SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 11/09/2007 16:07:29)
Table of Contents

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 September 30, 2007

OR

 

¨ 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   ¨

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   ¨     Non-accelerated filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

At October 31, 2007, 33,189,249 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 



Table of Contents

TABLE OF CONTENTS

 

     Page
PART I - FINANCIAL INFORMATION   
ITEM 1.    INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)    3
   INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 30, 2007 AND DECEMBER 31, 2006    3
   INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006    4
   INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006    5
   INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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    22
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    45
ITEM 4.    CONTROLS AND PROCEDURES    47
PART II - OTHER INFORMATION   
ITEM 1.    LEGAL PROCEEDINGS    47
ITEM 1A.    RISK FACTORS    47
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    53
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES    54
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    54
ITEM 5.    OTHER INFORMATION    54
ITEM 6.    EXHIBITS    54
SIGNATURE    55
INDEX TO EXHIBITS    56

 

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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)

   September 30,
2007
    December 31,
2006
 

Assets

    

Cash and due from banks

   $ 356,742     $ 393,284  

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

     302,377       239,301  

Investment securities

     1,571,619       1,692,343  

Loans, net of unearned income

     3,818,268       3,482,402  

Allowance for loan losses

     (44,225 )     (42,747 )
                

Net loans

     3,774,043       3,439,655  

Premises and equipment, net of accumulated depreciation and amortization

     39,016       37,306  

Goodwill

     4,092       21,296  

Accrued interest receivable and other assets

     256,199       258,267  
                

Total assets

   $ 6,304,088     $ 6,081,452  
                

Liabilities, Minority Interest and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 2,892,102     $ 3,039,528  

Negotiable order of withdrawal (NOW)

     23,099       35,983  

Money market

     723,369       668,794  

Time

     334,670       313,320  
                

Total deposits

     3,973,240       4,057,625  

Short-term borrowings

     370,000       683,537  

Other liabilities

     196,713       193,296  

Long-term debt

     855,370       352,465  
                

Total liabilities

     5,395,323       5,286,923  
                

Commitments and contingencies

     —         —    

Minority interest in capital of consolidated affiliates

     236,131       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; 33,448,121 and 34,401,230 shares outstanding at September 30, 2007 and December 31, 2006, respectively

     33       34  

Additional paid-in capital

     —         4,873  

Retained earnings

     687,350       641,528  

Accumulated other comprehensive loss

     (14,749 )     (17,921 )
                

Total stockholders’ equity

     672,634       628,514  
                

Total liabilities, minority interest and stockholders’ equity

   $ 6,304,088     $ 6,081,452  
                

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three months ended September 30,      Nine months ended September 30,  

(Dollars in thousands, except per share amounts)

   2007      2006      2007      2006  

Interest income:

           

Loans

   $ 93,243      $ 78,686      $ 267,526      $ 215,053  

Investment securities:

           

Taxable

     14,915        17,720        46,990        57,714  

Non-taxable

     528        737        1,692        2,341  

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

     4,485        3,161        12,660        7,731  
                                   

Total interest income

     113,171        100,304        328,868        282,839  
                                   

Interest expense:

           

Deposits

     3,572        2,197        8,328        6,858  

Borrowings

     13,891        8,299        36,892        16,532  
                                   

Total interest expense

     17,463        10,496        45,220        23,390  
                                   

Net interest income

     95,708        89,808        283,648        259,449  

Provision for loan losses

     3,155        2,767        10,865        4,895  
                                   

Net interest income after provision for loan losses

     92,553        87,041        272,783        254,554  
                                   

Noninterest income:

           

Gains (losses) on investment securities, net

     14,719        (2,048 )      40,611        (1,209 )

Client investment fees

     13,127        11,555        37,813        32,164  

Foreign exchange fees

     6,714        5,182        17,778        15,494  

Gains on derivative instruments, net

     8,790        3,240        15,514        11,062  

Corporate finance fees

     5,166        1,999        11,568        7,212  

Deposit service charges

     3,933        2,747        10,711        7,235  

Letter of credit and standby letter of credit income

     2,671        2,617        8,363        7,609  

Other

     9,914        5,676        25,837        15,780  
                                   

Total noninterest income

     65,034        30,968        168,195        95,347  
                                   

Noninterest expense:

           

Compensation and benefits

     56,460        45,505        161,777        138,701  

Professional services

     7,847        11,363        23,673        29,792  

Impairment of goodwill

     —          —          17,204        18,434  

Net occupancy

     5,149        4,112        16,238        12,615  

Furniture and equipment

     4,567        3,899        14,820        11,274  

Business development and travel

     2,429        3,013        8,747        8,754  

Correspondent bank fees

     1,511        1,510        4,371        4,092  

Telephone

     1,178        1,040        4,034        2,827  

Data processing services

     1,054        944        2,940        2,933  

(Reduction of) provision for unfunded credit commitments

     (973 )      458        (2,778 )      (3,363 )

Other

     3,737        3,163        11,966        13,274  
                                   

Total noninterest expense

     82,959        75,007        262,992        239,333  
                                   

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

     74,628        43,002        177,986        110,568  

Minority interest in net (income)/loss of consolidated affiliates

     (10,458 )      919        (26,639 )      (5,139 )
                                   

Income before income tax expense

     64,170        43,921        151,347        105,429  

Income tax expense

     26,054        18,751        61,975        44,586  
                                   

Net income before cumulative effect of change in accounting principle

     38,116        25,170        89,372        60,843  

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

     —          —          —          192  
                                   

Net income

   $ 38,116      $ 25,170      $ 89,372      $ 61,035  
                                   

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

   $ 1.12      $ 0.73      $ 2.61      $ 1.75  

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

   $ 1.03      $ 0.68      $ 2.41      $ 1.61  

Earnings per common share—basic

   $ 1.12      $ 0.73      $ 2.61      $ 1.75  

Earnings per common share—diluted

   $ 1.03      $ 0.68      $ 2.41      $ 1.61  

(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).

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     Three months ended September 30,    Nine months ended September 30,  

(Dollars in thousands)

   2007      2006    2007    2006  

Net income

   $ 38,116      $ 25,170    $ 89,372    $ 61,035  

Other comprehensive gain, net of tax:

           

Cumulative translation gains:

           

Translation gains, net of tax

     128        68      217      192  

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

           

Unrealized holding gains, net of tax

     10,479        17,630      2,845      3,469  

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

     (31 )      —        110      (1,787 )
                               

Other comprehensive gain, net of tax

     10,576        17,698      3,172      1,874  
                               

Comprehensive income

   $ 48,692      $ 42,868    $ 92,544    $ 62,909  
                               

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Nine months ended September 30,  

(Dollars in thousands)

   2007      2006  

Cash flows from operating activities:

     

Net income

   $ 89,372      $ 61,035  

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

     

Impairment of goodwill

     17,204        18,434  

Provision for loan losses

     10,865        4,895  

Reduction of provision for unfunded credit commitments

     (2,778 )      (3,363 )

Changes in fair values of derivatives, net

     (10,477 )      (7,883 )

Gains on investment securities, net

     (40,611 )      (1,209 )

Depreciation and amortization

     14,332        8,751  

Minority interest in net income of consolidated affiliates

     26,639        5,139  

Tax benefit of original issue discount

     2,522        2,378  

Tax benefits of share-based compensation and other

     1,420        5,734  

Amortization of share-based compensation

     12,206        16,788  

Amortization of deferred warrant-related loan fees

     (5,474 )      (5,605 )

Deferred income tax expense

     (9,337 )      (3,503 )

Loss on sale of other real estate owned property

     1,368        —    

Changes in other assets and liabilities:

     

Accrued interest receivable

     7,553        (4,415 )

Accounts receivable

     (3,469 )      2,743  

Income tax receivable, net

     1,959        (5,911 )

Accrued retention, incentive plans and other compensation benefits payable

     2,784        (14,510 )

Foreign exchange spot contract assets

     8,232        —    

Other, net

     6,113        3,950  
                 

Net cash provided by operating activities

     130,423        83,448  
                 

Cash flows from investing activities:

     

Purchases of available-for-sale securities

     (40,269 )      (30,683 )

Proceeds from sales of available-for-sale securities

     7,127        126,230  

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

     242,673        253,501  

Purchases of nonmarketable securities (cost and equity method accounting)

     (21,015 )      (22,430 )

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

     12,614        11,585  

Proceeds from nonmarketable securities (cost and equity method accounting)

     10,278        21,694  

Purchases of nonmarketable securities (investment fair value accounting)

     (56,656 )      (42,943 )

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

     19,356        9,501  

Net increase in loans

     (348,756 )      (487,339 )

Proceeds from recoveries of charged-off loans

     5,366        8,296  

Proceeds from sale of other real estate owned

     4,309        —    

Payment for acquisition, net of cash acquired

     —          (3,994 )

Purchases of premises and equipment

     (10,484 )      (17,783 )
                 

Net cash used for investing activities

     (175,457 )      (174,365 )
                 

Cash flows from financing activities:

     

Net decrease in deposits

     (87,917 )      (278,270 )

Proceeds from issuance of senior and subordinated notes, net

     495,030        —    

(Decrease) increase in short-term borrowings

     (313,537 )      530,292  

Capital contributions from minority interest participants, net of distributions

     43,477        33,170  

Stock compensation related tax benefits

     6,280        4,321  

Proceeds from issuance of common stock

     25,567        34,082  

Repurchases of common stock

     (97,332 )      (94,275 )
                 

Net cash provided by financing activities

     71,568        229,320  
                 

Net increase in cash and cash equivalents

     26,534        138,403  

Cash and cash equivalents at beginning of year

     632,585        462,098  
                 

Cash and cash equivalents at end of period

   $ 659,119      $ 600,501  
                 

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

 

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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 Quarterly Report on Form 10-Q) offer a variety 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 funds management, private equity investment and equity valuation, through our other subsidiaries and divisions.

