SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 05/08/2009 16:29:39)
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 March 31, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

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

Large accelerated filer   x     Accelerated filer   ¨     Non-accelerated filer   ¨     Smaller reporting company   ¨

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 April 30, 2009, 32,978,109 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 MARCH 31, 2009 AND DECEMBER 31, 2008    3
   INTERIM CONSOLIDATED STATEMENTS OF (LOSS) INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008    4
   INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008    5
   INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008    6
   INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008    7
   NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)    8
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    28
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    54
ITEM 4.    CONTROLS AND PROCEDURES    55
PART II - OTHER INFORMATION   
ITEM 1.    LEGAL PROCEEDINGS    55
ITEM 1A.    RISK FACTORS    55
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    64
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES    64
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    64
ITEM 5.    OTHER INFORMATION    64
ITEM 6.    EXHIBITS    64
SIGNATURE    65
INDEX TO EXHIBITS    66


Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

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

   March 31,
2009
    December 31,
2008
 

Assets

    

Cash and due from banks

   $ 3,362,216     $ 1,791,396  

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

     286,787       647,414  

Investment securities

     2,032,157       1,786,100  

Loans, net of unearned income

     5,003,069       5,506,253  

Allowance for loan losses

     (110,010 )     (107,396 )
                

Net loans

     4,893,059       5,398,857  
                

Premises and equipment, net of accumulated depreciation and amortization

     29,341       30,589  

Goodwill

     —         4,092  

Accrued interest receivable and other assets

     355,208       362,360  
                

Total assets

   $ 10,958,768     $ 10,020,808  
                

Liabilities and total equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 5,228,830     $ 4,419,965  

Negotiable order of withdrawal (NOW)

     43,802       58,133  

Money market

     1,061,547       1,213,086  

Foreign money market

     45,439       53,123  

Time

     393,433       379,200  

Sweep

     1,709,273       1,349,965  
                

Total deposits

     8,482,324       7,473,472  
                

Short-term borrowings

     56,450       62,120  

Other liabilities

     163,422       175,553  

Long-term debt

     964,175       995,423  
                

Total liabilities

     9,666,371       8,706,568  
                

Commitments and contingencies (Note 12)

    

SVBFG stockholders’ equity:

    

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

     —         —    

Preferred stock, Series B Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation value per share, 235,000 shares authorized; 235,000 shares issued and outstanding, net of discount

     221,783       221,185  

Common stock, $0.001 par value, 150,000,000 shares authorized; 32,935,515 and 32,917,007 shares outstanding, respectively

     33       33  

Additional paid-in capital

     71,761       66,201  

Retained earnings

     701,708       712,254  

Accumulated other comprehensive loss

     (3,162 )     (5,789 )
                

Total SVBFG stockholders’ equity

     992,123       993,884  

Noncontrolling interests

     300,274       320,356  
                

Total equity

     1,292,397       1,314,240  
                

Total liabilities and total equity

   $ 10,958,768     $ 10,020,808  
                

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF (LOSS) INCOME (UNAUDITED)

 

     Three months ended March 31,  

(Dollars in thousands, except per share amounts)

     2009         2008    

Interest income:

    

Loans

   $ 88,251     $ 89,759  

Investment securities:

    

Taxable

     14,851       13,770  

Non-taxable

     1,061       937  

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

     2,376       4,117  
                

Total interest income

     106,539       108,583  
                

Interest expense:

    

Deposits

     6,847       5,269  

Borrowings

     8,181       12,536  
                

Total interest expense

     15,028       17,805  
                

Net interest income

     91,511       90,778  

Provision for loan losses

     43,466       7,723  
                

Net interest income after provision for loan losses

     48,045       83,055  
                

Noninterest (loss) income:

    

Foreign exchange fees

     7,466       7,844  

Deposit service charges

     6,823       5,891  

Client investment fees

     6,248       13,722  

Letters of credit and standby letters of credit income

     2,892       2,946  

Gains on derivative instruments, net

     1,814       2,599  

Corporate finance fees

     —         3,640  

Losses on investment securities, net

     (35,045 )     (6,112 )

Other

     6,192       11,035  
                

Total noninterest (loss) income

     (3,610 )     41,565  
                

Noninterest expense:

    

Compensation and benefits

     48,280       53,781  

Professional services

     12,080       8,801  

Premises and equipment

     5,407       5,188  

Net occupancy

     4,305       4,348  

Impairment of goodwill

     4,092       —    

Business development and travel

     3,273       3,422  

FDIC assessments

     2,675       436  

Correspondent bank fees

     1,913       1,506  

(Reduction of) provision for unfunded credit commitments

     (2,284 )     (165 )

Other

     7,399       6,120  
                

Total noninterest expense

     87,140       83,437  
                

(Loss) income before income tax (benefit) expense

     (42,705 )     41,183  

Income tax (benefit) expense

     (1,702 )     18,283  
                

Net (loss) income

     (41,003 )     22,900  

Net loss attributable to noncontrolling interests

     33,993       4,218  
                

Net (loss) income attributable to SVBFG

   $ (7,010 )   $ 27,118  
                

Preferred stock dividend and discount accretion

     (3,536 )     —    
                

Net (loss) income available to common stockholders

   $ (10,546 )   $ 27,118  
                

(Loss) earnings per common share—basic

   $ (0.32 )   $ 0.84  

(Loss) earnings per common share—diluted

   $ (0.32 )   $ 0.78  

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

 

     Three months ended March 31,  

(Dollars in thousands)

     2009         2008    

Net (loss) income

   $ (41,003 )   $ 22,900  

Other comprehensive income, net of tax:

    

Cumulative translation (losses) gains:

    

Foreign currency translation losses

     (1,431 )     (98 )

Related tax effect

     365       39  

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

    

Unrealized holding gains

     6,268       4,956  

Related tax effect

     (2,571 )     (2,045 )

Reclassification adjustment for realized (losses) gains included in net (loss) income attributable to SVBFG

     (7 )     821  

Related tax effect

     3       (337 )
                

Other comprehensive income, net of tax

     2,627       3,336  
                

Comprehensive (loss) income

     (38,376 )     26,236  

Net loss attributable to noncontrolling interests

     33,993       4,218  
                

Comprehensive (loss) income attributable to SVBFG

   $ (4,383 )   $ 30,454  
                

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

     SVBFG Stockholders              
     Preferred Stock    Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Losses
    Total SVBFG
Stockholders’
Equity
    Noncontrolling
Interests
    Total Equity  

(Dollars in thousands)

   Shares    Amount    Shares     Amount              

Balance at December 31, 2007

   —      $ —      32,670,557     $ 33     $ 13,167     $ 669,703     $ (6,290 )   $ 676,613     $ 240,102     $ 916,715  
                                                                          

Common stock issued under employee benefit plans, net of restricted stock cancellations

   —        —      188,693       —         5,510       —         —         5,510       —         5,510  

Income tax benefit from stock options exercised, vesting of restricted stock and other

   —        —      —         —         2,022       —         —         2,022       —         2,022  

Net income (loss)

   —        —      —         —         —         27,118       —         27,118       (4,218 )     22,900  

Capital calls and (distributions), net

   —        —      —         —         —         —         —         —         36,845       36,845  

Net change in unrealized losses on available-for-sale investment securities

   —        —      —         —         —         —         3,395       3,395       —         3,395  

Translation adjustments

   —        —      —         —         —         —         (59 )     (59 )     —         (59 )

Common stock repurchases

   —        —      (979,628 )     (1 )     (11,870 )     (32,749 )     —         (44,620 )     —         (44,620 )

Stock-based compensation expense under SFAS 123(R)

   —        —      —         —         3,647       —         —         3,647       —         3,647  

Other-net

   —        —      —         —         1,499       13       —         1,512       —         1,512  
                                                                          

Balance at March 31, 2008

   —      $ —      31,879,622     $ 32     $ 13,975     $ 664,085     $ (2,954 )   $ 675,138     $ 272,729     $ 947,867  
                                                                          

Balance at December 31, 2008

   235,000    $ 221,185    32,917,007     $ 33     $ 66,201     $ 712,254     $ (5,789 )   $ 993,884     $ 320,356     $ 1,314,240  
                                                                          

Common stock issued under employee benefit plans, net of restricted stock cancellations

   —        —      18,508       —         85       —         —         85       —         85  

Income tax benefit from stock options exercised, vesting of restricted stock and other

   —        —      —         —         1,342       —         —         1,342       —         1,342  

Net (loss)

   —        —      —         —         —         (7,010 )     —         (7,010 )     (33,993 )     (41,003 )

Capital calls and (distributions), net

   —        —      —         —         —         —         —         —         13,911       13,911  

Net change in unrealized losses on available-for-sale investment securities

   —        —      —         —         —         —         3,693       3,693       —         3,693  

Translation adjustments

   —        —      —         —         —         —         (1,066 )     (1,066 )     —         (1,066 )

Stock-based compensation expense under SFAS 123(R)

   —        —      —         —         3,908       —         —         3,908       —         3,908  

Preferred stock dividend and discount accretion

   —        598    —         —         —         (3,536 )     —         (2,938 )     —         (2,938 )

Other-net

   —        —      —         —         225       —         —         225       —         225  
                                                                          

Balance at March 31, 2009

   235,000    $ 221,783    32,935,515     $ 33     $ 71,761     $ 701,708     $ (3,162 )   $ 992,123     $ 300,274     $ 1,292,397  
                                                                          

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Three months ended March 31,  

(Dollars in thousands)

       2009             2008      

Cash flows from operating activities:

    

Net (loss) income attributable to SVBFG

   $ (7,010 )   $ 27,118  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Impairment of goodwill

     4,092       —    

Provision for loan losses

     43,466       7,723  

(Reduction of) provision for unfunded credit commitments

     (2,284 )     (165 )

Changes in fair values of derivatives, net

     (1,452 )     2,325  

Losses on investment securities, net

     35,045       6,112  

Depreciation and amortization

     7,239       7,209  

Net loss attributable to noncontrolling interests

     (33,993 )     (4,218 )

Tax benefit of original issue discount

     1,105       627  

Tax benefit of share-based compensation and other

     178       620  

Amortization of share-based compensation

     3,887       3,647  

Amortization of deferred warrant-related loan fees

     (2,126 )     (1,862 )

Deferred income tax (benefit) expense

     (2,937 )     8,669  

Loss on valuation adjustments to other real estate owned property

     50       114  

Changes in other assets and liabilities:

    

Accrued interest, net

     5,503       3,928  

Accounts receivable

     (4,031 )     269  

Income tax receivable, net

     (11,930 )     2,969  

Accrued compensation

     (16,313 )     (42,914 )

Foreign exchange spot contracts, net

     (8,106 )     4,050  

Other, net

     2,807       2,109  
                

Net cash provided by operating activities

     13,190       28,330  
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (340,303 )     (27,726 )

Proceeds from sales of available-for-sale securities

     7       910  

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

     86,882       43,831  

Purchases of nonmarketable securities (cost and equity method accounting)

     (14,035 )     (15,956 )

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

     648       1,801  

Proceeds from nonmarketable securities (cost and equity method accounting)

     —         354  

Purchases of nonmarketable securities (investment fair value accounting)

     (12,381 )     (26,847 )

