable securities (investment company fair value accounting)

 

42

 

 

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

 

 

 

 

 

Private equity fund investments

 

12,592

 

2,567

 

Other private equity investments

 

47

 

2

 

Other investments

 

567

 

3

 

Non-marketable securities (equity method accounting)

 

324

 

207

 

Non-marketable securities (cost method accounting):

 

 

 

 

 

Private equity fund investments

 

224

 

76

 

Other private equity investments

 

227

 

 

Total gross gains on investment securities

 

14,341

 

3,025

 

 

 

 

 

 

 

Gross losses on investment securities:

 

 

 

 

 

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

 

 

 

 

 

Private equity fund investments

 

(1,206

)

(2,196

)

Other private equity investments

 

(700

)

 

Non-marketable securities (equity method accounting)

 

 

(552

)

Non-marketable securities (cost method accounting):

 

 

 

 

 

Private equity fund investments

 

(184

)

(293

)

Other private equity investments

 

 

(45

)

Total gross losses on investment securities

 

(2,090

)

(3,086

)

Gains (losses) on investment securities, net(1)

 

$

12,251

 

$

(61

)

 


(1)              The net gains on investment securities of $12.3 million for the three months ended March 31, 2007 were attributable to net gains of $11.3 million from two of our managed funds of funds.  Of the $11.3 million gain, $10.3 million was attributable to minority interests and these amounts are reflected in the interim consolidated statements of income under the caption “Minority Interest in Net Income of Consolidated Affliliates”.

7.                Loans and Allowance for Loan Losses

The detailed composition of loans, net of unearned income of $22.8 million and $27.2 million at March 31, 2007 and December 31, 2006, respectively, is presented in the following table:

(Dollars in thousands)

 

March 31, 
2007

 

December 31,
2006

 

 

 

 

 

 

 

Commercial loans

 

$

2,833,235

 

$

2,959,501

 

 

 

 

 

 

 

Vineyard development

 

121,950

 

118,266

 

Commercial real estate

 

16,073

 

13,336

 

Total real estate construction

 

138,023

 

131,602

 

 

 

 

 

 

 

Real estate term — consumer

 

49,406

 

46,812

 

Real estate term — commercial

 

42,335

 

50,051

 

Total real estate term

 

91,741

 

96,863

 

 

 

 

 

 

 

Consumer and other

 

295,391

 

294,436

 

Total loans, net of unearned income

 

$

3,358,390

 

$

3,482,402

 

 

12




The activity in the allowance for loan losses for the three months ended March 31, 2007 and 2006 were as follows:

 

Three months ended March 31,

 

(Dollars in thousands)

 

2007

 

2006

 

 

 

 

 

 

 

Beginning balance

 

$

42,747

 

$

36,785

 

Recovery of loan losses

 

(407

)

(2,474

)

Loan charge-offs

 

(4,350

)

(1,361

)

Loan recoveries

 

2,266

 

3,032

 

Ending balance

 

$

40,256

 

$

35,982

 

 

The aggregate investment in loans for which impairment has been determined in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS No. 114”) totaled $10.9 million and $11.0 million at March 31, 2007 and December 31, 2006, respectively. The allocation of the allowance for loan losses related to impaired loans was $0.6 million at March 31, 2007.  There was no allocation of the allowance for loan losses related to impaired loans at December 31, 2006. Average impaired loans for the three months ended March 31, 2007 and 2006 totaled $10.5 million and $5.6 million, respectively.  If these loans had not been impaired, $0.4 million and $0.3 million in interest income would have been recorded during the three months ended March 31, 2007 and 2006, respectively.

8.                  Borrowings

The following table represents outstanding borrowings at March 31, 2007 and December 31, 2006:

(Dollars in thousands)

 

Maturity

 

March 31, 
2007

 

December 31,
2006

 

Short-term borrowings:

 

 

 

 

 

 

 

Federal funds purchased and securities sold under agreement to repurchase

 

Less than One Month (1)

 

$

393,351

 

$

483,537

 

FHLB advances

 

One Month or Less (1)

 

190,000

 

200,000

 

Short-term notes payable

 

Three Months or Less (1)

 

550

 

 

Total short-term borrowings

 

 

 

$

583,901

 

$

683,537

 

 

 

 

 

 

 

 

 

Contingently convertible debt

 

June 15, 2008

 

$

148,673

 

$

148,441

 

 

 

 

 

 

 

 

 

Junior subordinated debentures

 

October 15, 2033

 

$

51,809

 

$

51,355

 

 

 

 

 

 

 

 

 

Other long-term debt:

 

 

 

 

 

 

 

FHLB advances

 

(2)

 

$

150,000

 

$

150,000

 

8.0% Long-term note payable (3)

 

November 30, 2009

 

2,669

 

2,669

 

Total other long-term debt

 

 

 

$

152,669

 

$

152,669

 


(1)              Represents remaining maturity as of the date reported.

(2)              Represents Federal Home Loan Bank (“FHLB”) advances maturing in 2008 and 2009.

(3)              Debt assumed in relation to the acquisition of a 65% interest in eProsper during the third quarter of 2006.

Interest expense related to borrowings was $10.4 million and $3.2 million for the three months ended March 31, 2007 and 2006, respectively. The weighted average interest rates associated with our borrowings outstanding for the three months ended March 31, 2007 and 2006, and the year ended December 31, 2006 were 4.69%, 3.33% and 4.26%, respectively.

Contingently Convertible Debt

The fair value of the convertible debt at March 31, 2007 and December 31, 2006 was $216.5 million and $207.7 million, respectively, based on quoted market prices. We intend to settle the outstanding principal amount in cash. Based on the terms of the notes, if, at any time on or 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 conversion price, the notes would become convertible. The per share closing price of $46.62 of our common stock on December 31, 2006, was 138.6% of the conversion price of $33.6277. Accordingly, during the first quarter of 2007, our note holders held the right, at their option, to convert their notes, in whole or in part, subject to certain limitations, at the conversion price of $33.6277. No conversion occurred during the first quarter of 2007. The per share closing price of $48.59 of our common stock on March 31, 2007, was 144.5% of the conversion price of $33.6277, so our noteholders hold the right to convert their notes until June 15, 2007.  After June 15, 2007, if the closing sales price of our common stock on the previous trading day is 110% or more of the conversion price of the notes, then the notes would become convertible.