We primarily focus on serving 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, 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, including an administrative office, 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 12 (Segment Reporting) below and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operating Segment Results” under Part I, Item 2 of this report.

Our Commercial Banking segment is comprised of the 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 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. We reached a decision in July 2007 to cease operations at SVB Alliant. We have elected to have SVB Alliant complete a limited number of client transactions, the last of which are currently expected to be completed during the fourth quarter of 2007 or the first quarter of 2008. Accordingly, we continue to report financial information relating to SVB Alliant as a separate operating segment. Finally, our Other Business Services segment is comprised of all other businesses, such as SVB Private Client Services (private banking), SVB Global (global banking and related products), SVB Analytics (equity valuation and management) and SVB Wine Division (commercial banking for premium wine industry clients).

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 and nine months ended September 30, 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”).

 

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The accompanying interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data—Note 2 (Summary of Significant Accounting Policies) under Part II, Item 8 of our 2006 Form 10-K.

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 (“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.

In April 2007, the FASB issued FASB Staff Position (“FSP”) No. FIN 39-1, Amendment of FASB Interpretation No. 39 . This FSP replaces certain terms in FIN No. 39 with “derivative instruments” (as defined in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”)) and permits the offsetting of fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. The FSP is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of applying the guidance in this FSP on our consolidated financial position and results of operations.

In May 2007, the Accounting Standards Executive Committee of the AICPA issued Statement of Position (SOP) 07-1, Clarification of the Scope of the Audit and Accounting Guide ‘Investment Companies’ and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (“SOP 07-1”). This new standard provides guidance for determining whether an entity is an “investment company,” as defined, and whether the specialized industry accounting principles for investment companies should be retained in the consolidated financial statements of the parent or of an equity method investor. As originally issued, SOP 07-1 was effective for the year beginning January 1, 2008; however, on October 17, 2007, the FASB voted to indefinitely defer the effective date. The Company is currently monitoring any changes to the existing guidance.

 

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3. Earnings Per Share (EPS)

The following is a reconciliation of basic EPS to diluted EPS for the three and nine months ended September 30, 2007 and 2006, respectively:

 

     Three months ended September 30,    Nine months ended September 30,

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

   2007    2006    2007    2006

Numerator:

           

Net income

   $ 38,116    $ 25,170    $ 89,372    $ 61,035
                           

Denominator:

           

Weighted average common shares outstanding-basic

     34,029      34,417      34,255      34,813

Weighted average effect of dilutive securities:

           

Stock options

     1,233      1,348      1,310      1,542

Restricted stock awards and units

     63      154      83      141

Convertible debt

     1,540      1,135      1,484      1,324

Warrants

     4      —        —        —  
                           

Denominator for diluted calculation

     36,869      37,054      37,132      37,820
                           

Net income per share:

           

Basic

   $ 1.12    $ 0.73    $ 2.61    $ 1.75
                           

Diluted

   $ 1.03    $ 0.68    $ 2.41    $ 1.61
                           

Stock options 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. Warrants outstanding under the warrant agreement entered into concurrent with the issuance of our contingently convertible notes, were excluded from the diluted calculation for the three months ended September 30, 2006 and the nine months ended September 30, 2007 and 2006, as their exercise price was higher than the average market price of the common stock and hence their inclusion would have been anti-dilutive.

The following table summarizes the potential common shares excluded from the diluted calculation:

 

     Three months ended September 30,    Nine months ended September 30,

(Shares in thousands)

   2007    2006    2007    2006

Stock options

   641    1,081    715    879

Restricted stock awards and units

   —      1    1    1

Warrants (Note 10 “Derivative Financial Instruments”)

   —      4,456    4,456    4,456
                   

Ending balance

   641    5,538    5,172    5,336
                   

In September 2004, the Emerging Issues Task Force (“EITF”) reached a 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. 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 September 30, 2007 and 2006, we recorded share-based compensation expense of $3.8 million and $5.2 million, respectively, resulting in the recognition of $0.8 million and $1.1 million, respectively, in related tax benefits. For the nine months ended September 30, 2007 and 2006, we recorded share-based compensation expense of $12.0 million and $16.8 million, respectively, resulting in the recognition of $2.4 million and $3.6 million, respectively, in related tax benefits.

 

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Unrecognized Compensation Expense

At September 30, 2007, unrecognized share-based compensation expense was as follows:

 

(Dollars in thousands)

   Unrecognized Expense    Average Expected
Recognition Period- in
Years

Stock options

   $ 10,473    1.18

Restricted stock awards and units

     7,449    2.50
         

Total unrecognized share-based compensation expense

   $ 17,922   
         

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 nine months ended September 30, 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

   282,396       49.48      

Exercised

   (867,593 )     27.15      

Forfeited

   (150,350 )     42.74      

Expired

   (4,040 )     48.23      
              

Outstanding at September 30, 2007

   3,933,552       33.59    3.70    $ 56,134,504
              

Vested and expected to vest at September 30, 2007

   3,810,534       33.14    3.64      55,920,023
              

Exercisable at September 30, 2007

   2,884,881     $ 29.61    3.35    $ 51,668,023
              

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value at September 30, 2007. This value is based on our closing stock price of $47.36 at September 30, 2007. The total intrinsic value of options exercised during the three and nine months ended September 30, 2007 was $4.3 million and $20.8 million, respectively, and the total intrinsic value of options exercised during the three and nine months ended September 30, 2006 was $2.4 million and $30.5 million, respectively.

The table below provides information for restricted stock awards and restricted stock units outstanding under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the nine months ended September 30, 2007:

 

     Shares     Weighted-Average
Grant Date Fair Value

Nonvested at December 31, 2006

   215,926     $ 40.03

Granted

   138,150       50.41

Vested

   (69,607 )     48.50

Forfeited

   (24,542 )     52.63
        

Nonvested at September 30, 2007

   259,927     $ 42.09
        

 

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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 September 30, 2007 and December 31, 2006, respectively:

 

(Dollars in thousands)

   September 30, 2007    December 31, 2006

Securities purchased under agreement to resell

   $ 79,505    $ 40,734

Interest-earning deposits

     57,938      34,357

Other short-term investment securities

     164,934      164,210
             

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

   $ 302,377    $ 239,301
             

6. Investment Securities

The detailed composition of our investment securities at September 30, 2007 and December 31, 2006 is presented as follows:

 

(Dollars in thousands)

   September 30, 2007    December 31, 2006

Available-for-sale securities, at fair value

   $ 1,250,472    $ 1,445,455

Marketable securities (investment company fair value accounting)

     238      —  

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

     

Private equity fund investments (1)

     178,185      126,475

Other private equity investments (2)

     41,785      32,913

Other investments (3)

     22,851      15,394

Non-marketable securities (equity method accounting):

     

Other investments (4)

     18,195      15,710

Low income housing tax credit funds

     20,264      22,664

Non-marketable securities (cost method accounting):

     

Private equity fund investments

     31,903      27,771

Other private equity investments

     7,726      5,961
             

Total investment securities

   $ 1,571,619    $ 1,692,343
             

(1) Private equity fund investments at September 30, 2007 and December 31, 2006 include the following investments:

 

     September 30, 2007     December 31, 2006

(Dollars in thousands)

   Amount    Ownership %     Amount

SVB Strategic Investors Fund, LP

   $ 70,395    12.6 %   $ 65,977

SVB Strategic Investors Fund II, LP

     76,215    8.6       47,668

SVB Strategic Investors Fund III, LP

     31,575    5.9 %     12,830
               

Total private equity fund investments

   $ 178,185      $ 126,475
               

 

(2) Other private equity investments at September 30, 2007 and December 31, 2006 include the following investments:

 

     September 30, 2007     December 31, 2006

(Dollars in thousands)

   Amount    Ownership %     Amount

Silicon Valley BancVentures, LP

   $ 28,929    10.7 %   $ 29,388

SVB Capital Partners II, LP (i)

     11,566    5.1       3,525

SVB India Capital Partners I, LP

     1,290    13.9 %     —  
               

Total other private equity investments

   $ 41,785      $ 32,913
               

  (i) At September 30, 2007 we had a direct ownership interest of 1.3% and an indirect ownership interest of 3.8% in the fund through our ownership of SVB Strategic Investors Fund II, LP.

 

(3) Other investments within non-marketable securities (investment company fair value accounting) include our ownership in Partners for Growth, LP. At September 30, 2007, we had a majority ownership interest of approximately 50.0% in the fund.

 

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(4) Other investments within non-marketable securities (equity method accounting) at September 30, 2007 and December 31, 2006 include the following investments:

 

     September 30, 2007     December 31, 2006

(Dollars in thousands)

   Amount    Ownership %     Amount

Gold Hill Venture Lending Partners 03, LLC

   $ 7,728    90.7 %   $ 6,941

Gold Hill Venture Lending 03, LP (i)

     7,345    9.3       6,565

Partners for Growth II, LP

     3,122    24.2 %     2,204
               

Total other investments

   $ 18,195      $ 15,710
               

  (i) At September 30, 2007, we had a direct ownership interest of 4.8% in the fund. In addition, at September 30, 2007, we had an indirect ownership interest of 4.5% in Gold Hill Venture Lending 03, LP and its parallel funds through our ownership of Gold Hill Venture Lending Partners 03, LLC.