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

     2,193       5,767  

Net decrease (increase) in loans

     460,629       (204,028 )

Proceeds from recoveries of charged-off loans

     1,161       828  

Purchases of premises and equipment

     (2,475 )     (1,983 )
                

Net cash provided by (used for) investing activities

     182,326       (223,049 )
                

Cash flows from financing activities:

    

Net increase in deposits

     1,008,852       158,010  

Principal payments of other long-term debt

     (505 )     (244 )

(Decrease) increase in short-term borrowings

     (5,670 )     30,000  

Capital contributions from noncontrolling interests, net of distributions

     13,911       37,358  

Stock compensation related tax benefits

     60       774  

Dividends paid on preferred stock

     (2,056 )     —    

Proceeds from issuance of common stock

     85       5,510  

Repurchases of common stock

     —         (44,620 )
                

Net cash provided by financing activities

     1,014,677       186,788  
                

Net increase (decrease) in cash and cash equivalents

     1,210,193       (7,931 )

Cash and cash equivalents at beginning of period

     2,438,810       684,063  
                

Cash and cash equivalents at end of period

   $ 3,649,003     $ 676,132  
                

Supplemental disclosures:

    

Noncash items during the period:

    

Preferred stock dividends accrued, not yet paid

   $ 1,469     $ —    

Expense associated with loans issued under the Employee Home Ownership Program

     365       180  

Unrealized gains on available-for-sale securities

     3,697       2,911  

Net change in fair value of interest rate swaps

     (31,629 )     17,454  

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

SVB Financial Group (“SVB Financial” or the “Parent”) is a diversified financial services company, as well as a bank holding company and financial holding company. SVB Financial 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 to support our clients through all stages of their life cycles. In these notes to our interim consolidated financial statements, when we refer to “SVB Financial Group,” the “Company,” “we,” “our,” “us” or use similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the “Bank”), unless the context requires otherwise. When we refer to “SVB Financial”, “SVBFG” or the “Parent” we are referring only to the parent company, SVB Financial Group, unless the context requires otherwise.

The accompanying 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 consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three months ended March 31, 2009 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, 2008 (“2008 Form 10-K”).

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 2008 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. Estimates may change as new information is obtained. Significant items that are subject to such estimates include the valuation of non-marketable securities, the adequacy of the allowance for loan losses, valuation of equity warrant assets, the recognition and measurement of income tax assets and liabilities, the adequacy of the reserve for unfunded credit commitments, and share-based compensation.

Principles of Consolidation and Presentation

Our consolidated interim financial statements include the accounts of SVB Financial Group and our majority-owned subsidiaries and variable interest entities (“VIEs”) for which we are the primary beneficiary. There have been no significant changes during the three months ended March 31, 2009 to our majority-owned subsidiaries and VIEs. Refer to our Consolidated Financial Statements and Supplementary Data-Note 2-”Summary of Significant Accounting Policies” under Part II, Item 8 of our 2008
Form 10-K.

Impact of Adopting SFAS No. 160

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. Our adoption of SFAS No. 160 on January 1, 2009 required us to reclassify our presentation of noncontrolling interests (formerly referred to as minority interests) and had no effect on our results of operations or stockholders’ equity.

Impact of Adopting SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). SFAS No. 161 requires companies with derivative instruments to provide enhanced disclosure information that should enable financial statement users to better understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”) and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. Our adoption of SFAS No. 161 on January 1, 2009 required us to expand our disclosures for our derivative financial instruments. Please refer to Note 9- “Derivative Financial Instruments” for further details.

 

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Impact of Adopting FSP APB No. 14-1

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Accounting Principles Board (“APB”) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB No. 14-1”). The FSP requires the proceeds from the issuance of convertible debt instruments to be allocated between a liability and an equity component in a manner that reflects the entity’s non-convertible debt borrowing rate when interest expense is recognized in subsequent periods. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. Our adoption on January 1, 2009 required historical financial statements for 2007 and 2008 to be adjusted to conform to the FSP’s new accounting treatment for both our $150 million zero-coupon convertible subordinated notes (“2003 Convertible Notes”), which matured on June 15, 2008, and our $250 million 3.875% convertible senior notes (“2008 Convertible Notes”), due April 15, 2011.

As a result of adopting the requirements of FSP APB No. 14-1, our net loss applicable to common stockholders for the three months ended March 31, 2009 increased by $0.3 million. Total SVBFG stockholders’ equity, based on cumulative adjustments beginning January 1, 2007 through March 31, 2009 increased by $4.9 million. The following table highlights certain revised items related to the adoption of FSP APB No. 14-1 in our unaudited consolidated statements of income and balance sheets for the quarters ended March 31, 2009, December 31, 2008, and March 31, 2008.

 

     Three months ended
     March 31, 2009     December 31, 2008    March 31, 2008

(Dollars in thousands, except per share amounts)

   As reported     As adjusted
(1/1/2009)
   As reported in
prior filings
   As adjusted
(1/1/2009)
   As reported in
prior filings

INCOME STATEMENT

             

Interest expense - borrowings

   $ 8,181     $ 10,219    $ 9,694    $ 12,536    $ 11,233

Income tax (benefit) expense

     (1,702 )     2,111      2,319      18,283      18,801

Net (loss) income attributable to SVBFG

     (7,010 )     2,105      2,422      27,118      27,903

Net (loss) income available to common stockholders

     (10,546 )     1,398      1,715      27,118      27,903

(Loss) earnings per common share — diluted

     (0.32 )     0.04      0.05      0.78      0.81

BALANCE SHEET

             

Total assets

   $ 10,958,768     $ 10,020,808    $ 10,020,892    $ 6,897,285    $ 6,897,303

Long-term debt

     964,175       995,423      1,000,640      892,516      893,189

Additional paid-in capital

     71,761       66,201      45,872      13,975      —  

Retained earnings

     701,708       712,254      727,450      664,085      678,078

Reclassifications

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

Recent Accounting Pronouncements

In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP No. 157-4”). FSP No. 157-4 provides guidance to highlight and expand on factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset or liability. FSP 157-4 also provides guidance on identifying circumstances that may indicate that a transaction is not orderly. FSP No. 157-4 is effective for interim periods ending after June 15, 2009. We are currently assessing the impact of FSP No. 157-4 on our consolidated financial position and results of operations and we do not expect any material changes.

In April 2009, the FASB issued FSP No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”) (“FSP No. 115-2 and SFAS No. 124-2”). FSP No. 115-2 and SFAS No. 124-2 change the methodology for determining whether OTTI exists for debt securities. FSP No. 115-2 and SFAS No. 124-2 require changes to the presentation of OTTI impairment in the statements of income for those impairments involving credit losses, as well as enhanced disclosures regarding the methodology and significant inputs used to measure the amount related to credit losses. FSP No. 115-2 and SFAS No. 124-2 is effective for interim periods ending after June 15, 2009. We are currently assessing the impact of FSP No. 115-2 and SFAS No. 124-2 on our consolidated financial position and results of operations and we do not expect any material changes.

In April 2009, the FASB issued FSP No. 107-1 and APB Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP No. 107-1 and APB No. 28-1”), which require interim disclosures regarding the fair values of all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments , as well as the methods and significant assumptions used to estimate the fair value of those financial instruments. FSP No. 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009. The guidance expands the disclosure requirements and has no impact on our consolidated financial position and results of operations.

 

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2. Stockholders’ Equity and Earnings Per Share (“EPS”)

Common Stock

We did not repurchase any shares of our common stock for the three months ended March 31, 2009. We repurchased 1.0 million shares for the three months ended March 31, 2008 totaling $44.6 million. In July 2008 upon expiration of our earlier stock repurchase program, our Board of Directors approved a stock repurchase program authorizing us to purchase up to $150.0 million of our common stock, which expires on December 31, 2009. At March 31, 2009, $150.0 million of shares remain authorized for repurchase under our current stock repurchase program.

Preferred Stock

In connection with our participation in the U.S. Treasury’s (“Treasury”) Capital Purchase Program (the “CPP”) in the latter part of the fourth quarter of 2008, for the three months ended March 31, 2009, we have accrued dividends of $2.9 million on our Series B Fixed Rate Cumulative Perpetual Preferred Stock (“Series B Preferred Stock”). At December 31, 2008, accrued dividends were $0.6 million.

Earnings Per Share

Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options, our Employee Stock Purchase Plan, restricted stock awards and units, our $150 million zero-coupon convertible subordinated notes (“2003 Convertible Notes”) and related warrants, our $250 million of 3.875% convertible senior notes (“2008 Convertible Notes”) and related warrants and note hedge, and our warrant under the CPP. Potentially dilutive common shares are excluded from the computation of dilutive earnings per share in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three months ended March 31, 2009 and 2008:

 

     Three months ended March 31,

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

     2009         2008  

Numerator:

    

Net (loss) income attributable to SVBFG

   $ (7,010 )   $ 27,118

Preferred stock dividend and discount accretion

     (3,536 )     —  
              

Net (loss) income available to common stockholders

   $ (10,546 )   $ 27,118
              

Denominator:

    

Weighted average common shares outstanding-basic

     32,932       32,280

Weighted average effect of dilutive securities:

    

Stock options

     —         1,012

Restricted stock awards and units

     —         73

2003 Convertible Notes

     —         1,218
              

Denominator for diluted calculation

     32,932       34,583
              

Net (loss) income per common share:

    

Basic

   $ (0.32 )   $ 0.84
              

Diluted

   $ (0.32 )   $ 0.78
              

Due to the loss applicable to common stockholders for the three months ended March 31, 2009, no potentially dilutive shares were included in the loss per share calculation as including such shares would be anti-dilutive and reduce the reported loss per share.

 

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The following table summarizes the common shares excluded from the diluted EPS calculation as they were deemed to be anti-dilutive for the three months ended March 31, 2009 and 2008:

 

     Three months ended March 31,

(Shares in thousands)

           2009                    2008        

Stock options

   2,933    880

Restricted stock awards and units

   847    3

Warrants associated with 2003 Convertible Notes

   —      485

2008 Convertible Notes

   7,848    —  

Warrants associated with 2008 Convertible Notes

   10,544    —  

Warrant associated with Capital Purchase Program

   1,062    —  
         

Total

   23,234    1,368
         

3. Share-Based Compensation

For the three months ended March 31, 2009 and 2008, we recorded share-based compensation expense of $3.9 million and $3.5 million, respectively, resulting in the recognition of $1.0 million and $0.8 million, respectively, in related tax benefits.

Unrecognized Compensation Expense

At March 31, 2009, unrecognized share-based compensation expense was as follows:

 

(Dollars in thousands)

   Unrecognized Expense    Average Expected
Recognition Period - in
Years

Stock options

   $ 5,939    1.25

Restricted stock units

     10,821    1.25
         

Total unrecognized share-based compensation expense

   $ 16,760   
         

Share-Based Payment Award Activity

The table below provides stock option information related to the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the three months ended March 31, 2009:

 

     Shares     Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contractual
Life in Years
   Aggregate
Intrinsic Value
of In-The-
Money Options

Outstanding at December 31, 2008

   3,130,929     $ 37.25      

Granted

   7,088       21.75      

Exercised

   (15,562 )     9.62      

Forfeited

   (2,975 )     48.90      

Expired

   (15,201 )     36.53      
              

Outstanding at March 31, 2009

   3,104,279       37.34    3.38    $ 570,227
              

Vested and expected to vest at March 31, 2009

   3,020,243       37.03    3.32      569,530
              

Exercisable at March 31, 2009

   2,278,543       33.21    2.70      566,732
              

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $20.01 as of March 31, 2009. The total intrinsic value of options exercised during the three months ended March 31, 2009 and 2008 was $0.2 million and $3.3 million, respectively.