13




Concurrent with the issuance of the convertible notes, we entered into a convertible note hedge (see Note 9. Derivative Financial Instruments - Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock).

7.0% Junior Subordinated Debentures

On October 30, 2003, we issued $51.5 million in 7.0% junior subordinated debentures to a special-purpose trust, SVB Capital II. 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. Distributions for each of the three months ended March 31, 2007 and 2006 were $0.9 million. The junior subordinated debentures are mandatorily redeemable upon the maturity of the debentures on October 15, 2033, or to the extent that we redeem any debentures earlier. We may redeem the debentures prior to maturity in whole or in part, at our option, at any time on or after October 30, 2008. In addition, we 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. We entered into a fixed-to-variable interest rate swap agreement related to these junior subordinated debentures (see Note 9. Derivative Financial Instruments).

Available Lines of Credit

At March 31, 2007, we have available uncommitted federal funds lines of credit totaling $1.02 billion of which $681.0 million were unused. We have repurchase agreements with multiple securities dealers, which allow us to access short-term borrowings by using fixed income securities as collateral. As of March 31, 2007, we borrowed $54.0 million against our repurchase lines. We also pledge securities to the Federal Home Loan Bank of San Francisco and the discount window at the Federal Reserve Bank. The market value of collateral pledged to the Federal Home Loan Bank of San Francisco at March 31, 2007 totaled $374.3 million, of which $13.6 million were unused.  The market value of collateral pledged at the discount window of the Federal Reserve Bank at March 31, 2007 totaled $63.4 million, of which the entire portion was unused.

9.                  Derivative Financial Instruments

If held for hedging purposes, we designate the derivative when we enter into a derivative contract. The designation may change based on management’s reassessment or changing circumstances. Derivative instruments that we obtain or use 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 or indices. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined future date, rate or price. An option or warrant contract is an agreement that conveys to the purchaser the right, but not the obligation, to buy or sell a quantity of a financial instrument (including another derivative financial instrument), index, currency or commodity at a predetermined rate or price during a period or at a time in the future. Option or warrant agreements can be transacted on organized exchanges or directly between parties. The gross positive fair values of derivative assets are recorded as a component of the other assets line item on the balance sheet. The gross negative fair values of derivative liabilities are recorded as a component of the other liabilities line item on the balance sheet.

The total notional or contractual amounts, credit risk amount and estimated net fair value for derivatives at March 31, 2007 and December 31, 2006 were as follows:

 

March 31, 2007

 

December 31, 2006

 

(Dollars in thousands)

 

Notional or
contractual
amount

 

Credit risk
Amount (1)

 

Estimated
net
fair value

 

Notional or
contractual
amount

 

Credit risk
Amount (1)

 

Estimated
net
fair value

 

Fair Value Hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

50,000

 

$

 

$

(1,795

)

$

50,000

 

$

 

$

(1,890

)

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forwards

 

637,649

 

9,914

 

371

 

562,205

 

7,284

 

(164

)

Foreign currency options

 

13,627

 

83

 

 

27,579

 

140

 

 

Equity warrant assets

 

$

112,693

 

$

33,535

 

$

33,535

 

$

113,276

 

$

37,725

 

$

37,725

 

 


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

  Fair Value Hedges

Derivative instruments that we hold as part of our interest rate risk management include interest rate swaps and forward contracts. The interest rate swap agreement was entered into on October 30, 2003 to hedge against the risk of changes in fair values associated with the majority of our 7.0% fixed rate, junior subordinated debentures, which management evaluates for effectiveness using the statistical regression analysis approach for each reporting period.

14




The terms of the interest rate swap agreement provide for a swap of our 7.0% fixed rate payment for a variable rate based on the London Inter-Bank Offered Rate (“LIBOR”) plus a spread. This interest rate swap agreement provided a cash benefit of $0.1 million and $0.2 million for the three months ended March 31, 2007 and 2006, respectively, related to interest expense that would have been incurred under a 7.0% fixed interest rate; which was recognized in the consolidated statements of income as a reduction in interest expense. The swap agreement largely mirrors the terms of the junior subordinated debentures and therefore is callable by the counterparty anytime on or after October 30, 2008. All components of the swap’s gain or loss are included in the assessment of hedge effectiveness. Changes in fair value of the fair value hedge agreement, which is primarily dependent on changes in market interest rates, are recognized in net income as gains or losses on derivative instruments. For the three months ended March 31, 2007, we recorded a non-cash decrease of $0.3 million for the fair value hedge implemented in April 2006, which was reflected in gains on derivative instruments, net.

Derivatives - Other

We enter into various derivative contracts primarily to provide derivative products or services to customers. All of these contracts are carried at fair value with changes in fair value recorded on the line item gains (losses) on derivatives, net as part of our noninterest income, a component of consolidated net income.

We enter into foreign exchange forward contracts and non-deliverable foreign exchange forward contracts with clients involved in international trade finance activities, either as the purchaser or seller of foreign currency at a future date, depending upon the clients’ need. For each of the foreign exchange forward contracts and non-deliverable foreign exchange forward contracts entered into with our clients, we enter into an opposite way foreign exchange forward contract and non-deliverable foreign exchange forward contract with a correspondent bank, which mitigates the risk of fluctuations in foreign currency exchange rates. These contracts are short-term in nature, typically expiring within one year. We have not experienced nonperformance by counterparties and therefore have not incurred related losses. Further, we anticipate performance by all counterparties to such agreements.

We enter into foreign exchange forward contracts with correspondent banks to economically hedge foreign exchange exposure risk related to certain foreign currency denominated loans. Revaluations of foreign currency denominated loans are recorded on the line item “Other” as part of noninterest income, a component of consolidated net income. These contracts are short term in nature, typically expiring within one year. We have not experienced nonperformance by counterparties and therefore have not incurred related losses. Further, we anticipate performance by all counterparties to such foreign exchange forward contracts.