The following table summarizes our unrealized losses on our available-for-sale investment securities portfolio into categories of less than 12 months, or 12 months or longer, at September 30, 2007:

 

     September 30, 2007  
     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. agencies and corporations:

               

Collateralized mortgage obligations (1)

   $ 129    $ (1 )   $ 514,418    $ (11,413 )   $ 514,547    $ (11,414 )

Mortgage-backed securities (1)

     30,356      (394 )     349,390      (12,592 )     379,746      (12,986 )

U.S. agency debentures (1)

     —        —         138,838      (1,141 )     138,838      (1,141 )

Commercial mortgage-backed securities (1)

     —        —         69,932      (1,242 )     69,932      (1,242 )

Municipal bonds and notes

     1,475      (5 )     —        —         1,475      (5 )

Marketable equity securities

     314      (141 )     —        —         314      (141 )
                                             

Total temporarily impaired securities

   $ 32,274    $ (541 )   $ 1,072,578    $ (26,388 )   $ 1,104,852    $ (26,929 )
                                             

(1) As of September 30, 2007, we identified a total of 145 investments that were in unrealized loss positions, of which 126 investments totaling $1,072.6 million with unrealized losses of $26.4 million had fair values less than their adjusted cost for a period of time greater than 12 months. Securities classified as collateralized mortgage obligations totaling $514.4 million with unrealized losses of $11.4 million were originally purchased between May 2002 and December 2005. Securities classified as mortgage-backed securities totaling $349.4 million with unrealized losses of $12.6 million were originally purchased between August 2002 and April 2005. Securities classified as U.S. agency debentures totaling $138.8 million with unrealized losses of $1.1 million were originally purchased between June 2003 and January 2005. Securities classified as commercial mortgage-backed securities totaling $69.9 million with unrealized losses of $1.2 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. The unrealized losses are due solely to increases in market interest rates and as 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.

 

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The following table summarizes 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 )
                                             

The following table presents the components of gains and losses on investment securities for the three and nine months ended September 30, 2007 and 2006:

 

     Three months ended September 30,     Nine months ended September 30,  

(Dollars in thousands)

   2007     2006     2007     2006  

Gross gains on investment securities:

        

Available-for-sale securities, at fair value

   $ 100     $ —       $ 496     $ 170  

Marketable securities (investment company fair value accounting)

     4       —         96       —    

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

        

Private equity fund investments

     15,766       2,161       35,859       9,341  

Other private equity investments

     407       588       1,838       974  

Other investments

     5,786       —         18,770       1,170  

Non-marketable securities (equity method accounting):

        

Other investments

     1,245       332       1,530       852  

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     247       103       1,044       465  

Other private equity investments

     1       11       233       120  
                                

Total gross gains on investment securities

     23,556       3,195       59,866       13,092  
                                

Gross losses on investment securities:

        

Available-for-sale securities, at fair value

     (152 )     (1 )     (306 )     (3,231 )

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

        

Private equity fund investments

     (3,013 )     (3,438 )     (10,569 )     (7,294 )

Other private equity investments

     (1,591 )     —         (3,426 )     (475 )

Other investments

     (3,835 )     (1,166 )     (4,176 )     (1,166 )

Non-marketable securities (equity method accounting):

        

Other investments

     —         (157 )     (214 )     (918 )

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     (246 )     (481 )     (564 )     (1,172 )

Other private equity investments

     —         —         —         (45 )
                                

Total gross losses on investment securities

     (8,837 )     (5,243 )     (19,255 )     (14,301 )
                                

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

   $ 14,719     $ (2,048 )   $ 40,611     $ (1,209 )
                                

(1) Net gains on investment securities of $14.7 million for the three months ended September 30, 2007 were mainly attributable to net gains of $12.8 million from two of our managed funds of funds and $3.2 million from two of our sponsored debt funds, partially offset by net losses of $1.2 million from one of our managed co-investment funds. Of the $14.7 million in net gains, $11.5 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)/Loss of Consolidated Affiliates”. Net gains on investment securities of $40.6 million for the nine months ended September 30, 2007 were mainly attributable to net gains of $25.3 million from three of our managed funds of funds and net gains from two of our sponsored debt funds of $15.9 million, partially offset by net losses of $1.5 million from one of our managed co-investment funds. Of the $40.6 in net gains, $28.7 million was attributable to minority interests.

 

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7. Loans and Allowance for Loan Losses

The detailed composition of loans, net of unearned income of $25.9 million and $27.2 million at September 30, 2007 and December 31, 2006, respectively, is presented in the following table:

 

(Dollars in thousands)

   September 30, 2007    December 31, 2006

Commercial loans

   $ 3,251,491    $ 2,959,501

Vineyard development

     121,501      118,266

Commercial real estate

     32,937      13,336
             

Total real estate construction

     154,438      131,602

Real estate term — consumer

     71,197      46,812

Real estate term — commercial

     47,098      50,051
             

Total real estate term

     118,295      96,863

Consumer and other

     294,044      294,436
             

Total loans, net of unearned income

   $ 3,818,268    $ 3,482,402
             

The activity in the allowance for loan losses for the three and nine months ended September 30, 2007 and 2006 was as follows:

 

     Three months ended September 30,     Nine months ended September 30,  

(Dollars in thousands)

   2007     2006     2007     2006  

Beginning balance

   $ 43,352     $ 37,907     $ 42,747     $ 36,785  

Provision for loan losses

     3,155       2,767       10,865       4,895  

Loan charge-offs

     (4,138 )     (3,216 )     (14,754 )     (10,427 )

Loan recoveries

     1,856       2,091       5,367       8,296  
                                

Ending balance

   $ 44,225     $ 39,549     $ 44,225     $ 39,549  
                                

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 $9.9 million and $11.0 million at September 30, 2007 and December 31, 2006, respectively. The allocation of the allowance for loan losses related to impaired loans was $1.6 million at September 30, 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 September 30, 2007 and 2006 was $12.3 million and $8.9 million, respectively, and average impaired loans for the nine months ended September 30, 2007 and 2006 was $11.1 million and $6.9 million, respectively. If these loans had not been impaired, $0.1 million and $0.2 million in interest income would have been recorded during the three months ended September 30, 2007 and 2006, respectively, and $0.7 million and $0.5 million in interest income would have been recorded during the nine months ended September 30, 2007 and 2006, respectively.

8. Goodwill

Goodwill at September 30, 2007 and December 31, 2006 was $4.1 million and $21.3 million, respectively. Goodwill at September 30, 2007 was related to our acquisition of a majority ownership interest in eProsper in 2006, an equity ownership data management services company. Goodwill at December 31, 2006 was related to our acquisitions of SVB Alliant, our investment banking subsidiary, and eProsper.

We conducted our annual goodwill impairment analysis of the SVB Alliant reporting unit during the second quarter of 2007. We concluded at that time that we had an impairment of goodwill based on forecasted discounted net cash flows for that reporting unit. The impairment resulted from changes in our outlook for SVB Alliant’s future financial performance. As required by SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No.142”), in measuring the amount of goodwill impairment, we made a hypothetical allocation of the reporting unit’s estimated fair value to the tangible and intangible assets (other than goodwill) for the reporting unit. Based on this allocation, we concluded that the remaining $17.2 million of goodwill was impaired and was required to be expensed as a noncash charge to continuing operations during the second quarter of 2007. In July 2007, we reached a decision to cease operations at SVB Alliant.

 

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9. Short-Term Borrowings and Long-Term Debt

The following table shows information regarding our short-term borrowings and long-term debt outstanding at September 30, 2007 and December 31, 2006:

 

(Dollars in thousands)

   Maturity   September 30, 2007    December 31, 2006

Short-term borrowings:

       

Federal funds purchased and securities sold under agreement to repurchase

   Less than One Month (1)   $ 270,000    $ 483,537

FHLB advances

   Less than One Month (1)     100,000      200,000
               

Total short-term borrowings

     $ 370,000    $ 683,537
               

Long-term debt:

       

FHLB advances

   (2)   $ 150,000    $ 150,000

5.70% senior notes

   June 1, 2012     252,300      —  

6.05% subordinated notes

   June 1, 2017     250,360      —  

Contingently convertible debt

   June 15, 2008     149,137      148,441

7.0% junior subordinated debentures

   October 15, 2033     50,904      51,355

8.0% long-term notes payable (3)

   November 30, 2009     2,669      2,669
               

Total long-term debt

     $ 855,370    $ 352,465
               

(1) Represents remaining maturity as of the date reported.
(2) Represents Federal Home Loan Bank (“FHLB”) advances maturing in November 2008, May 2009 and November 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 short-term borrowings and long-term debt was $13.9 million and $8.3 million for the three months ended September 30, 2007 and 2006, respectively, and $36.9 million and $16.5 million for the nine months ended September 30, 2007 and 2006, respectively. The weighted average interest rates associated with our short-term borrowings and long-term debt outstanding were 5.23 percent and 4.56 percent for the three months ended September 30, 2007 and 2006, respectively, and 4.99 percent and 4.07 percent for the nine months ended September 30, 2007 and 2006, respectively.

Senior Notes and Subordinated Notes

On May 15, 2007, the Bank issued 5.70% senior notes, due June 1, 2012, in an aggregate principal amount of $250.0 million and 6.05% subordinated notes, due June 1, 2017, in an aggregate principal amount of $250.0 million (collectively, the “Notes”). The discount and issuance costs related to the Notes were $0.8 million and $4.2 million, respectively, and the net proceeds from the offering of the Notes were $495.0 million. The Notes are not redeemable prior to maturity and interest is payable semi-annually. Proceeds from the issuance of these Notes were used for repayment of certain short-term borrowings. Debt issuance costs of $2.0 million and $2.2 million related to the senior and subordinated notes, respectively, were deferred and are being amortized to interest expense over the term of the Notes, using the effective yield method. Concurrent with the issuance of the Notes, we entered into fixed-to-variable interest rate swap agreements related to both the senior notes and the subordinated notes (see Note 10 (Derivative Financial Instruments)).