 

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The table below provides information for restricted stock awards and restricted stock units under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the three months ended March 31, 2009:

 

     Shares     Weighted Average
Grant Date Fair Value

Nonvested at December 31, 2008

   393,463     $ 46.49

Granted

   3,750       22.19

Vested

   (4,952 )     17.95

Forfeited

   (1,259 )     21.46
        

Nonvested at March 31, 2009

   391,002       46.70
        

4. Federal Funds Sold, Securities Purchased under Agreements to Resell and Other Short-Term Investment Securities

The following table details the federal funds sold, securities purchased under agreements to resell and other short-term investment securities at March 31, 2009 and December 31, 2008, respectively:

 

(Dollars in thousands)

   March 31, 2009    December 31, 2008

Federal funds sold overnight

   $ —      $ 250,000

Securities purchased under agreements to resell

     62,142      150,910

Interest-earning deposits

     174,997      169,022

Other short-term investment securities

     49,648      77,482
             

Total federal funds sold, securities purchased under agreements to resell and other short-term investment securities

   $ 286,787    $ 647,414
             

In addition to the above, as of March 31, 2009 and December 31, 2008, $3.1 billion and $1.1 billion, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate.

5. Investment Securities

The major components of our investment securities portfolio at March 31, 2009 and December 31, 2008 are as follows:

 

     March 31, 2009    December 31, 2008

(Dollars in thousands)

   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
    Carrying
Value
   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
    Carrying
Value

Marketable securities:

                     

Available-for-sale securities, at fair value:

                     

U.S. agencies and corporations:

                     

Collateralized mortgage obligations

   $ 549,258    $ 8,303    $ (20,498 )   $ 537,063    $ 590,876    $ 5,609    $ (16,736 )   $ 579,749

Mortgage-backed securities

     439,991      14,378      (1,564 )     452,805      459,770      9,910      (2,230 )     467,450

U.S. agency debentures

     430,016      3,880      (129 )     433,767      109,981      3,622      —         113,603

Commercial mortgage-backed securities

     52,773      —        (5,956 )     46,817      54,202      —        (6,721 )     47,481

Municipal bonds and notes

     104,786      1,784      (1,136 )     105,434      109,405      1,384      (2,034 )     108,755

Marketable equity securities

     443      15      (12 )     446      157      —        (5 )     152

Venture capital fund investments

     —        1      —         1      —        1      —         1
                                                         

Total available-for-sale securities

   $ 1,577,267    $ 28,361    $ (29,295 )   $ 1,576,333    $ 1,324,391    $ 20,526    $ (27,726 )   $ 1,317,191
                                                         

Marketable securities (investment company fair value accounting) (1)

             1,297              1,703

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

                     

Private equity fund investments (2)

             218,366              242,645

Other private equity investments (3)

             82,473              82,444

Other investments (4)

             1,276              1,547

Non-marketable securities (equity method accounting):

                     

Other investments (5)

             32,137              27,000

Low income housing tax credit funds

             30,381              31,510

Non-marketable securities (cost method accounting):

                     

Private equity fund investments (6)

             76,755              69,971

Other private equity investments

             13,139              12,089
                             

Total investment securities

           $ 2,032,157            $ 1,786,100
                             

 

(1) Marketable securities (investment company fair value accounting) represent investments managed by us or our consolidated subsidiaries that were originally made within our non-marketable securities portfolio that have been converted into publicly-traded shares. The following table shows the amount of investments by the following funds and our ownership of each fund at March 31, 2009 and December 31, 2008:

 

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     March 31, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Partners for Growth, LP

   $ 960    50.0 %   $ 1,233    50.0 %

SVB India Capital Partners I, LP

     337    14.4       470    14.4  
                  

Total marketable securities

   $ 1,297      $ 1,703   
                  

 

(2) The following table shows the amount of investments by the following consolidated funds of funds and our ownership of each fund at March 31, 2009 and December 31, 2008:

 

     March 31, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

SVB Strategic Investors Fund, LP

   $ 55,464    12.6 %   $ 65,985    12.6 %

SVB Strategic Investors Fund II, LP

     80,951    8.6       94,161    8.6  

SVB Strategic Investors Fund III, LP

     79,582    5.9       80,780    5.9  

SVB Strategic Investors Fund IV, LP

     2,369    5.0       1,719    5.0  
                  

Total private equity fund investments

   $ 218,366      $ 242,645   
                  

 

(3) The following table shows the amount of investments by the following consolidated co-investment funds and our ownership of each fund at March 31, 2009 and December 31, 2008:

 

     March 31, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Silicon Valley BancVentures, LP

   $ 23,537    10.7 %   $ 24,188    10.7 %

SVB Capital Partners II, LP (i)

     37,253    5.1       38,234    5.1  

SVB India Capital Partners I, LP

     21,683    14.4       20,022    14.4  
                  

Total other private equity investments

   $ 82,473      $ 82,444   
                  

 

  (i) At March 31, 2009, we had a direct ownership interest of 1.3% and an indirect ownership interest of 3.8% in the fund through our ownership interest of SVB Strategic Investors Fund II, LP.

 

(4) Other investments within non-marketable securities (investment company fair value accounting) include our ownership in Partners for Growth, LP, a consolidated sponsored debt fund. At March 31, 2009 and December 31, 2008 we had a majority ownership interest of approximately 50.0% in the fund. Partners for Growth, LP is managed by a third party, and we do not have an ownership interest in the general partner of this fund.

 

(5) The following table shows the amount of investments by the following sponsored debt funds and our ownership of each fund at March 31, 2009 and December 31, 2008:

 

     March 31, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Gold Hill Venture Lending 03, LP (i)

   $ 17,816    9.3 %   $ 18,234    9.3 %

Partners for Growth II, LP

     10,622    24.2       8,559    24.2  

Other fund investment

     3,699    —         207    —    
                  

Total other investments

   $ 32,137      $ 27,000   
                  

 

  (i) At March 31, 2009, we had a direct ownership interest of 4.8% in the fund. In addition, we had a 90.7% direct ownership interest in the fund’s general partner, Gold Hill Venture Lending Partners 03, LLC (“GHLLC”). GHLLC has a direct ownership interest of 5.0% in Gold Hill Venture Lending 03, LP and its parallel funds. Our indirect interest in the fund through our investment in GHLLC is 4.5%. Our aggregate direct and indirect ownership in the fund is 9.3%.

 

(6) Represents investments in 356 and 360 private equity funds at March 31, 2009 and December 31, 2008, respectively, where our ownership interest is less than 5% of the voting stock of each such fund.

 

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The following table summarizes our unrealized losses on our available-for-sale investment securities into categories of less than 12 months, or 12 months or longer, at March 31, 2009:

 

     March 31, 2009  
     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)

   $ 16,408    $ (875 )   $ 86,804    $ (19,623 )   $ 103,212    $ (20,498 )

Mortgage-backed securities (1)

     4,499      (12 )     18,531      (1,552 )     23,030      (1,564 )

U.S. agency debentures

     85,971      (129 )     —        —         85,971      (129 )

Commercial mortgage-backed securities (1)

     —        —         46,817      (5,956 )     46,817      (5,956 )

Municipal bonds and notes (1)

     19,695      (757 )     12,502      (379 )     32,197      (1,136 )

Marketable equity securities

     38      (12 )     —        —         38      (12 )
                                             

Total temporarily impaired securities

   $ 126,611    $ (1,785 )   $ 164,654    $ (27,510 )   $ 291,265    $ (29,295 )
                                             

 

(1) As of March 31, 2009, we identified a total of 93 investments that were in unrealized loss positions, of which 51 investments totaling $164.7 million with unrealized losses of $27.5 million have been in an impaired position for a period of time greater than 12 months. The time periods in which these securities were originally purchased were as follows: Collateralized mortgage obligations between May 2002 and July 2005, mortgage-backed securities between June 2003 and April 2005, commercial mortgage-backed securities between April 2005 and July 2005 and municipal bonds and notes between December 2007 and February 2008. All investments with unrealized losses for a period of time greater than 12 months are considered investment graded by either Moody’s or S&P or were issued by a government sponsored enterprise. The unrealized losses are due primarily to increases in market interest rate or increase in market spreads to benchmark interest rates relative to rates and spreads at the time of purchase. Based on the underlying credit quality of the investments, we expect these impairments to be temporary, and as such, we expect the market value on these investments to recover over time and we have the intent and ability to hold these investments until recovery or final maturity. Market valuations and impairment analyses on assets in the investment portfolio are reviewed and monitored on an ongoing basis.

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, 2008:

 

     December 31, 2008  
     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

   $ 53,618    $ (2,892 )   $ 94,550    $ (13,844 )   $ 148,168    $ (16,736 )

Mortgage-backed securities

     4,692      (1,433 )     19,239      (797 )     23,931      (2,230 )

Commercial mortgage-backed securities

     9,491      (404 )     37,990      (6,317 )     47,481      (6,721 )

Municipal bonds and notes

     39,694      (1,827 )     4,091      (207 )     43,785      (2,034 )

Marketable equity securities

     152      (5 )     —        —         152      (5 )
                                             

Total temporarily impaired securities

   $ 107,647    $ (6,561 )   $ 155,870    $ (21,165 )   $ 263,517    $ (27,726 )
                                             

 

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The cost of investment securities is determined on a specific identification basis. The following table presents the components of gains and losses on investment securities for the three months ended March 31, 2009 and 2008:

 

     Three months ended March 31,  

(Dollars in thousands)

       2009             2008      

Gross gains on investment securities:

    

Available-for-sale securities, at fair value

   $ 7     $ 66  

Marketable securities (investment company fair value accounting)

     488       —    

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

    

Private equity fund investments

     615       10,100  

Other private equity investments

     52       1,718  

Other investments

     364       —    

Non-marketable securities (equity method accounting):

    

Other investments

     564       369  

Non-marketable securities (cost method accounting):

    

Private equity fund investments

     66       284  

Other private equity investments

     22       —    
                

Total gross gains on investment securities

     2,178       12,537  
                

Gross losses on investment securities:

    

Available-for-sale securities, at fair value

     —         (887 )

Marketable securities (investment company fair value accounting)

     (196 )     (1,913 )

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

    

Private equity fund investments

     (30,810 )     (7,317 )

Other private equity investments

     (5,149 )     (1,653 )

Other investments

     —         (5,514 )

Non-marketable securities (equity method accounting):

    

Other investments

     (120 )     (1,091 )

Non-marketable securities (cost method accounting):

    

Private equity fund investments

     (948 )     (274 )

Other private equity investments

     —         —    
                

Total gross losses on investment securities

     (37,223 )     (18,649 )
                

Losses on investment securities, net

   $ (35,045 )   $ (6,112 )
                

Losses attributable to noncontrolling interests, including carried interest

   $ (30,438 )   $ (1,899 )
                

6. Loans and Allowance for Loan Losses

The composition of loans, net of unearned income of $42.1 million and $45.4 million at March 31, 2009 and December 31, 2008, respectively, is presented in the following table:

 

(Dollars in thousands)

   March 31, 2009    December 31, 2008

Commercial loans

   $ 4,028,813    $ 4,515,019

Premium wine (1)

     400,505      419,539

Community development loans (2)

     57,769      48,293

Consumer and other (3)

     515,982      523,402
             

Total loans, net of unearned income

   $ 5,003,069    $ 5,506,253
             

 

(1) Premium wine consists of loans for vineyard development as well as working capital and equipment term loans to meet the needs of our clients’ premium wineries and vineyards. At March 31, 2009 and December 31, 2008, $266.5 million and $269.6 million, respectively, of such loans were secured by real estate.
(2) Community development loans consist of low income housing loans made as part of our responsibilities under the Community Reinvestment Act and are primarily secured by real estate.

