SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 08/07/2009 17:13:08)
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 June 30, 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 July 31, 2009, 33,172,636 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page

PART I - FINANCIAL INFORMATION

   3
ITEM 1.    INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)    3
   INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF JUNE 30, 2009 AND DECEMBER 31, 2008    3
   INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008    4
   INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008    5
   INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008    6
   INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 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    33
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    63
ITEM 4.    CONTROLS AND PROCEDURES    64
PART II - OTHER INFORMATION    64
ITEM 1.    LEGAL PROCEEDINGS    64
ITEM 1A.    RISK FACTORS    65
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    73
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES    73
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    73
ITEM 5.    OTHER INFORMATION    74
ITEM 6.    EXHIBITS    74
SIGNATURE    75
INDEX TO EXHIBITS    76


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)    June 30,
2009
    December 31,
2008 *
 

Assets

    

Cash and due from banks

   $ 3,246,560      $ 1,789,311   

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

     462,810        647,414   

Investment securities

     2,638,380        1,786,100   

Loans, net of unearned income

     4,844,253        5,506,253   

Allowance for loan losses

     (110,473     (107,396
                

Net loans

     4,733,780        5,398,857   
                

Premises and equipment, net of accumulated depreciation and amortization

     30,196        30,589   

Goodwill

     —          4,092   

Accrued interest receivable and other assets

     354,161        361,917   
                

Total assets

   $ 11,465,887      $ 10,018,280   
                

Liabilities and total equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 5,551,226      $ 4,419,965   

Negotiable order of withdrawal (NOW)

     31,719        58,133   

Money market

     1,178,716        1,213,086   

Foreign money market

     29,832        53,123   

Time

     356,781        379,200   

Sweep

     1,846,309        1,349,965   
                

Total deposits

     8,994,583        7,473,472   
                

Short-term borrowings

     31,340        62,120   

Other liabilities

     205,113        175,553   

Long-term debt

     909,641        995,423   
                

Total liabilities

     10,140,677        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

     222,391        221,185   

Common stock, $0.001 par value, 150,000,000 shares authorized; 33,142,568 and 32,917,007 shares outstanding, respectively

     33        33   

Additional paid-in capital

     86,478        66,201   

Retained earnings

     705,847        709,726   

Accumulated other comprehensive income (loss)

     4,470        (5,789
                

Total SVBFG stockholders’ equity

     1,019,219        991,356   

Noncontrolling interests

     305,991        320,356   
                

Total equity

     1,325,210        1,311,712   
                

Total liabilities and total equity

   $ 11,465,887      $ 10,018,280   
                

 

* Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- “Basis of Presentation” for more details. Amounts for December 31, 2008 have been revised.

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 INCOME (LOSS) (UNAUDITED)

 

     Three months ended June 30,    Six months ended June 30,  
(Dollars in thousands, except per share amounts)    2009      2008 *    2009      2008 *  

Interest income:

           

Loans

   $ 84,248       $ 84,515    $ 172,499       $ 174,274   

Investment securities:

           

Taxable

     16,794         14,586      31,645         28,356   

Non-taxable

     1,029         1,078      2,090         2,015   

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

     2,485         3,684      4,861         7,801   
                                 

Total interest income

     104,556         103,863      211,095         212,446   
                                 

Interest expense:

           

Deposits

     5,605         5,372      12,452         10,641   

Borrowings

     7,270         11,695      15,451         24,231   
                                 

Total interest expense

     12,875         17,067      27,903         34,872   
                                 

Net interest income

     91,681         86,796      183,192         177,574   

Provision for loan losses

     21,393         8,351      64,859         16,074   
                                 

Net interest income after provision for loan losses

     70,288         78,445      118,333         161,500   
                                 

Noninterest income:

           

Foreign exchange fees

     7,617         7,961      15,083         15,805   

Deposit service charges

     6,590         6,056      13,413         11,947   

Client investment fees

     5,580         13,648      11,828         27,370   

Letters of credit and standby letters of credit income

     2,329         3,142      5,221         6,088   

Credit card fees

     2,957         1,502      4,396         3,202   

Corporate finance fees

     —           —        —           3,640   

(Losses) gains on derivative instruments, net

     (2,847      4,408      (1,033      7,007   

(Losses) gains on investment securities, net

     (6,750      2,039      (41,795      (4,073

Other

     12,799         5,759      15,581         15,281   
                                 

Total noninterest income

     28,275         44,515      22,694         86,267   
                                 

Noninterest expense:

           