Contingently Convertible Debt

The fair value of the convertible debt at September 30, 2007 and December 31, 2006 was $211.0 million and $207.7 million, respectively, based on quoted market prices. We intend to settle the outstanding principal amount in cash. We have the option to settle any amount exceeding the principal value of the convertible debt in either cash or shares of our common stock. During the third 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 nine months ended September 30, 2007.

Concurrent with the issuance of the convertible notes, we entered into a convertible note hedge (see Note 10 (Derivative Financial Instruments—Derivative Fair Value Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock)).

 

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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 were $0.8 million for both the three months ended September 30, 2007 and 2006, respectively, and $2.6 million for both the nine months ended September 30, 2007 and 2006, respectively. We entered into a fixed-to-variable interest rate swap agreement related to these junior subordinated debentures (see Note 10 (Derivative Financial Instruments)).

Available Lines of Credit

At September 30, 2007, we have available uncommitted federal funds lines of credit totaling $1.25 billion, of which $0.98 billion 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 September 30, 2007, we had not borrowed 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 September 30, 2007 totaled $277.7 million, of which $15.0 million was unused. The market value of collateral pledged at the discount window of the Federal Reserve Bank at September 30, 2007 totaled $64.2 million, all of which was unused.

10. Derivative Financial Instruments

The total notional or contractual amounts, credit risk amount and estimated net fair value for derivatives at September 30, 2007 and December 31, 2006, respectively, were as follows:

 

     September 30, 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 Hedges

                

Interest rate swap - senior notes

   $ 250,000    $ 2,520    $ 2,520     $ —      $ —      $ —    

Interest rate swap - subordinated notes

     250,000      893      893       —        —        —    

Interest rate swap - junior subordinated debt

     50,000      —        (2,476 )     50,000      —        (1,890 )

Derivatives - Other

                

Foreign exchange forwards

     681,815      20,678      (576 )     562,205      7,284      (164 )

Foreign currency options

     39,778      175      —         27,579      140      —    

Equity warrant assets

   $ 110,749    $ 35,888    $ 35,888     $ 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

Concurrent with the issuance of $250.0 million in 5.70% senior notes and $250.0 million in 6.05% subordinated notes, we entered into interest rate swap agreements, whereby we swapped the fixed interest rate of the Notes with a variable interest rate based on LIBOR to hedge against the risk of changes in fair values due to changes in interest rates for both issuances. We use the “shortcut” method for these fair value hedges, as SFAS No. 133 allows us to assume no ineffectiveness if the hedging relationship involves an interest-bearing financial asset or liability and an interest rate swap. In order to assume no ineffectiveness, we ensure that all the shortcut method requirements of SFAS No. 133 for this type of hedge relationship are met. The interest rate swap agreements resulted in interest expense of $0.3 million and $0.4 million, respectively, for the senior notes and $0.2 million and $0.3 million, respectively, for the subordinated notes for the three and nine months ended September 30, 2007, which were recognized in the consolidated statements of income as an increase in interest expense.

In October 2003, we entered into an interest rate swap agreement whereby we swapped the fixed interest rate of our 7.0% junior subordinated debentures with a variable interest rate based on LIBOR. Subsequently, in April 2006, we designated this interest rate swap as a fair value hedge. The interest rate swap agreement provided a cash benefit of $39 thousand and $30 thousand for the three months ended September 30, 2007 and 2006, respectively, and $116 thousand and $299 thousand for the nine months ended September 30, 2007 and 2006, respectively. The cash benefit was recognized in the consolidated statements of income as a reduction in interest expense. For the three and nine months ended September 30, 2007, we recorded a non-cash decrease of $0.3 million and $0.1 million, respectively, for the fair value hedge implemented in April 2006 in connection with our junior subordinated debentures, which was reflected in gains on derivative instruments, net.

 

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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 as gains (losses) on derivatives, net as part of our 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 $9.2 million and $2.7 million for the three months ended September 30, 2007 and 2006, respectively, and $15.2 million and $14.4 million for the nine months ended September 30, 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 agreement 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. The convertible note hedge and the warrant agreement have terms commensurate with 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. We have the option to settle any amounts 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, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s own Stock . 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 nine months ended September 30, 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 certain conversion events. Due to conversion events in 2006, the counterparty exercised their right to purchase 714 shares of our stock under the warrant agreement. The number of shares outstanding under the warrant agreement decreased by 3,093 shares in 2006. There were no exercises during the nine months ended September 30, 2007.

11. Common Stock Repurchases

On July 26, 2007, our Board of Directors authorized a stock repurchase program that enables us to purchase up to $250.0 million of our common stock. This program expires on July 31, 2008 and replaces all share repurchase programs previously in effect. We may, at our discretion, exercise this repurchase authority any time on or before July 31, 2008 in the open market, through block trades, through an accelerated stock repurchase program or otherwise, pursuant to applicable securities laws. Depending on market conditions, availability of funds, and other relevant factors, we may begin or suspend repurchases at any time prior to the termination of the repurchase program on July 31, 2008, without any prior notice.

During the nine months ended September 30, 2007, we repurchased 1.9 million shares of our common stock totaling $97.3 million. At September 30, 2007, $199.2 million of shares may still be repurchased under our common stock repurchase program.

12. 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. In July 2007, we reached a decision to cease operations at SVB Alliant. Our Other Business Services group includes SVB Global, SVB Private Client Services, SVB Analytics, as well as SVB Wine Division, which focuses on providing banking and financial products and services to our premium wine industry clients. Income generated by banking services and financial solutions provided to private equity clients is included under the Commercial Banking segment effective January 1, 2007. Prior to January 1, 2007, it was included under the SVB Capital segment. Income generated by the SVB Wine Division is included under the Other Business Services segment effective July 1, 2007. Prior to July 1, 2007, it was included under the Commercial Banking segment. All prior period amounts have been reclassified to conform with current period 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

 

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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 September 30, 2007. SVB Global, SVB Private Client Services, SVB Analytics and SVB Wine Division did not individually meet the separate reporting thresholds and, as a result, have been aggregated in the table below, 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 period 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.

 

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Our segment information at and for the three and nine months ended September 30, 2007 and 2006 is as follows:

 

(Dollars in thousands)

   Commercial
Banking
    SVB
Capital
    SVB
Alliant
    Other Business
Services
    Reconciling
Items
    Total  

Three months ended September 30, 2007

            

Net interest income

   $ 86,419     $ 166     $ 235     $ 8,535     $ 353     $ 95,708  

(Provision for) recovery of loan losses (1)

     (2,247 )     —         —         2       (910 )     (3,155 )

Noninterest income (2)

     36,927       5,703       5,165       2,512       14,727       65,034  

Noninterest expense (3)

     (60,765 )     (1,799 )     (5,068 )     (11,878 )     (3,449 )     (82,959 )

Minority interest in net income of consolidated affiliates

     —         —         —         —         (10,458 )     (10,458 )
                                                

Income (loss) before income tax expense (4)

   $ 60,334     $ 4,070     $ 332     $ (829 )   $ 263     $ 64,170  
                                                

Total average loans

   $ 2,806,699     $ —       $ —       $ 800,709     $ 22,871     $ 3,630,279  

Total average assets (5)

     4,218,448       313,840       42,949       883,892       628,187       6,087,316  

Total average deposits

     3,683,120       —         —         236,533       16,974       3,936,627  

Goodwill at September 30, 2007

   $ —       $ —       $ —       $ 4,092     $ —       $ 4,092  

Three months ended September 30, 2006

            

Net interest income

   $ 76,455     $ 162     $ 209     $ 8,395     $ 4,587     $ 89,808  

Provision for loan losses (1)

     (1,056 )     —         —         (70 )     (1,641 )     (2,767 )

Noninterest income (2)

     26,386       1,876       1,932       1,064       (290 )     30,968  

Noninterest expense (3)

     (57,287 )     (2,478 )     (5,061 )     (7,316 )     (2,865 )     (75,007 )

Minority interest in net (income)/loss of consolidated affiliates

     —         —         —         —         919       919  
                                                

Income (loss) before income tax expense (4)

   $ 44,498     $ (440 )   $ (2,920 )   $ 2,073     $ 710     $ 43,921  
                                                

Total average loans

   $ 2,210,239     $ —       $ —       $ 734,985     $ 30,813     $ 2,976,037  

Total average assets (5)

     4,087,318       223,187       62,003       820,166       212,897       5,405,571  

Total average deposits

     3,606,705       —         —         209,597       17,638       3,833,940  

Goodwill at September 30, 2006

   $ —       $ —       $ 17,204     $ 4,039     $ —       $ 21,243  

Nine months ended September 30, 2007

            

Net interest income

   $ 251,243     $ 531     $ 634     $ 26,046     $ 5,194     $ 283,648  

Provision for loan losses (1)

     (9,312 )     —         —         (39 )     (1,514 )     (10,865 )

Noninterest income (2)

     96,967       19,491       11,510       5,494       34,733       168,195  

Noninterest expense, excluding impairment of goodwill (3)

     (178,968 )     (10,693 )     (14,332 )     (33,381 )     (8,414 )     (245,788 )

Impairment of goodwill

     —         —         (17,204 )     —         —         (17,204 )

Minority interest in net income of consolidated affiliates

     —         —         —         —         (26,639 )     (26,639 )
                                                

Income (loss) before income tax expense (4)

   $ 159,930     $ 9,329     $ (19,392 )   $ (1,880 )   $ 3,360     $ 151,347  
                                                

Total average loans

   $ 2,608,327     $ —       $ —       $ 797,726     $ 33,471     $ 3,439,524  

Total average assets (5)

     4,133,441       278,530       54,520       891,288       558,149       5,915,928  

Total average deposits

     3,614,993       —         —         248,535       16,337       3,879,865  

Goodwill at September 30, 2007

   $ —       $ —       $ —       $ 4,092     $ —       $ 4,092  

Nine months ended September 30, 2006

            