 

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(3) Consumer and other loans consist of loans to targeted high-net-worth individuals. These products and services include home equity lines of credit, secured lines of credit, restricted stock purchase loans and capital call lines of credit. This category also includes loans made to eligible employees through our Employee Home Ownership Plan (“EHOP”). Loans secured by real estate at March 31, 2009, and December 31, 2008 were comprised of the following:

 

(Dollars in thousands)

   March 31, 2009    December 31, 2008

Home equity lines of credit (i)

   $ 86,675    $ 89,544

Loans to eligible employees (ii)

     83,771      74,759

Loans for personal residence (iii)

     63,743      58,700
             

Consumer loans secured by real estate

   $ 234,189    $ 223,003
             

 

  (i) Represents home equity lines of credits, which may have been used to finance real estate investments.
  (ii) Represents loans made to eligible employees through our EHOP.
  (iii) Represents loans used to purchase, renovate or refinance personal residences.

The activity in the allowance for loan losses for the three months ended March 31, 2009 and 2008 was as follows:

 

     Three months ended March 31,  

(Dollars in thousands)

             2009                         2008            

Allowance for loan losses, beginning balance

   $ 107,396     $ 47,293  

Provision for loan losses

     43,466       7,723  

Gross loan charge-offs

     (42,013 )     (6,208 )

Loan recoveries

     1,161       828  
                

Allowance for loan losses, ending balance

   $ 110,010     $ 49,636  
                

Nonaccrual Loans

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, totaled $97.6 million and $84.9 million at March 31, 2009 and December 31, 2008, respectively. There were no commitments available for funding to any clients with nonaccrual loans at March 31, 2009 and at December 31, 2008. The allocation of the allowance for loan losses related to impaired loans was $41.7 million and $25.9 million at March 31, 2009 and December 31, 2008, respectively. Our accruing loans past due 90 days or more were $3.5 million and $2.3 million at March 31, 2009 and December 31, 2008, respectively.

7. Goodwill

During the first quarter of 2009, we conducted an assessment of goodwill of eProsper, a data management services company, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets , based on eProsper’s revised forecast of discounted net cash flows for that reporting unit. We concluded that we had an impairment of goodwill resulting from changes in our outlook for eProsper’s future financial performance. As a result, $4.1 million of goodwill was expensed as a noncash non tax-deductible charge to continuing operations during the first quarter of 2009. There is no remaining goodwill on our balance sheet as of March 31, 2009, compared to $4.1 million at December 31, 2008.

 

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8. Short-Term Borrowings and Long-Term Debt

The following table represents outstanding short-term borrowings and long-term debt at March 31, 2009 and December 31, 2008:

 

(Dollars in thousands)

  

Maturity

   March 31, 2009    December 31, 2008

Short-term borrowings:

        

Other short-term borrowings

   (1)    $ 56,450    $ 62,120
                

Total short-term borrowings

      $ 56,450    $ 62,120
                

Long-term debt:

        

FHLB advances

   (2)    $ 100,000    $ 100,000

5.70% senior notes

   June 1, 2012      273,664      279,370

6.05% subordinated notes

   June 1, 2017      288,220      313,953

3.875% convertible senior notes (3)

   April 15, 2011      245,329      244,783

7.0% junior subordinated debentures

   October 15, 2033      55,932      55,914

8.0% long-term notes payable

   (4)      1,030      1,403
                

Total long-term debt

      $ 964,175    $ 995,423
                

 

(1) Represents cash collateral received from counterparties for our interest rate swap agreements related to our senior and subordinated notes.
(2) Represents Federal Home Loan Bank (“FHLB”) advances of $50 million maturing in May 2009 and $50 million maturing in November 2009.
(3) Balance as of December 31, 2008 reflects a retrospective adjustment resulting from our adoption of FSP APB No. 14-1 on January 1, 2009 (see Note 1- “Basis of Presentation”).
(4) Represents long-term notes payable at eProsper and was payable beginning January 1, 2008 with the last payment due in November 2009. SVB purchased a 65% interest in eProsper in 2006.

Interest expense related to short-term borrowings and long-term debt was $8.2 million and $12.5 million for the three months ended March 31, 2009 and 2008, respectively. Interest expense shown is net of the cash flow impact from our interest rate swap agreements related to our senior and subordinated notes and junior subordinated debentures. In December 2008, our counterparty called the swap on our junior subordinated debentures for settlement in January 2009. As a result, the swap was terminated and is no longer designated as a hedging instrument. Additionally, interest expense for the three months ended March 31, 2008 reflects a retrospective adjustment resulting from our adoption of FSP APB No. 14-1 on January 1, 2009 (see Note 1- “Basis of Presentation”).

3.875% Convertible Senior Notes (“2008 Convertible Notes”)

In April 2008, we issued our 2008 Convertible Notes, due April 15, 2011, in the aggregate principal amount of $250 million to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The issuance costs related to the 2008 Convertible Notes were $6.8 million, and the net proceeds from the offering were $243.2 million. We used $141.9 million of the net proceeds to settle the principal value of our zero-coupon convertible subordinated notes, which matured in June 2008. All remaining proceeds were used for purchasing the call spread and for general corporate purposes. The 2008 Convertible Notes are initially convertible, subject to certain conditions, into cash up to the principal amount of notes and, into shares of our common stock or cash or any combination thereof for any excess conversion value, at our option. Holders may convert their 2008 Convertible Notes beginning any fiscal quarter commencing after June 30, 2008, if: (i) the price of our common stock issuable upon conversion of the note reaches a specific threshold, (ii) specified corporate transactions occur, or (iii) the trading price for the note falls below certain thresholds. The notes have an initial conversion rate of 18.8525 shares of common stock per $1,000 principal amount of notes, which represents an initial effective conversion price of $53.04 per share. Upon maturity, we intend to settle the outstanding principal amount in cash, and we have the option to settle any amount exceeding the principal value of the 2008 Convertible Notes in either cash or shares of our common stock.

Concurrent with the issuance of our 2008 Convertible Notes, we entered into a convertible note hedge and warrant agreement (see Note 9- “Derivative Financial Instruments”), which effectively increased the economic conversion price of our 2008 Convertible Notes to $64.43 per share of common stock. The terms of the hedge and warrant agreement are not part of the terms of the notes and will not affect the rights of the holders of the notes.

For the three months ended March 31, 2009, the effective interest rate for our 2008 Convertible Notes was 5.81 percent and interest expense was $3.5 million. At March 31, 2009, the unamortized debt discount totaled $4.7 million, and will be amortized over the remaining contractual term of the debt.

 

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Available Lines of Credit

We have certain facilities in place to enable us to access short-term borrowings on a secured (using fixed income securities as collateral) and an unsecured basis. These include repurchase agreements and uncommitted federal funds lines with various financial institutions. As of March 31, 2009, we had not borrowed against our repurchase lines or any of our uncommitted federal funds lines. We also pledge securities to the Federal Home Loan Bank of San Francisco and the discount window at the Federal Reserve Bank. The market value of collateral pledged to the Federal Home Loan Bank of San Francisco at March 31, 2009 totaled $644.4 million, of which $542.4 million was available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank at March 31, 2009 totaled $84.8 million, all of which was unused.

9. Derivative Financial Instruments

We primarily use derivative financial instruments to manage interest rate risk, currency exchange rate risk and equity market price risk. Also, as part of negotiating credit facilities and certain other services, we obtain rights to acquire stock in the form of equity warrant assets in certain client companies.

Interest Rate Risk

Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate-sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk for our 5.70% senior notes and our 6.05% subordinated notes, we entered into fixed-for-floating interest rate swaps at the time of debt issuance.

Concurrent with the issuance of our 5.70% senior notes and 6.05% subordinated notes, we entered into matched-terms interest rate swap agreements based upon LIBOR with matched-terms. We use the shortcut method to assess hedge effectiveness and evaluate the hedging relationships for qualification under the shortcut method requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended (“SFAS No. 133”), for each reporting period.

For more information on our 5.70% senior notes and our 6.05% subordinated notes, see our Consolidated Financial Statements and Supplementary Data-Note 12- “Short-Term Borrowings and Long-Term Debt” under Part II, Item 8 of our 2008 Form 10-K.

Net cash benefits associated with our interest rate swaps are recorded in “Interest Expense: Borrowings”, a component of net interest income. The fair value of our interest rate swaps is calculated using a discounted cash flow method and adjusted for credit valuation associated with counterparty risk. Increases from changes in fair value are included in “Other Assets” and decreases from changes in fair value are included in “Other Liabilities”. Any differences associated with our interest rate swaps that arise as a result of hedge ineffectiveness are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Currency Exchange Risk

We enter into foreign exchange forward contracts to hedge against exposures of our credit facilities that are denominated in foreign currencies to our clients, primarily in Pound Sterling, Euro, and Japanese Yen. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting under SFAS No. 133. In accordance with SFAS No. 52, Foreign Currency Translation , changes in currency rates are included in other noninterest income, a component of noninterest income. We may experience ineffectiveness in the hedging relationship, because the credit facilities are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in “Other Assets” and loss positions in “Other Liabilities”, while net changes in fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Equity Market Price Risk

We have convertible debt instruments that contain conversion options that enable the holders to convert the instruments, subject to certain conditions. We intend to settle any conversions in cash up to the principal amount of the notes and, in shares of our common stock or cash or any combination thereof for any excess conversion value, at our option. The conversion option represents an equity risk exposure for the excess conversion value and is an equity derivative classified in stockholders’ equity. We manage equity market price risk of our convertible debt instruments by entering into convertible note hedge and warrant agreements to increase the economic conversion price of our convertible debt instruments and to decrease potential dilution to stockholders resulting from the conversion option. Similar to the conversion option, the hedge and warrant agreements are equity derivatives classified in stockholders’ equity.

 

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Concurrent with the issuance of our $150 million of Zero Coupon Convertible Subordinated Notes in 2003 (“2003 Convertible Notes), we entered into a convertible note hedge agreement and a warrant agreement at a net cost of $21.9 million, which effectively increased the economic conversion price from $33.63 per common share to $51.34. The 2003 Convertible Notes and associated note hedge and warrant agreement matured on June 15, 2008.