Compensation and benefits

     46,894         50,059      95,174         103,840   

Professional services

     11,258         9,132      23,338         17,933   

FDIC assessments

     8,589         700      11,264         1,136   

Premises and equipment

     5,473         5,455      10,880         10,643   

Net occupancy

     4,836         4,342      9,141         8,690   

Business development and travel

     3,152         3,764      6,425         7,186   

Impairment of goodwill

     —           —        4,092         —     

Correspondent bank fees

     1,963         1,816      3,876         3,322   

Loss from cash settlement of conversion premium of zero-coupon convertible subordinated notes

     —           3,858      —           3,858   

(Reduction of) provision for unfunded credit commitments

     (1,147      800      (3,431      635   

Other

     7,994         7,263      15,393         13,383   
                                 

Total noninterest expense

     89,012         87,189      176,152         170,626   
                                 

Income (loss) before income tax expense

     9,551         35,771      (35,125      77,141   

Income tax expense

     7,174         16,291      4,726         34,639   
                                 

Net income (loss) before noncontrolling interests

     2,377         19,480      (39,851      42,502   

Net loss attributable to noncontrolling interests

     8,961         1,534      42,954         5,752   
                                 

Net income attributable to SVBFG

   $ 11,338       $ 21,014    $ 3,103       $ 48,254   
                                 

Preferred stock dividend and discount accretion

     (3,545      —        (7,081      —     
                                 

Net income (loss) available to common stockholders

   $ 7,793       $ 21,014    $ (3,978    $ 48,254   
                                 

Earnings (loss) per common share—basic

   $ 0.24       $ 0.66    $ (0.12    $ 1.50   

Earnings (loss) per common share—diluted

     0.24         0.61      (0.12      1.40   

 

* Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- “Basis of Presentation” for more details. Amounts for the three and six months ended June 30, 2008 have been revised.

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 INCOME (LOSS) (UNAUDITED)

 

     Three months ended June 30,      Six months ended June 30,  
(Dollars in thousands)    2009      2008 *      2009      2008 *  

Net income (loss) before noncontrolling interests

   $ 2,377       $ 19,480       $ (39,851    $ 42,502   

Other comprehensive income (loss), net of tax:

           

Cumulative translation gains (losses):

           

Foreign currency translation gains (losses)

     889         (606      (542      (704

Related tax (expense) benefit

     (153      249         212         288   

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

           

Unrealized holding gains (losses)

     11,591         (18,020      17,859         (13,064

Related tax (expense) benefit

     (4,719      7,393         (7,290      5,348   

Reclassification adjustment for realized gains included in net income (loss)

     41         515         34         1,336   

Related tax (expense) benefit

     (17      (211      (14      (548
                                   

Other comprehensive income (loss), net of tax

     7,632         (10,680      10,259         (7,344
                                   

Comprehensive income (loss)

     10,009         8,800         (29,592      35,158   

Net loss attributable to noncontrolling interests

     8,961         1,534         42,954         5,752   
                                   

Comprehensive income attributable to SVBFG

   $ 18,970       $ 10,334       $ 13,362       $ 40,910   
                                   

 

* Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- “Basis of Presentation” for more details. Amounts for the three and six months ended June 30, 2008 have been revised.

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

    Retained     Accumulated
Other
Comprehensive
    Total SVBFG
Stockholders’
    Noncontrolling        
(Dollars in thousands)   Shares     Amount      Shares     Amount     Capital     Earnings     (Loss) Income     Equity     Interests     Total Equity  

Balance at December 31, 2007 *

  —        $ —         32,670,557      $ 33      $ 13,167      $ 669,459      $ (6,290   $ 676,369      $ 240,102      $ 916,471   
                                                                            

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

  —          —         586,438        —          15,890        —          —          15,890        —          15,890   

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

  —          —         —          —          3,370        —          —          3,370        —          3,370   

Net income (loss)

  —          —         —          —          —          48,254        —          48,254        (5,752     42,502   

Capital calls and (distributions), net

  —          —         —          —          —          —          —          —          57,025        57,025   

Net change in unrealized losses on available-for-sale investment securities, net of tax

  —          —         —          —          —          —          (6,928     (6,928     —          (6,928

Foreign currency translation adjustments, net of tax

  —          —         —          —          —          —          (416     (416     —          (416

Proceeds from cash exercise of call option on zero-coupon convertible subordinated notes

  —          —         —          —          3,858        —          —          3,858        —          3,858   

Net cost of convertible note hedge and warrant agreement related to our 3.875% convertible senior notes

  —          —         —          —          (20,550     —          —          (20,550     —          (20,550

Income tax benefit from original issue discount related to our zero-coupon convertible subordinated notes and 3.875% convertible senior notes