Net interest income

   $ 216,959     $ 602     $ 488     $ 23,732     $ 17,668     $ 259,449  

(Provision for) recovery of loan losses (1)

     (3,268 )     —         —         1,136       (2,763 )     (4,895 )

Noninterest income (2)

     74,490       7,703       7,142       2,741       3,271       95,347  

Noninterest expense, excluding impairment of goodwill (3)

     (162,892 )     (6,831 )     (15,845 )     (22,649 )     (12,682 )     (220,899 )

Impairment of goodwill

     —         —         (18,434 )     —         —         (18,434 )

Minority interest in net income of consolidated affiliates

     —         —         —         —         (5,139 )     (5,139 )
                                                

Income (loss) before income tax expense (4)

   $ 125,289     $ 1,474     $ (26,649 )   $ 4,960     $ 355     $ 105,429  
                                                

Total average loans

   $ 2,068,351     $ —       $ —       $ 692,419     $ 30,496     $ 2,791,266  

Total average assets (5)

     4,190,178       204,667       69,457       778,542       79,968       5,322,812  

Total average deposits

     3,709,631       —         —         219,498       23,447       3,952,576  

Goodwill at September 30, 2006

   $ —       $ —       $ 17,204     $ 4,039     $ —       $ 21,243  

(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 $0.9 million and $1.6 million of net charge-offs for the three months ended September 30, 2007 and 2006, respectively, and $1.5 million and $2.8 million for the nine months ended September 30, 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 $7.7 million and $2.4 million for the three months ended September 30, 2007 and 2006, respectively, and $15.4 million and $6.2 million for the nine months ended September 30, 2007 and 2006, respectively.
(3) The Commercial Banking segment includes direct depreciation and amortization of $1.3 million and $0.8 million for the three months ended September 30, 2007 and 2006, respectively, and $3.0 million and $2.4 million for the nine months ended September 30, 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 equal the greater of total average assets or the sum of total average deposits and total average stockholders’ equity for each segment.

 

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13. 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, commercial and standby letters of credit, credit card guarantees and commitments to invest in private equity funds. 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

Commitments which are available for funding, due to clients meeting all collateral, compliance, and financial covenants required under loan commitment agreements, totaled $4.5 billion and $4.1 billion at September 30, 2007 and December 31, 2006, respectively. Out of these available commitment balances, fixed interest rate commitments were $512.3 million and $611.7 million at September 30, 2007 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 both September 30, 2007 and December 31, 2006. Additionally, at September 30, 2007 and December 31, 2006, we had an aggregate maximum lending limit of $509.7 million and $468.1 million, respectively, 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

The table below summarizes our commercial and standby letters of credit at September 30, 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

   $ 622,531    $ 25,009    $ 647,540    $ 647,540

Performance standby letters of credit

     20,930      5,784      26,714      26,714

Commercial letters of credit

     11,138      —        11,138      11,138
                           

Total

   $ 654,599    $ 30,793    $ 685,392    $ 685,392
                           

At September 30, 2007 and December 31, 2006, deferred fees related to financial and performance standby letters of credit were $3.6 million and $3.9 million, respectively. At September 30, 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 credit was $274.6 million.

Credit Card Guarantees

The total amount of credit card guarantees was $92.3 million at September 30, 2007. It is not considered probable that material losses will be incurred by the Bank as a result of these arrangements. Credit card fees totaled $1.6 million and $1.1 million for the three months ended September 30, 2007 and 2006, respectively, and $4.3 million and $3.3 million for the nine months ended September 30, 2007 and 2006, respectively.

 

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Commitments to Invest in Private Equity Funds

The following table details our total capital commitments and our unfunded commitments at September 30, 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)

     1,200      960    5.1  

SVB Strategic Investors Fund, LP

     15,300      1,989    12.6  

SVB Strategic Investors Fund II, LP

     15,000      7,650    8.6  

SVB Strategic Investors Fund III, LP

     15,000      12,750    5.9  

Partners for Growth, LP

     25,000      9,750    50.0  

Partners for Growth II, LP

     15,000      11,700    24.2  

Gold Hill Venture Lending 03, LP (2)

     20,000      3,821    9.3  

SVB India Capital Partners I, LP

     7,500      6,000    13.9  

Other Fund Investments (3)

     139,866      78,091    —   %
                

Total

   $ 259,866    $ 133,371   
                

(1) Includes 1.3% direct ownership in SVB Capital Partners II, LP through SVB Capital Partners II, LLC, and 3.8% indirect ownership through our investment in SVB Strategic Investors Fund II, LP.
(2) Includes 4.8% direct ownership in Gold Hill Venture Lending 03, LP and its parallel funds. In addition, includes 4.5% indirect ownership interest through Gold Hill Venture Lending Partners, 03, LLC.
(3) Represents commitments to 316 private equity funds where our ownership interest is less than 5%.

14. 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 September 30, 2007, our unrecognized tax benefits increased by $0.1 million to $1.1 million, which if recognized, would reduce our effective tax rate. Total accrued interest and penalties at September 30, 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 2004 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 2004 through 2006, respectively, remain open to examination.

15. Related Party Transactions

In January 2007, SVB Financial increased the revolving line of credit facility to Gold Hill Venture Lending 03, LP, a sponsored 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 nine months ended September 30, 2007 was $42.0 million.

In May 2007, SVB Business Partners (Shanghai) Co., Ltd., a wholly-owned subsidiary of SVB Financial (“SVB Shanghai”), amended its agreement with New Enterprise Associates (Beijing), Ltd. (“NEA Beijing”), under which SVB Shanghai provides business consulting services, to increase its annual services fees to $87,000. The original agreement was entered into in October 2006 for a three year term. NEA Beijing is a wholly-owned subsidiary of NEA Management Company, LLC, a company in which Richard Kramlich, a director of SVB Financial, has an ownership interest.

 

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In June 2007, Mr. Felda Hardymon, a director of SVB Financial, invested $0.5 million in SVB Capital Partners II, L.P. (“SCPII”), a fund in the current amount of $90.1 million that invests in privately held companies. SCPII is managed by its general partner, a wholly-owned subsidiary of SVB Financial, which holds a minority interest in the fund. Additionally in June 2007, Mr. Jim Porter, also a director of SVB Financial, invested $0.2 million in SVB India Capital Partners I, L.P. (“SICP”), a $53.9 million fund which primarily invests in privately-held companies in India. SICP is managed by its general partner, a wholly-owned subsidiary of SVB Financial, which holds a minority interest in the fund.

16. Legal Matters

On October 4, 2007, a consolidated class action was filed in the United States District Court for the Central District of California, purportedly on behalf of a class of investors who purchased the common stock of Vitesse Semiconductor Corporation (“Vitesse”). The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against Vitesse, the Bank and other named defendants in connection with alleged fraudulent recognition of revenue by Vitesse, specifically with respect to sales of certain accounts receivable to the Bank. This action is in the preliminary stages with respect to the Bank. No discovery has taken place and no trial date has been set. While it is still too early to predict the outcome of the litigation, we believe the suit is without merit and intends to vigorously defend against the claims.

Additionally, 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, we establish reserves 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.

17. Subsequent Events

For the period October 1, 2007 through November 1, 2007, we repurchased 303,969 shares of our common stock at a total cost of $14.9 million. As of close of business, November 1, 2007, $184.3 million of our common shares may still be repurchased under our current common stock repurchase program.

 

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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part 1, Item 2 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 are 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, deposits, fees for deposit services, letters of credit, foreign exchange, noninterest expense, and client funds

 

   

Forecasts of venture capital and private equity funding levels

 

   

Forecasts of interest rates and net interest margin

 

   

Forecasts of 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

 

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Levels of nonperforming loans

 

   

Capital and liquidity provided by funds generated through retained earnings

 

   

Activities for which capital will be used or 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

 

   

Venture capital and private equity funding levels

 

   

Strategic initiatives

 

   

Realization of revenues from SVB Alliant

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 “Risk Factors” under Part II, Item 1A 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 accompanying 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”).

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. Through our various subsidiaries and divisions, we offer a variety of banking and financial products and services. 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 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 products and services, such as funds management, private equity investment and equity valuation services, through the other subsidiaries and divisions of the company.

We operate through 27 offices, including an administrative office, 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.

Our business generates three distinct primary sources of income: interest rate differentials, fee-based services and investments in private equity funds and other securities.

We generate income 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 and private equity industry sectors, and, to a lesser extent, from premium wine industry commercial clients and individual clients served by our SVB Private Client Services group. We do not obtain deposits from conventional retail sources and currently have no brokered deposits.

 

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Fee-based services also generate income for our business. We market a full range of financial services to all of our commercial and private equity firm clients, including commercial banking, private client, 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 seek to obtain returns by managing and investing in private equity funds and obtaining rights to acquire stock in client companies. We manage and invest in private equity funds that invest directly in privately held companies, as well as 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.

In addition to the above three primary sources of income, we also generate income from other sources.

We have four operating segments in which we report our financial information: Commercial Banking, SVB Capital, SVB Alliant, and Other Business Services. As previously announced, we reached a decision in July 2007 to cease operations of SVB Alliant and SVB Alliant Europe Limited. The Company elected to have SVB Alliant complete a limited number of client transactions, the last of which are currently expected to be completed during the fourth quarter of 2007 or the first quarter of 2008. The Company has realized certain revenues from these transactions and currently expects to realize additional revenues from SVB Alliant. Accordingly, the Company continues to report financial information relating to SVB Alliant as a separate operating segment in this Quarterly Report.

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 nine months ended September 30, 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” under Part II, Item 7 of our 2006 Form 10-K.