Concurrent with the issuance of our $250 million of 3.875% Convertible Senior Notes in 2008 (“2008 Convertible Notes”), we entered into a convertible note hedge and warrant agreement at a net cost of $20.6 million, which effectively increased the economic conversion price from $53.04 per common share to $64.43. For the three months ended March 31, 2009, there were no note conversions or exercises under the warrant agreement as the notes were not convertible. For more information on the 2003 Convertible Notes and the 2008 Convertible Notes, see our Consolidated Financial Statements and Supplementary Data-Note 12- “Short-Term Borrowings and Long-Term Debt” under Part II, Item 8 of our 2008 Form 10-K.

Other Derivative Instruments

Equity Warrant Assets

Our equity warrant assets are concentrated in private, venture-backed companies in the technology and life science industries. Our warrant agreements contain net share settlement provisions, which permit us to pay the warrant exercise price using shares issuable under the warrant (“cashless exercise”). Because we can net settle our warrant agreements, our equity warrant assets qualify as derivative instruments. We value our equity warrant assets using a modified Black-Scholes option pricing model, which incorporates assumptions about the underlying asset value, volatility, and the risk-free rate. We make valuation adjustments for estimated remaining life and marketability for warrants issued by private companies. Equity warrant assets are recorded at fair value in “Other Assets”, while changes in their fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Other Derivatives

Our consolidated sponsored debt fund may extend credit facilities with options to convert their principal value into the borrower’s common stock. These instruments often contain a price range whereby the conversion option may be exercised. As this fund follows fair value accounting, this embedded conversion feature is integrated into the fair value of the debt instrument and does not receive separate accounting recognition. The fair value of these instruments is recorded in “Investment Securities” with changes in fair value recorded through net gains (losses) in investment securities, in noninterest income, a component of consolidated net income.

We sell forward and option contracts to clients that wish to mitigate their foreign currency exposure. We hedge the currency risk from this business by entering into opposite way contracts with correspondent banks. This hedging relationship does not qualify for hedge accounting. The contracts generally have terms of one year or less, although we may have contracts extending for up to five years. We generally have not experienced nonperformance on these contracts, have not incurred credit losses, and anticipate performance by all counterparties to such agreements. Increases from changes in fair value are included in “Other Assets” and decreases from changes in fair value are included in “Other Liabilities”. The net change in the fair value of these contracts is recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

 

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The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at March 31, 2009 and December 31, 2008, respectively, were as follows:

 

   

Balance sheet
location

  March 31, 2009     December 31, 2008  

(Dollars in thousands)

    Notional or
contractual
amount
  Fair
value
    Collateral   Net
exposure
(1)
    Notional or
contractual
amount
  Fair
value
    Collateral   Net
exposure
(1)
 

Derivatives designated as hedging instruments:

                 

Interest Rate Risks:

                 

Interest rate swaps

  Other assets   $ 500,000   $ 62,513     $ 56,450   $ 6,063     $ 550,000   $ 94,142     $ 62,120   $ 32,022  
                                                 

Derivatives not designated as hedging instruments:

                 

Currency Exchange Risks:

                 

Foreign exchange forwards

  Other assets     42,742     3,044       —       3,044       50,393     4,212       —       4,212  

Foreign exchange forwards

  Other liabilities     11,697     (303 )     —       (303 )     23,193     (1,092 )     —       (1,092 )
                                                 

Net exposure

        2,741       —       2,741         3,120       —       3,120  
                                                 

Other Derivative Instruments:

                 

Equity warrant assets

  Other assets     130,151     44,933       —       44,933       130,401     43,659       —       43,659  
                                                 

Other derivatives:

                 

Foreign exchange forwards

  Other assets     385,297     27,952       —       27,952       354,399     32,476       —       32,476  

Foreign exchange forwards

  Other liabilities     376,665     (26,352 )     —       (26,352 )     344,703     (31,039 )     —       (31,039 )

Foreign currency options

  Other assets     25,024     683       —       683       25,848     501       —       501  

Foreign currency options

  Other liabilities     25,024     (683 )     —       (683 )     25,848     (501 )     —       (501 )
                                                 

Net exposure

        1,600       —       1,600         1,437       —       1,437  
                                                 

Net

      $ 111,787     $ 56,450   $ 55,337       $ 142,358     $ 62,120   $ 80,238  
                                                 

 

(1) Net exposure for contracts in a gain position reflects the replacement cost in the event of nonperformance by all such counterparties. The credit ratings of our institutional counterparties as of March 31, 2009 remain at “A” or higher and there have been no material changes in their credit ratings for the three months ended March 31, 2009.

A summary of our derivative activity and the related impact on our consolidated statements of income for the three months ended March 31, 2009 and 2008 is as follows:

 

          Three months ended March 31,  

(Dollars in thousands)

  

Statement of income location

   2009     2008  

Derivatives designated as hedging instruments:

       

Interest Rate Risks:

       

Net cash benefit associated with interest rate swaps

   Interest expense - borrowings    $ 4,204     $ 809  

Changes in fair value of interest rate swap

   Net gains on derivative instruments      (170 )     (493 )
                   

Net gains associated with interest rate risk derivatives

      $ 4,034     $ 316  
                   

Derivatives not designated as hedging instruments:

       

Currency Exchange Risks:

       

(Losses) gains on foreign currency loan revaluations, net

   Other noninterest income    $ (2,677 )   $ 3,907  

Gains (losses) on foreign exchange forward contracts, net

   Net gains on derivative instruments      1,943       (3,091 )
                   

Net (losses) gains associated with currency risk

      $ (734 )   $ 816  
                   

Other Derivative Instruments:

       

Equity warrant assets

   Net gains on derivative instruments    $ (455 )   $ 5,455  
                   

Gains on client foreign exchange forward contracts, net

   Net gains on derivative instruments    $ 496     $ 728  
                   

 

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10. Other Noninterest Income and Other Noninterest Expense

A summary of other noninterest income for the three months ended March 31, 2009 and 2008, respectively, is as follows:

 

     Three months ended March 31,  

(Dollars in thousands)

   2009     2008  

Fund management fees

   $ 2,717     $ 1,920  

Gains (losses) on foreign currency revaluation, net

     2,094       (521 )

Service-based fee income (1)

     1,829       1,990  

Credit card fees

     1,439       1,699  

(Losses) gains on foreign currency loans revaluation, net

     (2,677 )     3,907  

Other

     790       2,040  
                

Total other noninterest income

   $ 6,192     $ 11,035  
                

 

(1) Includes income from SVB Analytics and eProsper.

A summary of other noninterest expense for the three months ended March 31, 2009 and 2008, respectively, is as follows:

 

     Three months ended March 31,

(Dollars in thousands)

   2009    2008

Telephone

   $ 1,380    $ 1,152

Postage and supplies

     1,258      754

Tax credit fund amortization

     1,129      982

Data processing services

     1,012      1,077

Other

     2,620      2,155
             

Total other noninterest expense

   $ 7,399    $ 6,120
             

11. Segment Reporting

We have four operating segments for management reporting purposes: Global Commercial Bank, Relationship Management, SVB Capital, and Other Business Services. Our Other Business Services group includes Sponsored Debt Funds & Strategic Investments and SVB Analytics. The results of our operating segments are based on our internal management reporting process.

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

An operating segment is separately reportable if it exceeds any one of several quantitative thresholds specified in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information . With respect to our operating segments, only Global Commercial Bank, Relationship Management and SVB Capital were determined to be reportable segments as of March 31, 2009.

The summary financial results of our operating segments are presented along with a reconciliation to our consolidated interim results. The Reconciling Items column reflects the adjustments necessary to reconcile the results of the operating segments to the interim consolidated financial statements prepared in conformity with GAAP. Net interest income in the Reconciling Items column is primarily interest income recognized from our fixed income investment portfolio. Noninterest income in the Reconciling Items column is primarily attributable to noncontrolling interests (formerly referred to as minority interests) and gains (losses) on equity warrant assets. Noninterest expense in the Reconciling Items column primarily consists of expenses associated with corporate support functions such as information technology, finance, human resources, loan and deposit operations, and legal, as well as certain corporate wide adjustments related to compensation expenses. Additionally, average assets in the Reconciling Items column primarily consist of our fixed income investment portfolio balances.

Changes to Segment Reporting Effective January 1, 2009

Effective January 1, 2009, we changed the way we monitor performance and result of our business segments and as a result, we changed how our operating segments are presented. We have reclassified all prior period segment information to conform to the current presentation of our reportable segments. The following is a description of the services that our four operating segments provide:

 

   

Global Commercial Bank provides solutions to the financial needs of commercial clients through lending, deposit products, cash management services, and global banking and trade products and services. It also serves

 

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the needs of our non-U.S. clients with global banking products, including loans, deposits and global finance, in key foreign entrepreneurial markets. Previously, the operations of SVB Global were aggregated as a part of Other Business Services.

 

   

Relationship Management provides banking products and services to our premium wine industry clients, including vineyard development loans, as well as a range of credit services to targeted high-net-worth individuals using both long-term secured and short-term unsecured lines of credit. Previously, the operations of SVB Wine and SVB Private Client Services were aggregated as part of Other Business Services.

 

   

SVB Capital manages and sponsors venture capital and private equity funds on behalf of SVB Financial Group and other third party limited partners. The SVB Capital family of funds is comprised of funds it manages, including funds of funds, such as our SVB Strategic Investors Funds, and co-investment funds, such as our SVB Capital Partners funds and SVB India Capital Partners fund. Previously, SVB Capital also included our sponsored debt funds, Gold Hill Venture Lending funds, which provide secured debt, typically to emerging-technology clients in their earliest stages, and Partners for Growth funds, which provide secured debt primarily to higher-risk, middle-market clients in their later stages, and certain strategic investments held by SVB Financial.

 

   

Other Business Services includes the results of our Sponsored Debt Funds & Strategic Investments segment, which is comprised of our sponsored debt funds, Gold Hill Venture Lending funds and Partners for Growth funds, and certain strategic investments held by SVB Financial. Previously, the operations of our sponsored debt funds and strategic investments were reported as part of the SVB Capital operating segment. Other Business Services also includes the results of SVB Analytics, which provides equity valuation and equity management services to private companies and venture capital firms.

The following table summarizes the key operating results and financial position for each of our business segments, as well as a reconciliation used to arrive at our consolidated totals. We have reclassified all prior period amounts to conform to the current period’s presentation.