We enter into foreign currency option contracts with clients involved in international trade finance activities, either as the purchaser or seller of foreign currency options, depending upon the client’s need. For each of the currency option contracts entered into with our clients, we enter into an opposite way foreign currency option contract with a correspondent bank, which mitigates the risk of fluctuations in foreign currency exchange rates. These contracts typically expire in less than one year. We have not experienced nonperformance by counterparties and therefore have not incurred related losses. Further, we anticipate performance by all counterparties.

We obtain equity warrant assets to purchase an equity position in a client company’s stock in consideration for providing credit facilities and less frequently for providing other services. The purpose of obtaining warrants from client companies is intended to increase future revenue. The change in fair value of equity warrant assets is recorded as gains on derivative instruments, net, in noninterest income, a component of consolidated net income. Total net gains on equity warrant assets from gains on exercise and changes in fair value were $1.4 million and $0.3 million for the three months ended March 31, 2007 and 2006, respectively.

Derivative Fair Value Instruments Indexed to and Potentially Settled in a Company’s Own Stock

Concurrent with the issuance of the $150.0 million principal amount of contingently convertible notes, we entered into a convertible note hedge (purchased call option) at a cost of $39.3 million, and a warrant transaction providing proceeds of $17.4 million with respect to our common stock, with the objective of decreasing our exposure to potential dilution from conversion of the contingently convertible notes.

At issuance, under the terms of the convertible note hedge, upon the occurrence of conversion events, we acquired the right to purchase up to approximately 4,460,610 shares of our common stock from the counterparty at a price of $33.6277 per common share. The convertible note hedge agreement will expire on June 15, 2008. We have the option to settle any amounts

15




due under the convertible hedge either in cash or net shares of our common stock. The cost of the convertible note hedge is included in stockholders’ equity in accordance with the guidance in EITF 00-19. In 2006, we exercised our right to purchase 3,093 shares under the terms of the convertible bond hedge. We did not exercise any of these options during the first quarter of 2007.

At issuance, under the warrant agreement, the counterparty could purchase up to approximately 4,460,608 shares of our common stock at $51.34 per share, upon the occurrence of conversion events defined above. The warrant transaction will expire on June 15, 2008. The proceeds of the warrant transaction were included in stockholders’ equity in accordance with the guidance in EITF 00-19. Due to conversion events in 2006, the counterparty’s right to purchase our stock under warrant has been decreased by 3,093 shares. No conversion occurred during the first quarter of 2007.

10.           Common Stock Repurchases

We currently have in place a program authorizing our repurchase of our common stock. During the three months ended March 31, 2007, we repurchased 0.4 million shares of our common stock totaling $19.1 million. At March 31, 2007, $48.7 million of shares may still be repurchased under our common stock repurchase program, which expires on June 30, 2008.

11.           Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), requires that we report certain financial and descriptive information about our reportable operating segments, as well as related disclosures about products and services, geographic areas and major customers. Our reportable operating segments results are regularly reviewed internally by our chief operating decision maker (“CODM”) when evaluating segment performance and deciding how to allocate resources and in assessing performance.   Our CODM is our Chief Executive Officer (“CEO”).

For management reporting purposes, we report information through four strategic operating segments:  Commercial Banking, SVB Capital, SVB Alliant, and Other Business Services. Our Other Business Services group includes SVB Global, SVB Private Client Services and SVB Analytics. Beginning with the first quarter of 2007, income generated by banking services and financial solutions provided to private equity clients is included under the Commercial Banking segment, rather than the SVB Capital segment as previously reported.  All prior period amounts have been reclassified to conform with current presentations.

Unlike financial reporting, which benefits from the comprehensive structure provided by GAAP, the internal profitability reporting process is highly subjective, as there is no comprehensive, authoritative guidance for management reporting. Our management reporting process measures the performance of our operating segments based on our internal operating structure and is not necessarily comparable with similar information for other financial services companies. In addition, changes in an individual client’s primary relationship designation have resulted, and may in the future result, in the inclusion of certain clients in different segments in different periods. We have reclassified certain prior-period amounts to conform to the current period’s presentation.

An operating segment is separately reportable if it exceeds any one of several quantitative thresholds specified in SFAS No. 131. Of our operating segments, only Commercial Banking, SVB Capital and SVB Alliant were determined to be reportable segments as of March 31, 2007. SVB Global, SVB Private Client Services and SVB Analytics did not meet the separate reporting thresholds and as a result, in the table below, have been aggregated in a column labeled “Other Business Services” for segment reporting purposes.  Previously, the Other Business Services segment included Reconciling Items, as described below.  All prior period amounts have been reclassified to conform with current presentations.

The Reconciling Items column reflects those adjustments necessary to reconcile the results of the operating segments based on our internal profitability reporting process to the consolidated financial statements prepared in conformity with GAAP. Our CODM allocates resources to and assesses the performance of each operating segment based on net interest income, noninterest income and noninterest expense, which are presented as components of segment operating profit or loss before income taxes. Net interest income, our primary source of revenue, is reported, net of funds transfer pricing (“FTP”). FTP is an internal measurement framework designed to assess the financial impact of a financial institution’s sources and uses of funds. It is the mechanism by which an earnings credit is given for deposits raised and an earnings charge is made for funded loans. In addition, we evaluate assets based on average balances; therefore, period-end asset balances are not presented for segment reporting purposes. We have not reached reportable levels of revenue, net income or assets outside the United States and as such we do not present geographic segment information.