Recent Accounting Pronouncements

Please refer to the discussion of our recent accounting pronouncements in Note 2 (Summary of Significant Accounting Policies) of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 above.

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, federal funds sold, 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 $96.0 million for the three months ended September 30, 2007, an increase of $5.8 million or 6.4 percent, compared to $90.2 million for the comparable 2006 period. The increase in net interest income was primarily due to a $14.6 million increase in income from our loan portfolio and a $1.3 million increase in interest income from short-term investment securities, partially offset by a $7.0 million increase in interest expense and a $3.1 million decrease in interest income from our investment securities portfolio.

The increase in interest income from our loan portfolio is primarily related to growth in our loan portfolio. Average loans outstanding for the three months ended September 30, 2007 totaled $3.63 billion, compared to $2.98 billion for the

 

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comparable 2006 period. The increase in average loans outstanding of $654.2 million was driven primarily by our commercial loan portfolio, which increased by $580.2 million as a result of our focus on serving later-staged clients and loan growth increases from all industry segments, with particularly strong growth in loans to private equity firms for capital calls. The average yield on our loan portfolio was 10.19 percent for the three months ended September 30, 2007, compared to 10.49 percent for the comparable 2006 period.

We lowered our Prime Lending Rate by 50 basis points to 7.75 percent on September 19, 2007. Additionally, we lowered our Prime Lending Rate by 25 basis points to 7.50 percent on November 1, 2007. Our Prime Lending Rate was lowered in line with the Federal Reserve’s lowering of the targeted federal funds rate.

The increase in interest expense is primarily related to increases in interest expense from long-term debt and deposits, partially offset by a decrease in interest expense from short-term borrowings. Average long-term debt increased by $648.2 million to $847.2 million, primarily due to the issuance of $500 million of long-term debt in May 2007 and the utilization of $150 million of long-term Federal Home Loan Bank (“FHLB”) advances beginning in the fourth quarter of 2006. The proceeds from the long-term debt were used to pay-down our short-term borrowings, which decreased by $317.7 million to $205.7 million for the three months ended September 30, 2007, compared to $523.4 million for the comparable 2006 period. Short-term borrowings are a significant source of funding to support the growth of our loan portfolio. The increase in interest expense from deposits was primarily related to our new money market deposit product for early stage clients introduced in May 2007, which bears higher yields compared to our other money market products.

The decrease in interest income from our investment securities portfolio reflects lower levels of investment securities due to scheduled maturities and prepayments. Average interest-earning investment securities were $1.33 billion for the three months ended September 30, 2007, a decrease of $259.2 million or 16.3 percent, from $1.59 billion for the comparable 2006 period.

Net interest income was $284.6 million for the nine months ended September 30, 2007, an increase of $23.9 million or 9.2 percent, compared to $260.7 million for the comparable 2006 period. The increase in net interest income was primarily due to growth of $648.3 million in our average loan portfolio and the effect of increases in our average Prime Lending Rate, which increased to 8.23 percent for the nine months ended September 30, 2007, compared to 7.85 percent for the comparable 2006 period. Additionally, we had an increase of $4.9 million in interest income from short-term investments due to increases in amounts of short-term investments. These increases were partially offset by a decrease of $11.7 million in interest income from our investment securities portfolio due to scheduled maturities and prepayments and the sale of $119.1 million of securities in the second quarter of 2006, as well as an increase of $21.8 million in interest expense primarily from short-term borrowings and long-term debt. The increases in average short-term borrowings and long-term debt were used to fund the growth of our loan portfolio.

Summary of Interest Changes Due to Volume and Rate (Fully Taxable-Equivalent Basis)

Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume change.” Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate change.” The following table sets forth changes in interest income for each major category of interest-earning assets and interest expense for each major category of interest-bearing liabilities. The table also reflects the amount of simultaneous changes attributable to both volume and rate changes for the periods indicated. For this table, changes that are not solely due to either volume or rate are allocated in proportion to the percentage changes in average volume and average rate.

 

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     2007 Compared to 2006     2007 Compared to 2006  
     Three Months Ended September 30,
Increase (Decrease) Due to Change in
    Nine Months Ended September 30,
Increase (Decrease) Due to Change in
 

(Dollars in thousands)

   Volume     Rate     Total     Volume     Rate     Total  

Interest income:

            

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

   $ 1,409     $ (85 )   $ 1,324     $ 4,004     $ 925     $ 4,929  

Investment securities (Taxable)

     (2,814 )     9       (2,805 )     (11,470 )     746       (10,724 )

Investment securities (Non-Taxable)

     (304 )     (17 )     (321 )     (1,030 )     31       (999 )

Loans

     16,860       (2,303 )     14,557       50,403       2,070       52,473  
                                                

Increase (decrease) in interest income, net

     15,151       (2,396 )     12,755       41,907       3,772       45,679  
                                                

Interest expense:

            

NOW deposits

     (3 )     —         (3 )     (6 )     (4 )     (10 )

Regular money market deposits

     (101 )     216       115       (478 )     497       19  

Bonus money market deposits

     35       1,103       1,138       (436 )     1,301       865  

Time deposits

     (2 )     127       125       4       592       596  

Short-term borrowings

     (4,196 )     (304 )     (4,500 )     1,755       370       2,125  

Contingently convertible debt

     2       (2 )     —         4       8       12  

Junior subordinated debentures

     (5 )     13       8       37       164       201  

Senior and subordinated notes

     7,992       —         7,992       11,837       —         11,837  

Other long-term debt

     2,106       (14 )     2,092       6,185       —         6,185  
                                                

Increase in interest expense, net

     5,828       1,139       6,967       18,902       2,928       21,830  
                                                

Increase (decrease) in net interest income

   $ 9,323     $ (3,535 )   $ 5,788     $ 23,005     $ 844     $ 23,849  
                                                

Net Interest Margin (Fully Taxable-Equivalent Basis)

Net interest margin was 7.18 percent for the three months ended September 30, 2007, compared to 7.45 percent for the comparable 2006 period. The decrease in net interest margin was due to a decrease in our loan yield, primarily from lower fee income recognized. Our net interest margin also decreased due to increases in rates paid on our interest-bearing liabilities from the issuance of long-term debt in May 2007 and utilization of long-term FHLB advances, as well as the introduction of our new money market deposit product for early stage clients, partially offset by decreases from the pay-down of short-term borrowings. The long-term debt issued in May 2007 was composed of $250.0 million in senior notes due in June 2012 with a fixed coupon of 5.70%, and $250.0 million in subordinated notes due in June 2017 with a fixed coupon of 6.05% (collectively, the “Notes”). Concurrent with the issuance of the Notes, we entered into interest rate swap agreements whereby we swapped the fixed interest rates for variable rates based on LIBOR.

Net interest margin was 7.38 percent for the nine months ended September 30, 2007, compared to 7.34 percent for the comparable 2006 period. The increase in net interest margin was largely due to growth and increases in yield of our loan portfolio and increased fee income due to loan prepayments. Our net interest margin was negatively affected by increases in short-term borrowings and long-term debt used to fund the growth of our loan portfolio and the introduction of our new money market deposit product for early stage clients in May 2007.

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 and nine months ended September 30, 2007 and 2006, respectively.

 

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Average Balances, Rates and Yields Three Months Ended September 30, 2007 and 2006

 

     Three months ended September 30,  
     2007     2006  

(Dollars in thousands)

   Average
Balance
    Interest
Income/
Expense
   Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
   Yield/
Rate
 

Interest-earning assets :

              

Federal funds sold, securities purchased under agreement the resell and other short-term investment securities (1)

   $ 350,833     $ 4,485    5.07 %   $ 240,767     $ 3,161    5.21 %

Investment securities:

              

Taxable

     1,277,910       14,915    4.63       1,518,983       17,720    4.63  

Non-taxable (2)

     48,486       813    6.65       66,620       1,134    6.75  

Loans:

              

Commercial

     3,077,872       82,957    10.69       2,497,698       69,277    11.00  

Real estate construction and term

     258,700       4,233    6.49       201,147       3,567    7.04  

Consumer and other

     293,707       6,053    8.18       277,192       5,842    8.36  
                                          

Total loans, net of unearned income

     3,630,279       93,243    10.19       2,976,037       78,686    10.49  
                                          

Total interest-earning assets

     5,307,508       113,456    8.48       4,802,407       100,701    8.32  
                                          

Cash and due from banks

     283,711            242,194       

Allowance for loan losses

     (45,174 )          (39,088 )     

Goodwill

     4,092            18,521       

Other assets (3)

     537,179            381,537       
                          

Total assets

   $ 6,087,316          $ 5,405,571       
                          

Funding sources :

              

Interest-bearing liabilities:

              

NOW deposits

   $ 30,647     $ 31    0.40 %   $ 33,660     $ 34    0.40 %

Regular money market deposits

     149,580       513    1.36       191,418       398    0.82  

Bonus money market deposits

     567,345       2,283    1.60       551,071       1,145    0.82  

Time deposits

     321,243       745    0.92       322,310       620    0.76  
                                          

Total interest-bearing deposits

     1,068,815       3,572    1.33       1,098,459       2,197    0.79  

Short-term borrowings

     205,715       2,701    5.21       523,352       7,201    5.46  

Contingently convertible debt

     149,011       232    0.62       148,090       232    0.62  

Junior subordinated debentures

     49,798       853    6.80       50,117       845    6.69  

Senior and subordinated notes

     495,771       7,992    6.40       —         —      —    

Other long-term debt

     152,669       2,113    5.49       837       21    9.95  
                                          

Total interest-bearing liabilities

     2,121,779       17,463    3.27       1,820,855       10,496    2.29  

Portion of noninterest-bearing funding sources

     3,185,729            2,981,552       
                                          

Total funding sources

     5,307,508       17,463    1.30       4,802,407       10,496    0.87  
                                          

Noninterest-bearing funding sources :

              

Demand deposits

     2,867,812            2,735,481       

Other liabilities

     193,955            117,911       

Minority interest in capital of consolidated affiliates

     227,072            151,496       

Stockholders’ equity

     676,698            579,828       

Portion used to fund interest-earning assets

     (3,185,729 )          (2,981,552 )     
                          

Total liabilities, minority interest, and stockholders’ equity

   $ 6,087,316          $ 5,405,571       
                          

Net interest income and margin

     $ 95,993    7.18 %     $ 90,205    7.45 %
                              

Total deposits

   $ 3,936,627          $ 3,833,940       
                          

(1) Includes average interest-bearing deposits in other financial institutions of $59.4 million and $29.1 million for the three months ended September 30, 2007 and 2006, respectively.
(2) Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory income tax rate of 35.0 percent. The tax equivalent adjustments were $0.3 million and $0.4 million for the three months ended September 30, 2007 and 2006, respectively.
(3) Average investment securities of $250.3 million and $155.6 million for the three months ended September 30, 2007 and 2006, respectively, were classified as Other Assets as they were noninterest-earning assets.