 

(Dollars in thousands)

   Global
Commercial
Banking
    Relationship
Management
    SVB
Capital
    Other
Business
Services
    Reconciling
Items
    Total  

Three months ended March 31, 2009

            

Net interest income (loss)

   $ 94,259     $ 8,887     $ (2 )   $ (26 )   $ (11,607 )   $ 91,511  

Provision for loan losses

     (42,815 )     (649 )     —         —         (2 )     (43,466 )

Noninterest income (loss)

     26,240       303       (2,358 )     1,597       (29,392 )     (3,610 )

Noninterest expense(1)

     (29,562 )     (3,649 )     (3,346 )     (7,026 )     (43,557 )     (87,140 )
                                                

(Loss) income before income tax expense(2)

   $ 48,122     $ 4,892     $ (5,706 )   $ (5,455 )   $ (84,558 )   $ (42,705 )
                                                

Total average loans, net of unearned income

   $ 4,114,099     $ 989,842     $ —       $ —       $ 12,311     $ 5,116,252  

Total average assets(3)

     4,199,044       991,605       400,862       76,295       4,788,601       10,456,407  

Total average deposits

     7,749,826       172,661       —         —         5,219       7,927,706  

Three months ended March 31, 2008

            

Net interest income (loss)

   $ 84,649     $ 7,408     $ 13     $ 34     $ (1,326 )   $ 90,778  

Provision for (recovery of) loan losses

     (8,149 )     455       —         —         (29 )     (7,723 )

Noninterest income (loss)

     33,657       409       2,079       (1,856 )     7,276       41,565  

Noninterest expense(1)

     (30,216 )     (4,136 )     (4,228 )     (2,285 )     (42,572 )     (83,437 )
                                                

Income (loss) before income tax expense(2)

   $ 79,941     $ 4,136     $ (2,136 )   $ (4,107 )   $ (36,651 )   $ 41,183  
                                                

Total average loans, net of unearned income

   $ 3,193,371     $ 834,921     $ —       $ —       $ 84,573     $ 4,112,865  

Total average assets(4)

     3,247,069       839,159       293,612       73,248       2,298,901       6,751,989  

Total average deposits

     4,282,395       160,692       —         —         (8,074 )     4,435,013  

 

(1) The Global Commercial Bank segment includes direct depreciation and amortization of $0.6 million and $0.7 million for the three months ended March 31, 2009 and 2008, respectively.
(2) The internal reporting model used by management to assess segment performance does not calculate income tax expense by segment.
(3) For the three months ended March 31, 2009, total average assets for SVB Capital and Other Business Services included $315.2 million and $2.1 million, respectively, attributable to noncontrolling interests.
(4) For the three months ended March 31, 2008, total average assets for SVB Capital and Other Business Services included $257.2 million and $6.5 million, respectively, attributable to noncontrolling interests.

12. Off-Balance Sheet Arrangements, Guarantees and Other Commitments

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 and commitments to invest in private equity fund investments. 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.

 

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Commitments to Extend Credit

The following table summarizes information related to our commitments to extend credit at March 31, 2009 and December 31, 2008, respectively:

 

(Dollars in thousands)

   March 31, 2009    December 31, 2008

Commitments available for funding: (1)

     

Fixed interest rate commitments

   $ 803,201    $ 689,063

Variable interest rate commitments

     4,269,403      4,941,423
             

Total commitments available for funding

   $ 5,072,604    $ 5,630,486
             

Commitments unavailable for funding (2)

   $ 1,232,678    $ 922,170

Maximum lending limits for accounts receivable factoring arrangements (3)

     462,355      476,329

Reserve for unfunded credit commitments

     12,418      14,698

 

(1) Represents commitments which are available for funding, due to clients meeting all collateral, compliance, and financial covenants under loan commitment agreements.
(2) Represents commitments which are not available for funding, due to clients failing to meet all collateral, compliance, and financial covenants under loan commitment agreements.
(3) We extend credit under accounts receivable factoring arrangements when our clients’ sales invoices are deemed creditworthy under existing underwriting practices.

As of December 31, 2008, we guaranteed credit cards for some of our customers that had been provided by an unaffiliated financial institution. The total amount of these guarantees at December 31, 2008 was $87.4 million. During the three months ended March 31, 2009, we purchased this credit card portfolio and began processing these credit cards in-house. The credit card commitments as of March 31, 2009 are included in the summary above within our commitments to extend credit.

Commercial and Standby Letters of Credit

The table below summarizes our commercial and standby letters of credit at March 31, 2009. 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

   $ 593,410    $ 45,552    $ 638,962    $ 638,962

Performance standby letters of credit

     21,444      9,208      30,652      30,652

Commercial letters of credit

     3,444      —        3,444      3,444
                           

Total

   $ 618,298    $ 54,760    $ 673,058    $ 673,058
                           

At both March 31, 2009 and December 31, 2008, deferred fees related to financial and performance standby letters of credit were $4.8 million. At March 31, 2009, collateral in the form of cash of $225.8 million and investment securities of $42.3 million were available to us to reimburse losses, if any, under financial and performance standby letters of credit.

 

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Commitments to Invest in Private Equity Funds

We make commitments to invest in venture capital and private equity funds, which in turn make investments generally in, or in some cases make loans to, privately held companies. Commitments to invest in these funds are generally made for a ten-year period from the inception of the fund. Although the limited partnership agreements governing these investments typically do not restrict the general partners from calling 100% of committed capital in one year, it is customary for these funds to generally call most of the capital commitments over 5 to 7 years. The actual timing of future cash requirements to fund such commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate. The following table details our total unfunded capital commitments as well as our ownership in each fund based on our total capital commitment at March 31, 2009:

 

Our Ownership in Limited Partnership (Dollars in thousands)

   Capital
Commitments
   Unfunded
Commitments
   Our Ownership
of each Fund
 

Silicon Valley BancVentures, LP

   $ 6,000    $ 270    10.7 %

SVB Capital Partners II, LP (1)

     1,200      546    5.1  

SVB Strategic Investors Fund, LP

     15,300      1,530    12.6  

SVB Strategic Investors Fund II, LP

     15,000      4,575    8.6  

SVB Strategic Investors Fund III, LP

     15,000      9,000    5.9  

SVB Strategic Investors Fund IV, LP

     12,239      11,505    5.0  

Partners for Growth, LP

     25,000      9,750    50.0  

Partners for Growth II, LP

     15,000      4,950    24.2  

Gold Hill Venture Lending 03, LP (2)

     20,000      —      9.3  

SVB India Capital Partners I, LP

     7,750      3,953    14.4  

Other Fund Investments (3)

     451,598      335,354    —    
                

Total

   $ 584,087    $ 381,433   
                

 

(1) Our ownership includes 1.3% direct ownership through SVB Capital Partners II, LLC and SVB Financial Group, and 3.8% indirect ownership through our investment in SVB Strategic Investors Fund II, LP.
(2) Our ownership includes 4.8% direct ownership and 4.5% indirect ownership interest through GHLLC.
(3) Represents commitments to 357 venture capital and private equity funds where our ownership interest is less than 5% of the voting stock of each such fund. Of the $335.4 million of unfunded commitments, approximately $290.1 million represents the remainder of the investment commitments made by SVB Financial on behalf of certain new managed funds of funds that we plan to form (“New Fund Commitments”). As of March 31, 2009, $42.7 million of the New Fund Commitments has already been funded and is included as a part of our investment securities portfolio in private equity investments (cost method accounting). The New Fund Commitments are intended to be transferred to, and become the financial obligations of, these new funds once they are formed with the binding commitments of outside investors. Upon formation of such funds and transfer of these investments to the new funds, these investments are typically accounted for under the investment company fair value basis and any underlying gains or losses are recognized in earnings according to the ownership interests of all participants in the fund, including SVB Financial.

13. Income Taxes

At March 31, 2009, the total amount of unrecognized tax benefits was $0.3 million, the recognition of which would reduce our income tax expense by $0.3 million. Total accrued interest and penalties at March 31, 2009 were $0.1 million. We expect that our unrecognized tax benefit will change in the next 12 months; however, we do not expect the change to have a material 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 2005 and subsequent years remain open to examination by the Internal Revenue Service. Our California and Massachusetts tax returns for the years 2004 and 2005, respectively, and subsequent years remain open to examination.

14. Fair Value of Financial Instruments

Our marketable investment securities, non-marketable investment securities and derivatives are financial instruments recorded at fair value on a recurring basis. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing our consolidated financial statements.

 

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The following fair value hierarchy tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2009, in accordance with SFAS No. 157, Fair Value Measurements (“SFAS No. 157”):

 

(Dollars in thousands)

   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
   Balance as of
March 31, 2009

Assets

           

Marketable securities:

           

Available-for-sale securities:

           

U.S. agencies and corporations:

           

Collateralized mortgage obligations

   $ —      $ 537,063    $ —      $ 537,063

Mortgage-backed securities

     —        452,805      —        452,805

U.S. agency debentures

     —        433,767      —        433,767

Commercial mortgage-backed securities

     —        46,817      —        46,817

Municipal bonds and notes

     —        105,434      —        105,434

Marketable equity securities

     446      —        —        446

Venture capital fund investments

     1      —        —        1
                           

Total available-for-sale securities

     447      1,575,886      —        1,576,333

Marketable securities (investment company fair value accounting)

     1,297      —        —        1,297
                           

Total marketable securities

     1,744      1,575,886      —        1,577,630
                           

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

           

Private equity fund investments

     —        —        218,366      218,366

Other private equity investments

     —        —        82,473      82,473

Other investments

     —        —        1,276      1,276
                           

Total non-marketable securities (investment company fair value accounting)

     —        —        302,115      302,115
                           

Other assets:

           

Interest rate swaps

     —        62,513      —        62,513

Foreign exchange forward contracts

     —        31,679      —        31,679

Equity warrant assets

        1,921      43,012      44,933
                           

Total assets (1)

   $ 1,744    $ 1,671,999    $ 345,127    $ 2,018,870
                           

Liabilities

           

Foreign exchange forward contracts

   $ —      $ 27,338    $ —      $ 27,338
                           

Total liabilities

   $ —      $ 27,338    $ —      $ 27,338
                           

 

(1) Included in Level 1 and Level 3 assets are $0.8 million and $275.4 million, respectively, attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.

 

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The following fair value hierarchy tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2008, in accordance with SFAS No. 157:

 

(Dollars in thousands)

   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
   Balance as of
December 31, 2008

Assets

           

Marketable securities:

           

Available-for-sale securities:

           

U.S. agencies and corporations:

           

Collateralized mortgage obligations

   $ —      $ 579,749    $ —      $ 579,749

Mortgage-backed securities

     —        467,450      —        467,450

U.S. agency debentures

     —        113,603      —        113,603

Commercial mortgage-backed securities

     —        47,481      —        47,481

Municipal bonds and notes

     —        108,755      —        108,755

Marketable equity securities

     152      —        —        152

Venture capital fund investments

     1      —        —        1
                           

Total available-for-sale securities

     153      1,317,038      —        1,317,191

Marketable securities (investment company fair value accounting)

     1,703      —        —        1,703
                           

Total marketable securities

     1,856      1,317,038      —        1,318,894
                           

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

           

Private equity fund investments

     —        —        242,645      242,645

Other private equity investments

     —        —        82,444      82,444

Other investments

     —        —        1,547      1,547
                           

Total non-marketable securities (investment company fair value accounting)

     —        —        326,636      326,636
                           

Other assets:

           

Interest rate swaps

     —        94,142      —        94,142

Foreign exchange forward contracts

     —        37,189      —        37,189

Equity warrant assets

     —        1,960      41,699      43,659
                           

Total assets (1)

   $ 1,856    $ 1,450,329    $ 368,335    $ 1,820,520
                           

Liabilities

           

Foreign exchange forward contracts

   $ —      $ 32,632    $ —      $ 32,632
                           

Total liabilities

   $ —      $ 32,632    $ —      $ 32,632
                           

 

(1) Included in Level 1 and Level 3 assets are $1.0 million and $297.4 million, respectively, attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.