  —          —         —          —          9,402        —          —          9,402        —          9,402   

Common stock repurchases

  —          —         (1,004,628     (1     (12,322     (33,294     —          (45,617     —          (45,617

Stock-based compensation expense under SFAS 123(R)

  —          —         —          —          7,397        —          —          7,397        —          7,397   

Other-net

  —          —         —          —          542        (15     —          527        —          527   
                                                                            

Balance at June 30, 2008 *

  —        $ —         32,252,367      $ 32      $ 20,754      $ 684,404      $ (13,634   $ 691,556      $ 291,375      $ 982,931   
                                                                            

Balance at December 31, 2008 *

  235,000      $ 221,185       32,917,007      $ 33      $ 66,201      $ 709,726      $ (5,789   $ 991,356      $ 320,356      $ 1,311,712   
                                                                            

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

  —          —         225,561        —          2,654        —          —          2,654        —          2,654   

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

  —          —         —          —          (1,369     —          —          (1,369     —          (1,369

Net income (loss)

  —          —         —          —          —          3,103        —          3,103        (42,954     (39,851

Capital calls and (distributions), net

  —          —         —          —          —          —          —          —          28,589        28,589   

Net change in unrealized gains on available-for-sale investment securities, net of tax

  —          —         —          —          —          —          10,589        10,589        —          10,589   

Foreign currency translation adjustments, net of tax

  —          —         —          —          —          —          (330     (330     —          (330

Income tax benefit from original issue discount related to our 3.875% convertible senior notes

  —          —         —          —          10,739        —          —          10,739        —          10,739   

Stock-based compensation expense under SFAS 123(R)

  —          —         —          —          7,758        —          —          7,758        —          7,758   

Preferred stock dividend and discount accretion

  —          1,206       —          —          —          (7,081     —          (5,875     —          (5,875

Other-net

  —          —         —          —          495        99        —          594        —          594   
                                                                            

Balance at June 30, 2009

  235,000      $ 222,391       33,142,568      $ 33      $ 86,478      $ 705,847      $ 4,470      $ 1,019,219      $ 305,991      $ 1,325,210   
                                                                            

 

* Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- “Basis of Presentation” for more details. Amounts for December 31, 2007, June 30, 2008, and December 31, 2008 have been revised.

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)

 

     Six months ended June 30,  
(Dollars in thousands)        2009             2008 *      

Cash flows from operating activities:

    

Net (loss) income before noncontrolling interests

   $ (39,851   $ 42,502   

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

    

Impairment of goodwill

     4,092        —     

Loss from cash settlement of conversion premium of zero-coupon convertible subordinated notes

     —          3,858   

Provision for loan losses

     64,859        16,074   

(Reduction of) provision for unfunded credit commitments

     (3,431     635   

Changes in fair values of derivatives, net

     1,449        471   

Losses on investment securities, net

     41,795        4,073   

Depreciation and amortization

     15,370        14,784   

Tax benefit of original issue discount

     10,745        1,567   

Tax (expense) benefit of share-based compensation and other

     (1,436     1,584   

Amortization of share-based compensation

     7,743        7,470   

Amortization of deferred warrant-related loan fees

     (4,375     (3,944

Deferred income tax (benefit) expense

     (6,647     10,824   

Losses on sale of and valuation adjustments to other real estate owned property

     107        296   

Changes in other assets and liabilities:

    

Accrued interest, net

     (4,021     (2,507

Accounts receivable

     (3,840     (686

Income tax receivable, net

     (24,458     (8,681

Accrued compensation

     (11,003     (30,864

Foreign exchange spot contracts, net

     33,914        (423

Other, net

     5,076        (9,184
                

Net cash provided by operating activities

     86,088        47,849   
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (1,071,073     (282,175

Proceeds from sales of available-for-sale securities

     189        2,915   

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

     244,141        134,144   

Purchases of nonmarketable securities (cost and equity method accounting)

     (30,168     (22,161

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

     2,120        3,554   

Proceeds from nonmarketable securities (cost and equity method accounting)

     —          889   

Purchases of nonmarketable securities (investment fair value accounting)

     (31,067     (56,048

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

     5,307        19,976   

Net decrease (increase) in loans

     597,309        (498,096

Proceeds from recoveries of charged-off loans

     2,129        4,827   

Proceeds from sale of other real estate owned

     693        —     

Purchases of premises and equipment

     (6,811     (4,188
                

Net cash used for investing activities

     (287,231     (696,363
                

Cash flows from financing activities:

    