16




Our segment information at and for the three months ended March 31, 2007 and 2006 are as follows:

(Dollars in thousands)

 

Commercial
Banking

 

SVB
Capital

 

SVB
Alliant

 

Other
Business
Services

 

Reconciling
Items

 

Total

 

Three months ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

84,457

 

$

121

 

$

200

 

$

5,484

 

$

3,102

 

$

93,364

 

Provision for (recovery of) loan losses (1)

 

1,984

 

 

 

100

 

(2,491

)

(407

)

Noninterest income (2)

 

30,011

 

4,768

 

2,922

 

1,047

 

8,713

 

47,461

 

Noninterest expense (3)

 

64,515

 

4,383

 

3,589

 

7,161

 

2,469

 

82,117

 

Minority interest in net loss of consolidated affiliates

 

 

 

 

 

(10,356

)

(10,356

)

Income (loss) before income tax expense (4)

 

$

47,969

 

$

506

 

$

(467

)

$

(730

)

$

1,481

 

$

48,759

 

Total average loans

 

$

2,803,166

 

$

 

$

 

$

424,300

 

$

30,041

 

$

3,257,507

 

Total average assets (5)

 

4,169,995

 

243,487

 

62,159

 

518,887

 

727,940

 

5,722,468

 

Total average deposits

 

3,626,623

 

 

 

208,900

 

15,493

 

3,851,016

 

Goodwill at March 31, 2007

 

$

 

$

 

$

17,204

 

$

4,092

 

$

 

$

21,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

71,902

 

$

65

 

$

113

 

$

3,959

 

$

7,840

 

$

83,879

 

(Recovery of) provision for loan losses (1)

 

(570

)

 

 

(1,090

)

(814

)

(2,474

)

Noninterest income (2)

 

21,517

 

434

 

2,438

 

930

 

(1,918

)

23,401

 

Noninterest expense (3)

 

48,759

 

2,079

 

5,406

 

5,649

 

8,795

 

70,688

 

Minority interest in net income of consolidated affiliates

 

 

 

 

 

(244

)

(244

)

Income (loss) before income tax expense (4)

 

$

45,230

 

$

(1,580

)

$

(2,855

)

$

330

 

$

(2,303

)

$

38,822

 

Total average loans

 

$

2,309,411

 

$

 

$

 

$

327,447

 

$

26,590

 

$

2,663,448

 

Total average assets (5)

 

4,396,697

 

181,606

 

76,308

 

391,005

 

219,178

 

5,264,794

 

Total average deposits

 

3,864,590

 

 

 

159,924

 

37,037

 

4,061,551

 

Goodwill at March 31, 2006

 

$

 

$

 

$

35,638

 

$

 

$

 

$

35,638

 

 


(1)              For segment reporting purposes, we report net charge-offs as the provision for or recovery of loan losses. Thus, the Reconciling Items column includes net recovery of loan losses of $2.5 million and $0.8 million for the three months ended March 31, 2007 and 2006, respectively, which represents the difference between net charge-offs and the provision for loan losses.

(2)              Noninterest income presented in the Commercial Banking segment includes warrant income of $3.7 million and $0.3 million for the three months ended March 31, 2007 and 2006, respectively.

(3)              The Commercial Banking segment includes direct depreciation and amortization of $0.8 million for both the three months ended March 31, 2007 and 2006, respectively. Due to the complexity of our cost allocation model, it is not feasible to determine the exact amount of the remaining depreciation and amortization expense allocated to the various business segments (totaling approximately $2.9 million and $1.2 million for the three months ended March 31, 2007 and 2006, respectively).

(4)              The internal reporting model used by management to assess segment performance does not calculate tax expense by segment. Our effective tax rate is a reasonable approximation of the segment rates.

(5)           Total Average Assets equals the greater of total loans or the sum of total deposits and total stockholders’ equity for each segment.

12.           Obligations Under Guarantees

In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit and commercial and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract.

Commitments to Extend Credit

A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established in the agreement. Such commitments generally have fixed expiration dates, or other termination clauses, and usually require a fee paid by the client upon us issuing the commitment. Commitments which are available for funding, due to clients meeting all collateral, compliance, and financial covenants required under loan commitment agreements, totaled $4.3 billion and $4.1 billion at March 31, 2007 and December 31, 2006, respectively. Out of these available commitment balances, fixed interest rate commitments were $640.2 million and $611.7 million at March 31, 2007

17




and December 31, 2006, respectively. Commitments which are unavailable for funding, due to clients not meeting all collateral, compliance, and financial covenants required under loan commitment agreements, totaled $0.6 billion at March 31, 2007 and December 31, 2006. Our potential exposure to credit loss, in the event of nonperformance by the other party to the financial instrument, is the contractual amount of the available unused loan commitment. We use the same credit approval and monitoring process in extending loan commitments as we do in making loans. The actual liquidity needs or the credit risk that we have experienced have historically been lower than the contractual amount of commitments to extend credit because a significant portion of these commitments expire without being drawn upon. We evaluate each potential borrower and the necessary collateral on an individual basis. The type of collateral varies, but may include real property, intellectual property, bank deposits, or business and personal assets. The potential credit risk associated with these commitments is considered in management’s evaluation of the adequacy of the liability for unfunded credit commitments. Additionally, at March 31, 2007 and December 31, 2006, we had an aggregate maximum lending limit of $468.1 million, related to our accounts receivable factoring arrangements. We extend credit under accounts receivable factoring arrangements when our clients’ sales invoices are deemed credit worthy under existing underwriting practices.

Commercial and Standby Letters of Credit

Commercial and standby letters of credit represent conditional commitments issued by us on behalf of a client to guarantee the performance of the client to a third party when certain specified future events have occurred. Commercial letters of credit are issued primarily for inventory purchases by a client and are typically short-term in nature. We provide two types of standby letters of credit: performance and financial standby letters of credit. Performance standby letters of credit are issued to guarantee the performance of a client to a third party when certain specified future events have occurred and are primarily used to support performance instruments such as bid bonds, performance bonds, lease obligations, repayment of loans, and past due notices. Financial standby letters of credit are conditional commitments issued by us to guarantee the payment by a client to a third party (beneficiary) and are primarily used to support many types of domestic and international payments. These standby letters of credit have fixed expiration dates and generally require a fee to be paid by the client at the time we issue the commitment. Fees generated from these standby letters of credit are recognized in noninterest income over the commitment period using the straight-line method.