 

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Average Balances, Rates and Yields Nine Months Ended September 30, 2007 and 2006

 

     Nine months ended September 30,  
     2007     2006  

(Dollars in thousands)

   Average
Balance
    Interest
Income/
Expense
   Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
   Yield/
Rate
 

Interest-earning assets :

              

Federal funds sold, securities purchased under agreement to resell and other short-term investment securities (1)

   $ 326,761     $ 12,660    5.18 %   $ 221,458     $ 7,731    4.67 %

Investment securities:

              

Taxable

     1,340,953       46,990    4.69       1,668,553       57,714    4.62  

Non-taxable (2)

     50,618       2,603    6.88       70,646       3,602    6.82  

Loans:

              

Commercial

     2,900,526       237,211    10.93       2,346,110       189,879    10.82  

Real estate construction and term

     242,678       12,080    6.66       185,717       9,575    6.89  

Consumer and other

     296,320       18,235    8.23       259,439       15,599    8.04  
                                          

Total loans, net of unearned income

     3,439,524       267,526    10.40       2,791,266       215,053    10.30  
                                          

Total interest-earning assets

     5,157,856       329,779    8.55       4,751,923       284,100    7.99  
                                          

Cash and due from banks

     276,202            241,805       

Allowance for loan losses

     (42,979 )          (38,095 )     

Goodwill

     15,435            29,802       

Other assets (3)

     509,414            337,377       
                          

Total assets

   $ 5,915,928          $ 5,322,812       
                          

Funding sources :

              

Interest-bearing liabilities:

              

NOW deposits

   $ 36,114     $ 107    0.40 %   $ 38,049     $ 117    0.41 %

Regular money market deposits

     161,748       1,414    1.17       228,398       1,395    0.82  

Bonus money market deposits

     523,636       4,548    1.16       587,803       3,683    0.84  

Time deposits

     320,180       2,259    0.94       319,357       1,663    0.70  
                                          

Total interest-bearing deposits

     1,041,678       8,328    1.07       1,173,607       6,858    0.78  

Short-term borrowings

     388,622       15,556    5.35       344,571       13,431    5.21  

Contingently convertible debt

     148,789       709    0.64       147,898       697    0.63  

Junior subordinated debentures

     50,704       2,563    6.76       49,935       2,362    6.32  

Senior and subordinated notes

     246,775       11,837    6.41       —         —      —    

Other long-term debt

     152,669       6,227    5.45       924       42    6.08  
                                          

Total interest-bearing liabilities

     2,029,237       45,220    2.98       1,716,935       23,390    1.82  

Portion of noninterest-bearing funding sources

     3,128,619            3,034,988       
                                          

Total funding sources

     5,157,856       45,220    1.17       4,751,923       23,390    0.65  
                                          

Noninterest-bearing funding sources :

              

Demand deposits

     2,838,187            2,778,969       

Other liabilities

     183,440            110,809       

Minority interest in capital of consolidated affiliates

     199,927            137,168       

Stockholders’ equity

     665,137            578,931       

Portion used to fund interest-earning assets

     (3,128,619 )          (3,034,988 )     
                          

Total liabilities, minority interest, and stockholders’ equity

   $ 5,915,928          $ 5,322,812       
                          

Net interest income and margin

     $ 284,559    7.38 %     $ 260,710    7.34 %
                              

Total deposits

   $ 3,879,865          $ 3,952,576       
                          

(1) Includes average interest-bearing deposits in other financial institutions of $50.8 million and $29.7 million for the nine months ended September 30, 2007 and 2006, respectively.
(2) Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory income tax rate of 35.0 percent. The tax equivalent adjustments were $0.9 million and $1.3 million for the nine months ended September 30, 2007 and 2006, respectively.
(3) Average investment securities of $233.2 million and $137.7 million for the nine months ended September 30, 2007 and 2006, respectively, were classified as Other Assets as they were noninterest-earning assets.

Provision for Loan Losses

The provision for loan losses is based on our evaluation of the adequacy of the existing allowance for loan losses in relation to total loans and on our periodic assessment of the inherent and identified risk dynamics of the loan portfolio resulting from reviews of selected individual loans.

 

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The following table summarizes our provision for loan losses for the three and nine months ended September 30, 2007 and 2006:

 

     Three months ended September 30,     Nine months ended September 30,  

(Dollars in thousands)

   2007     2006     2007     2006  

Gross loan charge-offs

   $ 4,138     $ 3,216     $ 14,754     $ 10,427  

Loan recoveries

     (1,856 )     (2,091 )     (5,367 )     (8,296 )

Provision for loan growth and other

     873       1,642       1,478       2,764  
                                

Provision for Loan Losses

   $ 3,155     $ 2,767     $ 10,865     $ 4,895  
                                

Provision as a percentage of total gross loans (annualized)

     0.33 %     0.33 %     0.38 %     0.19 %

Allowance for loan losses as a percentage of total gross loans

     1.15 %     1.18 %     1.15 %     1.18 %

The provision for loan losses was higher in the three and nine months ended September 30, 2007 as compared to the comparable 2006 periods mainly due to higher charge-offs related to loans made to companies in the technology niche, as well as lower loan recoveries as we continue to experience historically low losses in our loan portfolio.

We consider our allowance for loan losses of $44.2 million adequate to cover credit losses inherent in the loan portfolio at September 30, 2007.

Noninterest Income

 

     Three months ended September 30,     Nine months ended September 30,  

(Dollars in thousands)

   2007    2006     % Change     2007    2006     % Change  

Gains (losses) on investment securities, net

   $ 14,719    $ (2,048 )   (818.7 )%   $ 40,611    $ (1,209 )   —   %

Client investment fees

     13,127      11,555     13.6       37,813      32,164     17.6  

Foreign exchange fees

     6,714      5,182     29.6       17,778      15,494     14.7  

Gains on derivative instruments, net

     8,790      3,240     171.3       15,514      11,062     40.2  

Corporate finance fees

     5,166      1,999     158.4       11,568      7,212     60.4  

Deposit service charges

     3,933      2,747     43.2       10,711      7,235     48.0  

Letter of credit and standby letter of credit income

     2,671      2,617     2.1       8,363      7,609     9.9  

Other

     9,914      5,676     74.7       25,837      15,780     63.7  
                                  

Total noninterest income

   $ 65,034    $ 30,968     110.0 %   $ 168,195    $ 95,347     76.4 %
                                  

Gains (Losses) on Investment Securities, Net

Gains on investment securities, net was $14.7 million for the three months ended September 30, 2007, compared to losses on investment securities, net of $2.0 million for the comparable 2006 period. Net gains on investment securities of $14.7 million for the three months ended September 30, 2007 were mainly attributable to net gains of $12.8 million from two of our managed funds of funds and $3.2 million from two of our sponsored debt funds, partially offset by net losses of $1.2 million from one of our managed co-investment funds. The net gains on investment securities of $14.7 million were primarily related to net increases of $8.2 million in net gains from valuation adjustments and $6.5 million in gains from distributions. Of the $14.7 million in net gains, $11.5 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)/Loss of Consolidated Affiliates”. Net losses on investment securities of $2.0 million for the three months ended September 30, 2006 were mainly attributable to net losses of $2.4 million from one of our managed funds of funds and $1.2 million from one of our sponsored debt funds, partially offset by net gains of $1.3 million from one of our other managed funds of funds.

Gains on investment securities, net was $40.6 million for the nine months ended September 30, 2007, compared to losses on investment securities, net of $1.2 million for the comparable 2006 period. Net gains on investment securities of $40.6 million for the nine months ended September 30, 2007 were mainly attributable to net gains of $25.3 million from three of our managed funds of funds and $15.9 million from two of our sponsored debt funds, partially offset by net losses of $1.5 million from one of our managed co-investment funds. The net gains on investment securities of $40.6 million were primarily related to net increases of $12.5 million in net gains from valuation adjustments and $28.1 million in gains from distributions. Of the $40.6 million in net gains, $28.7 million was attributable to minority interests. Net losses on investment securities of $1.2 million for the nine months ended September 30, 2006 were mainly attributable to net losses of $3.2 million from the sale of $119.1 million of securities in the second quarter of 2006, partially offset by net gains of $2.3 million from two of our managed funds of funds.

At September 30, 2007, we held, either directly or through six of our managed investment funds, investments in 385 private equity funds, 57 companies and three sponsored debt funds.

 

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Client Investment Fees

Client investment fees were $13.1 million and $37.8 million for the three and nine months ended September 30, 2007, respectively, compared to $11.6 million and $32.2 million for the comparable 2006 periods. The increases in client investment fees were attributable to the growth in average client investment funds. The following table summarizes average client investment funds for the three and nine months ended September 30, 2007 and 2006.