 

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The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2009, and 2008:

 

          Total Realized and Unrealized Gains
(Losses) Included in Income
                       

(Dollars in thousands)

   Beginning
Balance
   Realized Gains
(Losses) Included
in Income
    Unrealized Gains
(Losses) Included
in Income
    Total Realized and
Unrealized Gains
(Losses) Included
in Income
    Purchases, Sales,
Other
Settlements and
Issuances, net
    Transfers In
and/or (Out)
of Level 3
    Ending
Balance

Three months ended March 31, 2009:

               

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

               

Private equity fund investments

   $ 242,645    $ 883     $ (31,079 )   $ (30,196 )   $ 5,917     $ —       $ 218,366

Other private equity investments

     82,444      (523 )     (5,009 )     (5,532 )     5,561       —         82,473

Other investments

     1,547      —         367       367       (638 )     —         1,276
                                                     

Total non-marketable securities (investment company fair value accounting) (1)

     326,636      360       (35,721 )     (35,361 )     10,840       —         302,115

Other assets:

               

Equity warrant assets (2)

     41,699      210       (401 )     (191 )     1,603       (99 )     43,012
                                                     

Total assets

   $ 368,335    $ 570     $ (36,122 )   $ (35,552 )   $ 12,443     $ (99 )   $ 345,127
                                                     

Three months ended March 31, 2008:

               

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

               

Private equity fund investments

   $ 194,862    $ 1,885     $ 898     $ 2,783     $ 13,716     $ —       $ 211,361

Other private equity investments

     44,872      548       (483 )     65       7,350       —         52,287

Other investments

     3,098      —         (301 )     (301 )     (146 )     —         2,651
                                                     

Total non-marketable securities (investment company fair value accounting) (1)

     242,832      2,433       114       2,547       20,920       —         266,299

Other assets:

               

Equity warrant assets (2)

     26,911      4,315       1,710       6,025       (2,293 )     (2 )     30,641
                                                     

Total assets

   $ 269,743    $ 6,748     $ 1,824     $ 8,572     $ 18,627     $ (2 )   $ 296,940
                                                     

 

(1) Realized and unrealized gains (losses) are recorded on the line item “losses on investment securities, net” a component of noninterest income.
(2) Realized and unrealized gains (losses) are recorded on the line item “gains on derivative instruments, net” a component of noninterest income.

The following table presents the amount of unrealized gains (losses) included in earnings for the three months ended March 31, 2009 attributable to Level 3 assets still held at March 31, 2009:

 

(Dollars in thousands)

   March 31, 2009  

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

  

Private equity fund investments

   $ (31,079 )

Other private equity investments

     (5,509 )

Other investments

     367  
        

Total non-marketable securities (investment company fair value accounting)

     (36,221 )

Other assets:

  

Equity warrant assets

     690  
        

Total unrealized losses

   $ (35,531 )
        

15. Legal Matters

Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us or our affiliates. Based upon information available to us, our review of such claims to date and consultation with our outside legal counsel, management believes the liability relating to these actions, if any, will not have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations. Where appropriate, as we determine, 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 operation.

 

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

Forward-Looking Statements; Reclassifications

This Quarterly Report on Form 10-Q, including in particular “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part 1, Item 2 of this report, 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 net interest income, noninterest income, earnings per share, noninterest expenses, including professional service, compliance, compensation and other costs, cash flows, balance sheet positions, capital expenditures, and capitalization or other financial items

 

   

Descriptions of strategic initiatives, plans or objectives of our management for future operations, including pending acquisitions

 

   

Forecasts of venture capital/private equity and investment funding levels

 

   

Forecasts of future interest rates, economic performance, and income on investments

 

   

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

 

   

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:

 

   

The likelihood that the market value of our impaired investments will recover

 

   

The extent to which counterparties to forward and option contracts will perform their obligations under such contracts

 

   

Formation of new managed funds and the transfer of investments to outside investors

 

   

The likelihood that our unrecognized tax benefit will change in the next 12 months

 

   

Sufficiency of our capital, including in the event of credit losses

 

   

Extent to which stronger capital ratios will attract higher levels of deposits

 

   

Likelihood that funds generated through retained earnings will continue to be a significant source of capital and liquidity

 

   

Expansion of operations in China, India, Israel, the United Kingdom and elsewhere

 

   

Economic conditions and associated impact on us

 

   

Extent to which our products and services will meet changing client needs

 

   

Payment of cash dividends on, or our repurchase of, our common stock

 

   

Adequacy of reserves and appropriateness of methodology for calculating our reserves

 

   

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

 

   

Realization, timing, valuation and performance of equity or other investments

 

   

Our liquidity position

 

   

Level of client investment fees

 

   

Growth in loan and deposit balances

 

   

Credit quality of our loan portfolio

 

   

Levels and trends of nonperforming loans

 

   

Activities for which capital will be used or required and use of excess capital

 

   

Financial impact of continued growth of our funds management business

 

   

Expansion and growth of our noninterest income sources

 

   

Profitability of our products and services

 

   

Venture capital and private equity funding and investment levels

 

   

Strategic initiatives

 

   

Effect of application of certain accounting pronouncements

 

   

Effect of lawsuits and claims

 

   

Changes in, or adequacy of, our unrecognized tax benefit and any associated impact

 

   

Cash requirements of unfunded commitments to certain investments

 

   

Financial impact of proposed transaction involving HRJ Capital

 

   

Performance by counterparties.

You can identify these and other forward-looking statements by the use of words such as “becoming”, “may”, “will”, “should”, “predicts”, “potential”, “continue”, “anticipates”, “believes”, “estimates”, “seeks”, “expects”, “plans”, “intends”, the negative of such

 

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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 of this report. 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, 2008 (“2008 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.

Management’s Overview of First Quarter 2009 Performance

Our clients were significantly affected by the continuing economic downturn in the first quarter of 2009. The worst economic environment in nearly 60 years led to continued declines in venture capital and private equity activity, continued pressure on valuations in our venture and private equity-related investments, higher-than-normal credit costs, lower demand for venture capital call lines of credit, and lower income from many of our fee-based products. In addition, the continued volatility and deterioration of the economy made it extremely challenging to anticipate the speed and severity of those events.

We recorded a net loss applicable to common stockholders for the three months ended March 31, 2009 of $10.5 million, or $0.32 per diluted common share. Despite these conditions, we continued to see strong deposit growth in the latter half of the fourth quarter of 2008 and during the first quarter of 2009 as a result of our deposit initiatives, as well as from the desire of some clients to benefit from the security provided by Federal Deposit Insurance Corporation (“FDIC”) insured deposits. Although the growth in deposits significantly increased our cash levels, we have deposited most of this excess cash with the Federal Reserve, earning interest at the Federal Funds target rate. While liquidity will remain a priority, we expect to invest a more significant portion of the excess cash from deposits into investment securities through the remainder of 2009 at higher yields.

Highlights of our first quarter 2009 financial results (compared to the first quarter of 2008) included the following:

 

   

Provision for loan losses of $43.5 million, of which $32.3 million related to two loans in our hardware industry portfolio, with the remainder primarily from certain loans to early stage companies.

 

   

Net losses on investment securities of $35.0 million due to lower valuations of our venture capital/private equity investments as a result of the continuing effects of the downturn in the overall economy. Net of noncontrolling interests (formerly referred to as minority interests), our net loss was $4.6 million.

 

   

Growth of $3.5 billion in average deposit balances to $7.9 billion, which decreased our average loan-to-deposit ratio to 64.5 percent for the first quarter of 2009.

 

   

Growth of $1.0 billion in average loans to $5.1 billion coming from all client industry segments, with particularly strong growth in loans to software clients and hardware clients.

 

   

A decrease in our net interest margin from 6.27 percent to 3.97 percent, primarily due to the current low interest rate environment, as well as from a significant increase in our cash as a result of the growth in interest-bearing deposits, which were primarily deposited in overnight funds with the Federal Reserve.

 

   

A non-tax deductible goodwill impairment charge of $4.1 million resulting from changes in our outlook for future financial performance of eProsper, our data management services company.

The discussions below under our results of operations provide more information on our first quarter 2009 performance.

 

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The key highlights of our performance for the three months ended March 31, 2009 and 2008, respectively, were as follows:

 

     Three months ended March 31,  

(Dollars in thousands, except per share data and ratios)

   2009     2008     Change  

Average loans, net of unearned income

   $ 5,116,252     $ 4,112,865     24.4 %

Average noninterest-bearing deposits

     4,636,553       2,899,599     59.9  

Average interest-bearing deposits

     3,291,153       1,535,414     114.3  

Average total deposits

     7,927,706       4,435,013     78.8  

Diluted (loss) earnings per share (1)

   $ (0.32 )   $ 0.78     (141.0 )%

Net (loss) income attributable to SVBFG (1)

     (7,010 )     27,118     (125.8 )

Net (loss) income available to common stockholders (1)

     (10,546 )     27,118     (138.9 )

Net interest income (1)

     91,511       90,778     0.8  

Net interest margin (1)

     3.97 %     6.27 %   (230 ) bps

Average SVB prime lending rate

     4.00       6.26     (226 ) bps

Allowance for loan losses as a percentage of total gross loans

     2.18       1.13     105  bps

Provision for loan losses

   $ 43,466     $ 7,723     NM %

Gross loan charge-offs as a percentage of average total gross loans (annualized)

     3.30 %     0.60 %   270  bps

Net loan charge-offs as a percentage of average total gross loans (annualized)

     3.21       0.52     269  bps

Noninterest (loss) income (2)

   $ (3,610 )   $ 41,565     (108.7 )%

Noninterest expense (3)

     87,140       83,437     4.4  

Return on average common SVBFG stockholders’ equity (annualized) (1)(4)

     (5.44 )%     15.86 %   (134.3 )

Return on average assets (annualized) (1)(5)

     (0.27 )     1.62     (116.7 )

Tangible common equity to tangible assets (6)

     7.03       9.76     (28.0 )

Tangible common equity to risk-weighted assets

     10.22       9.94     2.8  

Book value per common share (7)

     23.39       21.18     10.4  

Operating efficiency ratio (1)(8)

     98.49 %     62.81 %   56.8  

Period end full-time equivalent employees

     1,262       1,190     6.1  

Non-GAAP measures:

      

Non-GAAP operating efficiency ratio (1)(9)

     70.33 %     60.07 %   17.1 %

Non-GAAP noninterest income, net of noncontrolling interest (10)

   $ 26,982     $ 43,281     (37.7 )

Non-GAAP noninterest expense, net of noncontrolling interest (10)

     83,753       80,678     3.8  

 

NM- Not meaningful

(1) Balances and ratios for all periods presented reflect our adoption of FSP APB No. 14. Refer to “Critical Accounting Policies and Estimates – Impact of Adopting FSP APB No. 14-1” and “Note 1- “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for further details. Amounts for the three months ended March 31, 2008 have been retrospectively adjusted.
(2) Noninterest (loss) income included net losses of $31.9 million and $1.0 million attributable to noncontrolling interests for the three months ended March 31, 2009 and 2008, respectively. See “Results of Operations – Noninterest (Loss) Income” for a description of noninterest income attributable to noncontrolling interests.
(3) Noninterest expense included $3.4 million and $2.8 million attributable to noncontrolling interests for the three months ended March 31, 2009 and 2008, respectively. See “Results of Operations – Noninterest (Loss) Income” for a description of noninterest expense attributable to noncontrolling interests.
(4) Ratio represents annualized consolidated net (loss) income available to common stockholders divided by quarterly average SVB Financial Group (“SVBFG”) stockholders’ equity (excluding preferred equity).
(5) Ratio represents annualized consolidated net (loss) income attributable to SVBFG divided by quarterly average assets.
(6) Tangible common equity consists of SVB Financial Group (“SVBFG”) stockholders’ equity (excluding preferred equity and unrealized gains and losses from our fixed income investments) less acquired intangibles and goodwill. Tangible assets represent total assets (excluding unrealized gains and losses from our fixed income investments) less acquired intangibles and goodwill.
(7) Book value per common share is calculated by dividing total SVBFG stockholders’ equity (excluding preferred equity) by total outstanding common shares.
(8) The operating efficiency ratio is calculated by dividing noninterest expense by total taxable-equivalent income. Noninterest expense included $3.4 million and $2.8 million attributable to noncontrolling interests for the three months ended March 31, 2009 and 2008, respectively.