The credit risk involved in issuing letters of credit is essentially the same as that involved with extending loan commitments to clients, and accordingly, we use a credit evaluation process and collateral requirements similar to those for loan commitments. Our standby letters of credit often are cash secured by our clients. The actual liquidity needs or the credit risk that we have experienced historically have been lower than the contractual amount of letters of credit issued because a significant portion of these conditional commitments expire without being drawn upon.

The table below summarizes our commercial and standby letters of credit at March 31, 2007. The maximum potential amount of future payments represents the amount that could be remitted under letters of credit if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.

(Dollars in thousands)

 

Expires In 
One 
Year or Less

 

Expires
After
One Year

 

Total
Amount
Outstanding

 

Maximum 
Amount 
Of Future
Payments

 

Financial standby letters of credit

 

$

589,205

 

$

38,592

 

$

627,797

 

$

627,797

 

Performance standby letters of credit

 

57,366

 

5,217

 

62,583

 

62,583

 

Commercial letters of credit

 

7,074

 

 

7,074

 

7,074

 

Total

 

$

653,645

 

$

43,809

 

$

697,454

 

$

697,454

 

 

At March 31, 2007 and December 31, 2006, deferred fees related to financial and performance standby letters of credit were $3.7 million and $3.9 million, respectively. At March 31, 2007, collateral in the form of cash and investment securities available to us to reimburse losses, if any, under financial and performance standby letters of credits was $308.7 million.

Credit Card Guarantees

The Bank, as a financial provider, routinely guarantees credit cards for some of our customers that have been provided by an unaffiliated financial institution. The Bank has recourse against the customer for any amount it is required to pay to a third party in the event of default under these arrangements. These guarantees are subject to the same credit policies, underwriting standards and approval process as loans made by the Bank. Certain of these amounts are secured by certificates of deposit and other assets, which the Bank has rights to in the event of nonperformance by customers. The total amount of this guarantee was $97.8 million at March 31, 2007. It is not considered probable that material losses would be incurred by the Bank as a result of these arrangements. Credit card fees totaled $1.2 million and $1.1 million for the three months ended March 31, 2007 and 2006, respectively.

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Commitments to Invest in Private Equity Funds

We make commitments to invest in private equity funds, which in turn make investments in privately held companies. Commitments to invest in these funds are generally made up to a ten-year period from the inception of the fund. The timing of future cash requirements to fund such commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate. The following table details our total capital commitments and our unfunded commitments at March 31, 2007.

Our Ownership in Limited Partner (Dollars in thousands)

 

Our Capital
Commitment

 

Our Unfunded
Commitment

 

Our
Ownership
%

 

Silicon Valley BancVentures, LP

 

$

6,000

 

$

660

 

10.7

%

SVB Capital Partners II, LP (1)

 

3,575

 

3,128

 

5.4

 

SVB Strategic Investors Fund, LP

 

15,300

 

3,213

 

12.6

 

SVB Strategic Investors Fund II, LP

 

15,000

 

9,300

 

8.6

 

SVB Strategic Investors Fund III, LP

 

15,000

 

13,500

 

6.2

 

Partners for Growth, LP

 

25,000

 

9,750

 

50.0

 

Partners for Growth II, LP

 

15,000

 

12,750

 

24.2

 

Gold Hill Venture Lending 03, LP

 

20,000

 

5,230

 

9.3

 

SVB India Capital Partners I, LP

 

5,000

 

4,000

 

14.8

 

Other Fund Investments (2)

 

78,589

 

22,427

 

%

Total

 

$

198,464

 

$

83,958

 

 

 

 


(1)              Includes 0.3% direct ownership in SVB Capital Partners II, LP through SVB Capital Partners II, LLC, and 5.1% indirect ownership through our investment in SVB Strategic Investors Fund II, LP.

(2)              Represents commitments to 306 private equity funds where our ownership interest is less than 5%.

13.           Income Taxes

On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48 , Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the entity’s financial statements in accordance with SFAS No. 109. As a result, there was no cumulative effect relating to our adoption of FIN 48.

The total amount of unrecognized tax benefits at January 1, 2007 was $1.0 million, all of which related to tax benefits that, if recognized, would reduce our effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits as a component of operating expenses. Total accrued interest and penalties at January 1, 2007 were immaterial. At March 31, 2007, our unrecognized tax benefits increased by $0.1 million to $1.1 million, the recognition of which would have an effect of $1.1 million on the effective tax rate. Total accrued interest and penalties at March 31, 2007 was $0.1 million.

We expect that the amount of unrecognized tax benefits will change in the next 12 months; however we do not expect the change to have a significant impact on our financial position or our results of operations.

We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions and have identified our federal tax return and tax returns in California and Massachusetts as “major” tax filings. U.S. federal tax examinations through 1998 have been concluded. The U.S. federal tax return for 2003 and subsequent years remain open to examination by the Internal Revenue Service. Our California and Massachusetts tax returns for the years 2002 through 2006 and 2003 through 2006, respectively, remain open to examination.

14.           Related Party Transactions

In January 2007, SVB Financial increased the revolving line of credit facility to Gold Hill Venture Lending 03, LP, a venture debt fund (“Gold Hill”) and its affiliated funds, from a total commitment amount of $40.0 million to $75.0 million.  Contemporaneously with the increase, SVB Financial syndicated $35.0 million, or 46.667% of the total facility, to another lender.  SVB Financial has a 9.3% effective ownership interest in Gold Hill, as well as a 90.7% majority interest in its general partner, Gold Hill Venture Lending Partners 03, LLC.  The highest outstanding balance under the facility for the three months ended March 31, 2007 was $42.0 million.

19




15.           Legal Matters

Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us or our affiliates. Based upon information available to us, our review of such claims to date and consultation with our outside legal counsel, management believes the liability relating to these actions, if any, will not have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations. Where appropriate, as we determine, reserves have been established in accordance with SFAS No. 5, Accounting for Contingencies . The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal or regulatory matters currently pending or threatened could have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations.

16.           Subsequent Events

For the period April 1, 2007 through May 1, 2007, we repurchased 93,493 of our common shares at a total cost of $4.5 million. As of close of business, May 1, 2007, $44.2 million of our common shares may still be repurchased under our common stock repurchase program, which expires on June 30, 2008.