 

     Three months ended September 30,     Nine months ended September 30,  

(Dollars in millions)

   2007    2006    % Change     2007    2006    % Change  

Client directed investment assets (1)

   $ 12,584    $ 10,976    14.7 %   $ 12,245    $ 10,407    17.7 %

Client investment assets under management

     5,734      4,554    25.9       5,466      4,260    28.3  

Sweep money market funds

     2,414      2,291    5.4       2,379      2,215    7.4  
                                

Total average client investment funds (2)

   $ 20,732    $ 17,821    16.3 %   $ 20,090    $ 16,882    19.0 %
                                

(1) Mutual funds and Repurchase Agreement Program assets.
(2) Client funds invested through SVB Financial Group are maintained at third party financial institutions.

Foreign Exchange Fees

Foreign exchange fees represent the income differential between purchases and sales of foreign currency exchange on behalf of our clients. Foreign exchange fees were $6.7 million and $17.8 million for the three and nine months ended September 30 2007, respectively, compared to $5.2 million and $15.5 million for the comparable 2006 periods. The increases in foreign exchange fees were primarily due to increases in volumes and higher values of international trades by our clients. Foreign exchange fees were previously presented as a component of gains on derivative instruments, net, within noninterest income in the consolidated statements of income.

Gains on Derivative Instruments, Net

A summary of gains on derivative instruments, net, for the three and nine months ended September 30, 2007 and 2006 is as follows:

 

     Three months ended September 30,     Nine months ended September 30,  

(Dollars in thousands)

   2007     2006     % Change     2007     2006     % Change  

(Losses) gains on foreign exchange forwards, net (1)

   $ (90 )   $ 182     (149.5 )%   $ 381     $ 761     (49.9 )%

Change in fair value of interest rate swap (2)

     (338 )     397     (185.1 )     (81 )     (4,060 )   (98.0 )

Equity warrant assets:

            

Gains on exercise, net

     7,689       3,693     108.2       11,555       7,441     55.3  

Change in fair value (3):

            

Cancellations and expirations

     (514 )     (1,623 )   (68.3 )     (1,981 )     (3,099 )   (36.1 )

Other changes in fair value

     2,043       591     245.7       5,640       10,019     (43.7 )
                                    

Total net gains on equity warrant assets (4)

     9,218       2,661     246.4       15,214       14,361     5.9  
                                    

Total gains on derivative instruments, net

   $ 8,790     $ 3,240     171.3 %   $ 15,514     $ 11,062     40.2 %
                                    

(1) Represents the change in the fair value of foreign exchange forward contracts executed on behalf of clients and contracts with correspondent banks to economically reduce our 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.
(2) For the three and nine months ended September 30, 2007 and 2006, the amount represents the change in the fair value hedge implemented in April 2006. Prior to the fair value hedge implemented in April 2006, the amount represents the cumulative change in market value of the interest rate swap prior to its designation as a fair value hedge. Please refer to the discussion of our interest rate swap agreement related to our junior subordinated debentures in Note 10 (Derivative Financial Instruments) of the “Notes to Interim Consolidated Financial Statements (unaudited)” in Part I, Item 1.
(3) At September 30, 2007, we held warrants in 1,206 companies, compared to 1,275 companies at September 30, 2006.
(4) Includes net gains on equity warrant assets held by consolidated investment affiliates. Relevant amounts attributable to minority interests are reflected in the interim consolidated statements of income under the caption “Minority Interest in Net (Income)/Loss of Consolidated Affiliates”.

The increase in net gains on derivative instruments of $5.6 million for the three months ended September 30, 2007, compared to the comparable 2006 period was primarily due to higher gains on exercises of equity warrant assets arising from merger and acquisition activities and initial public offerings of stock by certain companies in our warrant portfolio and higher gains recognized from valuation adjustments of our equity warrant assets. These increases were partially offset by unfavorable changes in the fair value hedge agreement for our junior subordinated debentures.

 

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The net gains on derivatives of $8.8 million for the three months ended September 30, 2007 were primarily related to $7.7 million in net gains from exercised warrants and $1.1 million in net increase in fair value.

The increase in net gains on derivative instruments of $4.5 million for the nine months ended September 30, 2007, compared to the comparable 2006 period was primarily due to gains on exercises of equity warrant assets arising from merger and acquisition activities and initial public offerings of stock by certain companies in our warrant portfolio and favorable changes in the fair value hedge agreement for our junior subordinated debentures. These increases were partially offset by lower gains recognized from valuation adjustments of our equity warrant assets. The net gains on derivatives of $15.5 million for the nine months ended September 30, 2007 were primarily related to $11.6 million in net gains from exercised warrants and $3.9 million in net increase in fair value.

The change in the fair value of equity warrant assets was primarily attributable to changes in the value of the underlying assumptions used to value the equity warrant assets including changes in the risk-free interest rate, changes in the underlying value of the client companies’ stock, changes in the volatility of market-comparable public companies and changes in the expected life. The methodology used to calculate the fair value of equity warrant assets has been applied consistently.

Corporate Finance Fees

Corporate finance fees were $5.2 million for the three months ended September 30, 2007, compared to $2.0 million for the comparable 2006 period. The increase of $3.2 million was attributable to higher income from success fees recognized at SVB Alliant of $2.3 million, and an increase in revenue recognized of $0.9 million on certain previously collected retainer fees related to terminated contracts. In July 2007, we reached a decision to cease operations at SVB Alliant. We have elected to have SVB Alliant complete a limited number of client transactions, the last of which are currently expected to be completed during the fourth quarter of 2007 or the first quarter of 2008.

Corporate finance fees were $11.6 million for the nine months ended September 30, 2007, compared to $7.2 million for the comparable 2006 period. The increase of $4.4 million was primarily attributable to higher income from success fees recognized at SVB Alliant.

Deposit Service Charges

Deposit service charges were $3.9 million and $10.7 million for the three and nine months ended September 30, 2007, respectively, compared to $2.7 million and $7.2 million for the comparable 2006 periods. The increases in deposit service charges were attributable to an increase in fee rates and volume of transactions.

Other Noninterest Income

A summary of other noninterest income for the three and nine months ended September 30, 2007 and 2006 is as follows:

 

     Three months ended September 30,     Nine months ended September 30,  

(Dollars in thousands)

   2007    2006    % Change     2007    2006    % Change  

Fund management fees

   $ 1,901    $ 1,226    55.1 %   $ 6,643    $ 2,892    129.7 %

Credit card fees

     1,558      1,143    36.3       4,322      3,338    29.5  

Service-based fee income

     1,708      369    362.9       3,646      378    864.6  

Gains on foreign exchange loans revaluation, net

     2,133      275    675.6       3,016      1,548    94.8  

Other

     2,614      2,663    (1.8 )     8,210      7,624    7.7  
                                

Total other noninterest income

   $ 9,914    $ 5,676    74.7 %   $ 25,837    $ 15,780    63.7 %
                                

Other noninterest income was $9.9 million for the three months ended September 30, 2007, compared to $5.7 million for the comparable 2006 period. The increase of $4.2 million was primarily related to an increase in income on revaluations of foreign currency denominated loans due to a weaker U.S. dollar, an increase in service-based fee income primarily related to increased income from our subsidiary, SVB Analytics, which commenced operations in the second quarter of 2006, an increase in fund management fees due to additional managed investment funds which closed in the second quarter of 2007, and an increase in other income, primarily due to a $0.8 million payment received in the third quarter of 2007 related to an early exit from one of our domestic office leases.

Other noninterest income was $25.8 million for the nine months ended September 30, 2007, compared to $15.8 million for the comparable 2006 period. The increase of $10.0 million was primarily related to an increase in fund management fees, an increase in service-based fee income from SVB Analytics and from eProsper, a company in which we acquired a 65% ownership stake during the third quarter of 2006, an increase in income on revaluations of foreign currency denominated loans, and an increase in credit card fees related to an increase in volumes.

 

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Noninterest Expense

 

     Three months ended September 30,     Nine months ended September 30,  

(Dollars in thousands)

   2007     2006    % Change     2007     2006     % Change  

Compensation and benefits

   $ 56,460     $ 45,505    24.1 %   $ 161,777     $ 138,701     16.6 %

Professional services

     7,847       11,363    (30.9 )     23,673       29,792     (20.5 )

Impairment of goodwill

     —         —      —         17,204       18,434     (6.7 )

Net occupancy

     5,149       4,112    25.2       16,238       12,615     28.7  

Furniture and equipment

     4,567       3,899    17.1       14,820       11,274     31.5  

Business development and travel

     2,429       3,013    (19.4 )     8,747       8,754     (0.1 )

Correspondent bank fees

     1,511       1,510    0.1       4,371       4,092     6.8  

Telephone

     1,178       1,040    13.3       4,034       2,827     42.7  

Data processing services

     1,054       944    11.7       2,940       2,933     0.2  

(Reduction of) provision for unfunded credit commitments

     (973 )     458    (312.4 )     (2,778 )     (3,363 )   (17.4 )

Other

     3,737       3,163    18.1       11,966       13,274     (9.9 )
                                   

Total noninterest expense

   $ 82,959     $ 75,007    10.6 %   $ 262,992     $ 239,333     9.9 %
                                   

Compensation and Benefits

Compensation and benefits expenses were $56.5 million and $161.8 million for the three and nine months ended September 30, 2007, respectively, compared to $45.5 million and $138.7 million for the comparable 2006 periods. The increases were largely due to higher incentive compensation costs related to our strong financial performance, as well as increases in the number of average full-time equivalent (“FTE”) employees and higher rates of employee salaries and wages, partially offset by a decrease in share-based payment expense due to a decrease in stock option grants.