Net increase in deposits

     1,521,111        252,377   

Repayments of other long-term debt

     (50,885     (543

Proceeds from issuance of long-term debt

     8,032        —     

(Decrease) increase in short-term borrowings

     (30,780     240,000   

Net payments for settlement of zero-coupon convertible subordinated notes

     —          (149,732

Proceeds from the issuance of 3.875% convertible senior notes, note hedge and warrant, net of issuance costs

     —          222,686   

Capital contributions from noncontrolling interests, net of distributions

     28,589        57,025   

Stock compensation related tax benefits

     61        2,034   

Dividends paid on preferred stock

     (4,994     —     

Proceeds from issuance of common stock and Employee Stock Purchase Plan

     2,654        15,890   

Repurchases of common stock

     —          (45,617
                

Net cash provided by financing activities

     1,473,788        594,120   
                

Net increase (decrease) in cash and cash equivalents

     1,272,645        (54,394

Cash and cash equivalents at beginning of period

     2,436,725        683,174   
                

Cash and cash equivalents at end of period

   $ 3,709,370      $ 628,780   
                

Supplemental disclosures:

    

Cash paid during the period for:

    

Interest paid

   $ 28,569      $ 33,978   

Income taxes paid

     27,312        28,540   

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

     764        462   

Unrealized gains (losses) on available-for-sale securities

     10,569        (7,716

Net change in fair value of interest rate swaps

     (44,403     781   

 

* Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- “Basis of Presentation” for more details. Amounts for the six months ended June 30, 2008 have been revised.

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. 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 use or refer to “SVB Financial Group,” “SVBFG”, the “Company,” “we,” “our,” “us” or other 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 use or refer to “SVB Financial” 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 and six months ended June 30, 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, and with the accounting pronouncements adopted during the six months ended June 30, 2009, as discussed below.

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 six months ended June 30, 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 Financial Accounting Standards Board (“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) in our financial statements 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

 

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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.

Impact of Adopting FSP APB No. 14-1

In May 2008, the 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 retrospectively 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 income (loss) available to common stockholders for the three and six months ended June 30, 2009 decreased by $0.3 million and $0.6 million, respectively. Details of certain items revised in prior periods related to the adoption of FSP APB No. 14-1 are provided below under the section “Changes to Prior Period Balances”.

Impact of Adopting FSP SFAS No. 157-4

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 No. 157-4 also provides guidance on identifying circumstances that may indicate that a transaction is not orderly. Our adoption of FSP No. 157-4 on April 1, 2009 did not have a material effect on our financial position, results of operations or stockholders’ equity.

Impact of Adopting FSP SFAS No. 115-2 and SFAS No. 124-2

In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 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. Our adoption of FSP No. 115-2 and SFAS No. 124-2 on April 1, 2009 did not have a material effect on our financial position, results of operations or stockholders’ equity, but required us to update our significant accounting policy for available-for-sale debt securities, to include the specific requirements of FSP No. 115-2 and SFAS No. 124-2. Specifically within our accounting policy for available-for-sale debt securities, we have updated the policy for assessing and evaluating OTTI, to include the following: (a) an assertion of whether we have the intent to sell the impaired debt security or will more likely than not be required to sell the debt security prior to its anticipated recovery, (b) in the event that we do not expect to recover the security’s entire amortized cost, we will recognize in earnings the portion of OTTI related to credit losses, with the remainder recognized in other comprehensive income.

Impact of Adopting FSP SFAS No. 107-1 and APB No. 28-1

In April 2009, the FASB issued FSP SFAS 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. Our adoption of FSP No. 107-1 and APB No. 28-1 on April 1, 2009 required us to expand our interim disclosures of all financial instruments and had no effect on our financial position, results of operations or stockholders’ equity. Please refer to Note 14- “Fair Value of Financial Instruments” for further details.

Impact of Adopting SFAS No. 165

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Our adoption of SFAS No. 165 on July 1, 2009 required us to disclose the date through which we have evaluated subsequent events had no effect on our results of operations or stockholders’ equity.

Correction of an Immaterial Error

During the second quarter of 2009, we determined that we had incorrectly recognized certain gains and losses on foreign exchange contracts in prior periods. The cumulative pre-tax effect of the error was $6.2 million, or $3.8 million after-tax and is considered to be immaterial to the prior periods. However, since the cumulative impact of correcting this error would be material to

 

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the results of the quarter ended June 30, 2009, we applied the guidance of Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). This guidance requires that prior financial statements be corrected, even though such revisions were, and continue to be, immaterial to the prior period financial statements. As such, the affected prior period results have been revised as follows: For the three months ended March 31, 2009, net loss increased by $1.2 million, or $0.04 per diluted common share; for the year ended December 31, 2008, net income was reduced by $2.3 million, or $0.07 per diluted common share; and for the year ended December 31, 2007, net income was reduced by $0.2 million, or $0.01 per diluted common share. Details of the revisions are provided under the section “Changes to Prior Period Balances”.