In April 2007, the Company began exploring with the Managing Directors of SVB Alliant and SVB Alliant U.K. an arrangement under which the Managing Directors would create a limited partnership or other entity to operate the SVB Alliant business on an independent basis. If the parties reach an agreement, the Company anticipates that the arrangement would include a strategic alliance under which the successor entity would continue to operate SVB Alliant's existing business under the SVB Alliant name, and the parties would continue to cooperate in the areas of joint marketing and client referrals. In return, the successor entity would pay the Company a specified portion of its revenues and a share of the proceeds from certain types of strategic transactions. Depending on the terms of any agreement the parties may reach, the Company may make an adjustment to the carrying value of SVB Alliant's goodwill, currently valued at $17.2 million. In any event, the Company will conduct an impairment analysis of the remaining SVB Alliant goodwill during the second quarter of 2007 as part of its annual review process under SFAS No. 142, Goodwill and Other Intangible Assets .

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements; Reclassifications

This Quarterly Report on Form 10-Q, including in particular “Item 2 of Part 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management has in the past and might in the future make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements are statements that are not historical facts. Broadly speaking, forward-looking statements include, but not limited to, the following:

·        Projections of our revenues, income, earnings per share, noninterest costs (including professional service, compliance, compensation and other costs), cash flows, balance sheet, capital expenditures, capital structure or other financial items

·        Descriptions of strategic initiatives, plans, objectives and expectations of our management for the Company

·        Forecasts of expected levels of provisions for loan losses, loan growth and client funds

·        Forecasts of venture capital and private equity funding levels

·        Forecasts of future interest rates and future economic performance

·        Descriptions of assumptions underlying or relating to any of the foregoing

In this Quarterly Report on Form 10-Q, we make forward-looking statements, including, but not limited to, those discussing our management’s expectations about:

·        Sensitivity of our interest-earning assets and interest-bearing liabilities to interest rates, and impact to earnings from a change in interest rates

·        Realization, timing and performance of equity or other investments

·        Management of our liquidity position

·        Development of our later-stage corporate technology lending efforts

·        Growth in loan balances

·        Credit quality of our loan portfolio

·        Levels of nonperforming loans

·        Liquidity provided by funds generated through retained earnings

·        Activities for which capital will be required

·        Ability to expand on opportunities to increase our liquidity

·        Use of excess capital

·        Volatility of performance of our investment portfolio

·        Impact of our tax obligations and positions

·        Profitability of our products and services

·        Issuance of long-term indebtedness and use of proceeds from such indebtedness

·        Strategic initiatives

These and other forward-looking statements can be identified by our use of words such as “becoming”, “may”, “will”, “should”, “predicts”, “potential”, “continue”, “anticipates”, “believes”, “estimates”, “seeks”, “expects”, “plans”, “intends”, the negative of such words, or comparable terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we have based these expectations on our beliefs as well as our assumptions, and such expectations may prove to be incorrect. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our management’s forward-looking statements.

For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see Item 1A of Part II “Risk Factors” below.  We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this report. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this filing are made only as of the date of this filing. We assume no obligation and do not intend to revise or update any forward-looking statements contained in this Quarterly Report on Form 10-Q.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and notes as presented in Part I - Item 1 of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K”) as filed with the Securities and Exchange Commission (“SEC”).

21




Certain reclassifications have been made to prior years’ results to conform to the current period’s presentations. Such reclassifications had no effect on our results of operations or stockholders’ equity.

Overview of Company Operations

SVB Financial Group is a diversified financial services company, as well as a bank holding company and financial holding company.  The company was incorporated in the state of Delaware in March 1999.  We offer commercial banking products and services through our banking subsidiary, Silicon Valley Bank (the “Bank”), which is a California-chartered bank founded in 1983 and a member of the Federal Reserve System. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation. We operate through 27 offices in the United States and three internationally in the United Kingdom, India and China.  Our corporate headquarters is located at 3003 Tasman Drive, Santa Clara, California 95054, and our telephone number is 408.654.7400. Hereafter when we refer to “we”, “our”, “us” or the “Company”, we mean SVB Financial Group and all of its subsidiaries collectively, including the Bank. When we refer to “SVB Financial” or “the parent company,” we are referring only to the parent company, SVB Financial Group.

For more than 20 years, we have been dedicated to helping entrepreneurs succeed, especially in the technology, life science, private equity and premium wine industries. We provide our clients with a diversity of products and services to support them throughout their life cycles, regardless of their size or stage of maturity. We offer a range of financial services that generate three distinct sources of income: interest rate differentials, fee-based services and investments in private equity funds.

In part, our income is generated from interest rate differentials. The difference between the interest rates received on interest-earning assets, such as loans extended to clients and securities held in our investment portfolio, and the interest rates paid by us on interest-bearing liabilities, such as deposits and borrowings, accounts for the major portion of our earnings. Our deposits are largely obtained from commercial clients within our technology, life science, private equity, and premium wine industry sectors, and, to a lesser extent, from individuals served by our SVB Private Client Services group. We do not obtain deposits from conventional retail sources and currently have no brokered deposits.

Fee-based services also generate income for our business. We market our full range of financial services to all of our commercial and private equity firm clients. In addition to commercial banking and private client services, we offer fee-based merger and acquisition services, private placements, investment advisory, asset management, global consulting and valuation services. Our ability to integrate and cross-sell our diverse financial services to our clients is a strength of our business model.

We also generate income from other sources.  We seek to obtain returns through investments in private equity funds. As of March 31, 2007, we managed six limited partnerships: three private equity funds that invest directly in privately held companies and three funds that invest in other private equity funds.  Additionally, as part of negotiated credit facilities and certain other services, we frequently obtain rights to acquire stock in the form of warrants in certain client companies.

 We have four operating segments in which we report our financial information:  Commercial Banking, SVB Capital, SVB Alliant, and Other Business Services.

Commercial Banking

We provide commercial banking services through the Bank and its subsidiaries. The Bank provides solutions to the financial needs of commercial clients through lending, deposit account and cash management, and global banking and trade products and services.