 

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(9) The non-GAAP operating efficiency ratio is calculated by dividing noninterest expense (excluding the portion of noninterest expense attributable to noncontrolling interests of $3.4 million and $2.8 million for the three months ended March 31, 2009 and 2008, respectively) by total taxable-equivalent income (excluding taxable-equivalent losses attributable to noncontrolling interests of $30.6 million and $1.5 million for the three months ended March 31, 2009 and 2008, respectively).
(10) See “Results of Operations – Noninterest (Loss) Income” for a description of noninterest income and noninterest expense that is attributable to noncontrolling interests.

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 accounting principles generally accepted in the United States of America (“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, expenses and related disclosure of contingent assets and liabilities. Management evaluates estimates on an ongoing basis. Management bases its estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

There have been no significant changes during the three months ended March 31, 2009 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 2008 Form 10-K.

Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Our marketable investment securities, non-marketable investment securities and derivatives are financial instruments recorded at fair value on a recurring basis. For a detailed description of our method, critical estimates and approach for fair value measurements of assets and liabilities, refer to our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of our 2008 Form 10-K.

At March 31, 2009, approximately 18.4 percent of our total assets, or $2.0 billion, consisted of financial assets recorded at fair value on a recurring basis. Of these assets, 82.9 percent used valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements, to measure fair value, and 17.1 percent of these financial assets were measured using model-based techniques, or Level 3 measurements. Almost all of our financial assets valued using Level 3 measurements at March 31, 2009 represented non-marketable securities. At March 31, 2009, 0.3 percent of total liabilities, or $27.3 million, consisted of financial liabilities recorded at fair value on a recurring basis, which were valued using market-observable inputs. There were no material transfers in or out of Level 3 during the three months ended March 31, 2009. Our valuation processes include a number of key controls that are designed to ensure that fair value is calculated appropriately. Such controls include a model validation policy requiring that models that provide values used in financial statements be validated by qualified personnel and escalation procedures to ensure that valuations using unverifiable inputs are identified and monitored on a regular basis by senior management.

As of March 31, 2009, our available-for-sale investment portfolio, consisting primarily of U.S. agency debentures, investment grade mortgage securities and municipal bonds and notes, represented $1.6 billion, or 78.1 percent of our portfolio of assets measured at fair value on a recurring basis. These instruments were classified as Level 2 because their valuations were based on indicator prices corroborated by observable market quotes or pricing models with all significant inputs derived from or corroborated by observable market data. Since our available-for-sale fixed-income investment securities portfolio consisted primarily of fixed rate securities, the fair value of the portfolio is sensitive to changes in levels of market interest rates and market perceptions of credit quality of the underlying securities. Market valuations and impairment analyses on assets in the fixed-income investment portfolio are reviewed and monitored on an ongoing basis.

To the extent available-for-sale investment securities are used to secure borrowings, changes in the fair value of those securities could have an impact on the total amount of secured financing available. We 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 Mach 31, 2009 totaled $644.4 million, of which $542.4 million was available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank in accordance with our risk management practices at March 31, 2009 totaled $84.8 million, all of which was unused. We have repurchase agreements in place with multiple securities dealers, which allow us to access short-term borrowings by using fixed income securities as collateral. At March 31, 2009, we had not borrowed against our repurchase lines.

Financial assets valued using Level 3 measurements consist primarily of our investments in venture capital and private equity funds, direct equity investments in privately held companies and certain investments made by our consolidated sponsored debt fund. These funds are investment companies under the AICPA Audit and Accounting Guide for Investment Companies and accordingly,

 

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these funds report their investments at estimated fair value, with unrealized gains and losses resulting from changes in fair value reflected as investment gains or losses in our consolidated statements of income. Assets valued using Level 3 measurements also include equity warrant assets in shares of private company capital stock.

During the three months ended March 31, 2009, the Level 3 assets that are measured at fair value on a recurring basis experienced net unrealized fair value decreases totaling $36.1 million primarily due to lower valuations in underlying fund investments in our private equity funds. Realized gains related to the Level 3 assets for the three months ended March 31, 2009 of $0.6 million related primarily to gains from distributions from private equity funds.

The valuation of nonmarketable securities and equity warrant assets in shares of private company capital stock is subject to management judgment. The inherent uncertainty in the process of valuing securities for which a ready market does not exist may cause our estimated values of these securities to differ significantly from the values that would have been derived had a ready market for the securities existed, and those differences could be material. The timing and amount of changes in fair value, if any, of these financial instruments depend upon factors beyond our control, including the performance of the underlying companies, fluctuations in the market prices of the preferred or common stock of the underlying companies, general volatility and interest rate market factors, and legal and contractual restrictions. The timing and amount of actual net proceeds, if any, from the disposition of these financial instruments depend upon factors beyond our control, including investor demand for initial public offerings, levels of merger and acquisition activity, legal and contractual restrictions on our ability to sell, and the perceived and actual performance of portfolio companies. All of these factors are difficult to predict.

Recent Accounting Pronouncements

Please refer to Note 1-“Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.

Impact of Adopting FSP APB No. 14-1

Effective January 1, 2009, we adopted the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Accounting Principles Board (“APB”) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB No. 14-1”). For further details, please refer to Note 1-”Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.

As a result of adopting the requirements of FSP APB No. 14-1, our net loss applicable to common stockholders for the three months ended March 31, 2009 increased by $0.3 million. Total SVBFG stockholders’ equity, based on cumulative adjustments beginning January 1, 2007 through March 31, 2009 increased by $4.9 million. The following table highlights certain revised items related to the adoption of FSP APB No. 14-1 in our overall unaudited consolidated statements of income and balance sheets for the quarters ended March 31, 2009, December 31, 2008, and March 31, 2008.

 

     Three months ended  
     March 31, 2009     December 31, 2008     March 31, 2008  

(Dollars in thousands, except per share amounts)

   As reported     As adjusted
(1/1/2009)
    As reported in
prior filings
    As adjusted
(1/1/2009)
    As reported in
prior filings
 

INCOME STATEMENT

          

Interest expense - borrowings

   $ 8,181     $ 10,219     $ 9,694     $ 12,536     $ 11,233  

Income tax (benefit) expense

     (1,702 )     2,111       2,319       18,283       18,801  

Net (loss) income attributable to SVBFG

     (7,010 )     2,105       2,422       27,118       27,903  

Net (loss) income available to common stockholders

     (10,546 )     1,398       1,715       27,118       27,903  

(Loss) earnings per common share — diluted

     (0.32 )     0.04       0.05       0.78       0.81  

FULLY TAXABLE EQUIVALENT

          

Net interest income (fully taxable equivalent basis)

   $ 92,083     $ 97,024     $ 97,549     $ 91,283     $ 92,586  

Net interest margin

     3.97 %     5.39 %     5.42 %     6.27 %     6.36 %

BALANCE SHEET

          

Total assets

   $ 10,958,768     $ 10,020,808     $ 10,020,892     $ 6,897,285     $ 6,897,303  

Long-term debt

     964,175       995,423       1,000,640       892,516       893,189  

Additional paid-in capital

     71,761       66,201       45,872       13,975       —    

Retained earnings

     701,708       712,254       727,450       664,085       678,078  

Results of Operations

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

Net interest income is defined as the difference between interest earned on loans, investment securities, federal funds sold, securities purchased under agreements to resell and other short-term investment securities, and interest paid on funding sources

 

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including deposits and borrowings. 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 increased by $0.8 million to $92.1 million for the three months ended March 31, 2009, compared to $91.3 million for the comparable 2008 period. The increase in net interest income was primarily the result of an increase in average balances of our interest-earning assets and a decrease in the cost of our total funding sources, partially offset by a decrease in yields earned on interest-earning assets.

The main factors affecting interest income and interest expense for the three months ended March 31, 2009, compared to the comparable 2008 period are discussed below:

 

   

Interest income for the three months ended March 31, 2009 decreased by $2.0 million primarily due to:

 

  ¡  

A $1.5 million decrease in interest income on loans driven principally by a 178 basis point decrease in loan yields due primarily to decreases totaling 325 basis points in our prime-lending rate during 2008, in response to certain Federal Fund rate decreases. Our average prime-lending rate was 4.00 percent for the three months ended March 31, 2009, compared to 6.26 percent for the comparable 2008 period. The impact of lower loan yields was partially offset by an increase of $1.0 billion in average loan balances for the three months ended March 31, 2009, compared to the comparable 2008 period. This growth was driven primarily by increased loan growth from all client industry segments, with particularly strong growth in loans to software clients and hardware clients.

 

  ¡  

A $1.7 million decrease in interest income on short-term investments primarily due to the decreases in the Federal Funds rates from March 31, 2008 to March 31, 2009, partially offset by an increase in average balances as a result of the growth in our deposits.

These decreases were partially offset by an increase of $1.3 million in interest income on interest-earning investment securities, primarily due to purchases of U.S. agency securities and mortgage-backed securities as part of our overall investment strategy resulting from the growth in our deposit balances.

 

   

Interest expense for the three months ended March 31, 2009 decreased by $2.8 million primarily due to:

 

  ¡  

A decrease in interest expense of $2.6 million from long-term debt, primarily due to lower London Interbank Offered Rates (“LIBOR”) associated with interest rate swap agreements on the senior and subordinated notes. This decrease in rates was partially offset by an increase in average balances due to the issuance of $250 million in 3.875% convertible senior notes (“2008 Convertible Notes”) in April 2008. The proceeds from the issuance of the 2008 Convertible Notes were used primarily to settle the conversion of our zero-coupon convertible subordinated notes (“2003 Convertible Notes”), which matured in June 2008, and for other general corporate purposes.

 

  ¡  

A decrease in interest expense from short-term borrowings of $1.8 million, primarily due to declining short-term market interest rates, as well as a decrease in average balances of short-term borrowings. Average short-term borrowings decreased by $187.9 million to $47.0 million for the three months ended March 31, 2009, compared to $234.9 million for the comparable 2008 period due to growth in deposit balances.

These decreases were partially offset by an increase in interest expense of $1.6 million from interest-bearing deposits, primarily due to a $1.8 billion increase in average interest-bearing deposits. This increase was driven by growth from all our interest-bearing deposit products, with particularly strong growth from our sweep deposit product, which we introduced in late 2007 to provide funding for our loan growth. This increase was partially offset by a decrease in deposit rates due to declining market rates.

 

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Analysis 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