Through lending products and services, the Bank extends loans and other credit facilities to commercial clients. These loans are most often secured by clients’ assets. Lending products and services include traditional term loans, equipment loans, revolving lines of credit, accounts-receivable-based lines of credit, asset-based loans, real estate loans, vineyard development loans, and financing of affordable housing projects. The Bank obtains warrants to purchase equity securities of many of its emerging growth clients in consideration for making loans or providing other services.

The Bank’s deposit account and cash management products and services provide commercial clients with short- and long-term cash management solutions. Deposit account products and services include traditional deposit and checking accounts, certificates of deposit, and money market accounts. In connection with deposit accounts, the Bank also provides lockbox and merchant services that facilitate timely depositing of checks and other payments to clients’ accounts. Cash management products and services include wire transfer and Automated Clearing House (“ACH”) payment services to enable clients to transfer funds quickly from their deposit accounts. Additionally, the cash management services unit provides collection services, disbursement services, electronic funds transfers, and online banking through SVB eConnect.

22




The Bank’s global banking and trade products and services facilitate clients’ global finance and business needs. These products and services include foreign exchange services that allow commercial clients to manage their foreign currency risks through the purchase and sale of currencies on the global inter-bank market. To facilitate clients’ international trade, the Bank offers a variety of loans and credit facilities, including export working capital loans guaranteed by the Export-Import Bank of the United States. It also offers letters of credit, including export, import, and standby letters of credit, to enable clients to facilitate and finance trade activities globally.

The Bank offers a variety of investment services and solutions to its clients that enable companies to better manage their assets. The Bank’s Repurchase Agreement Program, which is targeted to those clients who seek interest income with minimal tolerance for loss of principal, offers the ability to enter into secure overnight investments that are fully collateralized. Through a broker-dealer subsidiary, SVB Securities, the Bank offers money market mutual funds and fixed-income securities. SVB Securities is registered with the SEC and is a member of the National Association of Securities Dealers, Inc. (“NASD”) and the Securities Investor Protection Corporation (“SIPC”). Finally, through a registered investment advisory subsidiary, SVB Asset Management, the Bank offers investment advisory services, including outsourced treasury services, with customized cash portfolio management and reporting.

Our commercial banking activities and business units are collectively referred to as SVB Silicon Valley Bank across all of the company’s marketing communication materials.

SVB Capital

SVB Capital is the private equity division of SVB Financial Group. This division focuses primarily on funds management, as well as developing strategic business relationships with the private equity community.  Previously, income generated by banking services and financial solutions provided to private equity clients was reflected in SVB Capital’s income.  Beginning with the first quarter of 2007, this income is included under the Commercial Banking segment, rather than the SVB Capital segment as previously reported.  All prior period amounts have been reclassified to conform with current presentations.

Through managed and sponsored funds, SVB Capital makes investments in private equity funds and companies in the niches we serve. SVB Capital manages six private equity funds that are consolidated into our financial statements. Three of these are fund of funds that invest in other private equity funds: SVB Strategic Investors Fund, LP; SVB Strategic Investors Fund II, LP; and SVB Strategic Investors Fund III, LP. The other three are direct equity funds that invest in companies, many of which are privately held technology and life sciences companies:  Silicon Valley BancVentures, LP, SVB Capital Partners II, LP and SVB India Capital Partners I, LP. SVB Capital also includes investments in Gold Hill Venture Lending 03, LP and its parallel funds (collectively known as Gold Hill Venture Lending 03, LP), which provide secured debt, typically to emerging-growth clients in their earliest stages; and the Partners for Growth funds that primarily provide secured debt to higher-risk, middle-market clients in their later stages.

SVB Alliant

SVB Alliant principally provides merger and acquisition advisory services (“M&A”), private placement advisory services and fairness opinions. SVB Alliant is a broker-dealer registered with the SEC and is a member of the NASD. Additionally, this segment includes SVB Alliant Europe Limited, a subsidiary based in London, England, which provides investment advisory services to companies in Europe. SVB Alliant Europe Limited is licensed by the Financial Services Authority, an independent body that regulates the financial services industry in the United Kingdom.

In April 2007, the Company began exploring with the Managing Directors of SVB Alliant and SVB Alliant U.K. an arrangement under which the Managing Directors would create a limited partnership or other entity to operate the SVB Alliant business on an independent basis. If the parties reach an agreement, the Company anticipates that the arrangement would include a strategic alliance under which the successor entity would continue to operate SVB Alliant's existing business under the SVB Alliant name, and the parties would continue to cooperate in the areas of joint marketing and client referrals. In return, the successor entity would pay the Company a specified portion of its revenues and a share of the proceeds from certain types of strategic transactions. Depending on the terms of any agreement the parties may reach, the Company may make an adjustment to the carrying value of SVB Alliant's goodwill, currently valued at $17.2 million. In any event, the Company will conduct an impairment analysis of the remaining SVB Alliant goodwill during the second quarter of 2007 as part of its annual review process under SFAS No. 142, Goodwill and Other Intangible Assets.

Other Business Services

The Other Business Services segment is principally comprised of SVB Private Client Services, SVB Global and SVB Analytics. These business units do not meet the separate reporting thresholds as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”) and, as a result, have been aggregated as Other Business Services for segment reporting purposes.

SVB Private Client Services

SVB Private Client Services is a Bank division that provides a wide range of credit services to targeted high-net-worth individuals using both long-term secured and short-term unsecured lines of credit. These products and services include home equity lines of credit, secured lines of credit, restricted stock purchase loans, airplane loans, and capital call lines of credit. We also help our private clients meet their cash management needs by providing deposit account products and services, including checking accounts, deposit accounts, money market accounts, and certificates of deposit.

23




SVB Global

SVB Global includes our foreign subsidiaries, which facilitate our clients’ global expansion into major technology centers around the world. SVB Global provides a variety of services, including consulting and business services, referrals, and knowledge sharing; and identifies business opportunities for the Company. SVB Global serves the needs of some of our non-U.S. clients with global banking products, including foreign exchange and global finance and access to our international banking network for in-country services abroad. SVB Global also supports our private equity and commercial banking clients with business services through subsidiaries in India, China and the United Kingdom.

SVB Analytics

SVB Analytics provides equity valuation and equity management services to private companies. We offer equity management services, including capitalization data management, through eProsper, Inc., a company in which SVB Analytics holds a controlling ownership stake.

Reconciling Items

For management reporting purposes, we report information through four strategic operating segments that we have mentioned above:  Commercial Banking, SVB Capital, SVB Alliant and Other Business Services. For management reporting purposes, we also include Reconciling Items, which are adjustments necessary to reconcile the results of operating segments based on our internal profitability reporting process to the interim unaudited consolidated financial statements prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”).

Critical Accounting Policies and Estimates

The accompanying management’s discussion and analysis of results of operations and financial condition are based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. Management evaluates estimates on an ongoing basis. Management bases its estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

There have been no significant changes during the three months ended March 31, 2007 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2006 Form 10-K.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS No. 157 on our consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 expands the use of fair value accounting but does not affect existing standards, which require assets or liabilities to be carried at fair value. Under SFAS No. 159, a company may elect to use fair value to measure certain financial assets and financial liabilities, on an instrument-by-instrument basis.  If the fair value option is elected, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS No. 159, changes in fair value are recognized in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 with earlier adoption permitted.  We have elected not to early adopt and are currently assessing the impact of SFAS No. 159 on our consolidated financial position and results of operations.

24




Results of Operations
Net Interest Income and Margin (Fully Taxable-Equivalent Basis)

Net interest income is defined as the difference between interest earned primarily on loans, investment securities, securities purchased under agreement to resell and other short-term investment securities, and interest paid on funding sources. Net interest income is our principal source of revenue. Net interest margin is defined as the amount of annualized net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. Net interest income and net interest margin are presented on a fully taxable-equivalent basis to consistently reflect income from taxable loans and securities and tax-exempt securities based on the federal statutory tax rate of 35.0 percent.

Net Interest Income (Fully Taxable-Equivalent Basis)

Net interest income was $93.7 million for the three months ended March 31, 2007, an increase of $9.4 million or 11.2 percent, compared to $84.3 million for the comparable 2006 period.  The increase in net interest income was primarily due to a $19.1 million increase in income from our loan portfolio, partially offset by a $4.4 million decrease in interest income from our investment securities portfolio and an increase in interest expense of $7.1 million.

The increases in interest income from our loan portfolio are primarily related to growth in our loan portfolio, the effect of increases in our base prime lending rate, as well as a $1.3 million increase of fee income, which resulted from loan prepayments recorded in the first quarter of 2007.  Average loans outstanding for the three months ended March 31, 2007 totaled $3.26 billion, compared to $2.66 billion for the comparable 2006 period. The increase in average loans outstanding of $594.1 million was driven by our commercial loan portfolio, which increased by $489.9 million as a result of our increased focus on serving later-staged clients and improvements in economic activity in the markets served by us.  Our average base prime lending rate increased to 8.25 percent for the three months ended March 31, 2007, compared to 7.42 percent for the comparable 2006 period.  The average yield on our loan portfolio was 10.61 percent for the three months ended March 31, 2007, compared to 10.07 percent for the comparable 2006 period.

The decrease in interest income from our investment securities portfolio reflects lower levels of investment securities due to scheduled maturities and prepayments as well as the sale of $119.1 million of securities in the second quarter of 2006. Average investment securities was $1.46 billion for the three months ended March 31, 2007, a decrease of $396.7 million or 21.4 percent, from $1.86 billion for the comparable 2006 period.

Net Interest Margin (Fully Taxable-Equivalent Basis)

Net interest margin was 7.58 percent for the three months ended March 31, 2007, compared to 7.25 percent for the comparable 2006 period. The increases in net interest margin were largely due to growth and increases in yield of our loan portfolio and increased fee income due to loan prepayments, partially offset by increases in the balances outstanding of our short-term borrowings and other long-term debt used to fund the growth of our loan portfolio.

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Average Balances, Yields and Rates Paid (Fully Taxable-Equivalent Basis)

The average yield earned on interest-earning assets is the amount of annualized fully taxable-equivalent interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is the amount of annualized interest expense expressed as a percentage of average funding sources. The following table sets forth average assets, liabilities, minority interest and stockholders’ equity, interest income, interest expense, annualized yields and rates, and the composition of our annualized net interest margin for the three months ended March 31, 2007 and 2006.

 

Three months ended March 31,

 

 

 

2007

 

2006

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

(Dollars in thousands)

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities purchased under agreement to resell and other short-term investments (1)

 

$

293,574

 

$

3,834

 

5.30

%

$

196,894

 

$

2,040

 

4.20

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,405,006

 

16,293

 

4.70

 

1,781,098

 

20,394

 

4.64

 

Non-taxable (2)

 

54,018

 

934

 

7.01

 

74,628

 

1,266

 

6.88

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

2,730,868

 

75,321

 

11.19

 

2,240,951

 

58,565

 

10.60

 

Real estate construction and term

 

230,053

 

3,823

 

6.74

 

174,701

 

2,939

 

6.82

 

Consumer and other

 

296,586

 

6,088

 

8.32

 

247,796

 

4,644

 

7.60

 

Total loans, net of unearned income

 

3,257,507

 

85,232

 

10.61

 

2,663,448

 

66,148

 

10.07

 

Total interest-earning assets

 

5,010,105

 

106,293

 

8.60

 

4,716,068

 

89,848

 

7.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

277,025

 

 

 

 

 

246,486

 

 

 

 

 

Allowance for loan losses

 

(43,611

)

 

 

 

 

(38,036

)

 

 

 

 

Goodwill

 

21,296

 

 

 

 

 

35,638

 

 

 

 

 

Other assets (3)

 

457,653

 

 

 

 

 

304,638

 

 

 

 

 

Total assets

 

$

5,722,468

 

 

 

 

 

$

5,264,794