Changes to Prior Period Balances

The table below highlights certain items revised in prior periods related to the revision of certain immaterial gains and losses on foreign exchange contracts that were incorrectly recorded in prior periods and to the adoption of FSP APB No. 14-1:

 

     Three months ended     Year ended  

(Dollars in thousands, except per
share amounts)

   March 31, 2009     December 31, 2008     September 30, 2008     June 30, 2008     March 31, 2008     December 31, 2007  

AS REVISED

            

Income Statement

            

Interest expense — borrowings

   $ 8,181      $ 10,219      $ 12,517      $ 11,695      $ 12,536      $ 54,259   

Other noninterest income

     2,782        1,858        1,913        5,759        9,522        26,096   

Income tax expense (benefit)

     (2,448     863        16,711        16,291        18,348        84,581   

Net income (loss) attributable to SVBFG

     (8,235     114        25,918        21,014        27,240        120,329   

Net income (loss) available to common stockholders

     (11,771     (593     25,918        21,014        27,240        120,329   

Earnings (loss) per common share — diluted

     (0.36     (0.02     0.77        0.61        0.79        3.28   

Fully Taxable Equivalent

            

Net interest income (fully taxable equivalent basis)

   $ 92,083      $ 97,024      $ 95,206      $ 87,377      $ 91,283      $ 377,115   

Net interest margin

     3.97     5.39     5.70     5.62     6.27     7.19

Balance Sheet

            

Cash and due from banks

   $ 3,360,199      $ 1,789,311      $ 371,425      $ 303,057      $ 301,888      $ 324,510   

Total assets

     10,955,015        10,018,280        8,070,315        7,310,010        6,897,163        6,692,171   

Long-term debt

     964,175        995,423        976,189        969,588        892,516        873,241   

Additional paid-in capital

     71,760        66,201        44,359        20,754        13,975        13,167   

Retained earnings

     697,956        709,726        710,321        684,404        663,963        669,459   

ADJUSTMENTS DUE TO CORRECTION OF ERROR

            

Income Statement

            

Other noninterest income

   $ (1,971   $ (3,239   $ (1,309   $ 578      $ 187      $ (415

Income tax expense (benefit)

     (746     (1,248     (531     215        65        (171

Net income (loss) attributable to SVBFG

     (1,225     (1,991     (778     363        122        (244

Net income (loss) available to common stockholders

     (1,225     (1,991     (778     363        122        (244

Earnings (loss) per common share — diluted

     (0.04     (0.06     (0.02     0.01        —          (0.01

Balance Sheet

            

Cash and due from banks

   $ (2,017   $ (2,085   $ (2,085   $ (2,085   $ (2,085   $ (889

Total assets

     (3,753     (2,528     (537     241        (122     (244

Retained earnings

     (3,753     (2,528     (537     241        (122     (244

ADJUSTMENTS DUE TO FSP APB No. 14-1

            

Income Statement

            

Interest expense — borrowings

     N/A      $ 525      $ 518      $ 1,068      $ 1,303      $ 5,091   

Income tax expense (benefit)

     N/A        (208     (206     (424     (518     (2,026

Net income (loss) attributable to SVBFG

     N/A        (317     (312     (644     (785     (3,065

Net income (loss) available to common stockholders

     N/A        (317     (312     (644     (785     (3,065

Fully Taxable Equivalent

            

Net interest income (fully taxable equivalent basis)

     N/A      $ (525   $ (518   $ (1,068   $ (1,303   $ (5,091

Net interest margin

     N/A        (0.03 )%      (0.03 )%      (0.07 )%      (0.09 )%      (0.10 )% 

Balance Sheet

            

Total assets

     N/A      $ (84   $ (93   $ (102   $ (18   $ (41

Long-term debt

     N/A        (5,217     (5,757     (6,290     (673     (2,013

Additional paid-in capital

     N/A        20,329        20,543        20,754        13,975        13,167   

Retained earnings

     N/A        (15,196     (14,879     (14,566     (13,993     (13,208

Reclassifications

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

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140 (“SFAS No. 166”). SFAS No. 166 defines the term “participating interest” to establish specific conditions for reporting a transfer of a

 

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portion of a financial asset as a sale. SFAS No. 166 also removes the concept of a qualifying special-purpose entity for accounting purposes. SFAS No. 166 is effective for interim or annual financial periods ending after November 15, 2009. We are currently assessing the impact of SFAS No. 166 on our consolidated financial position and results of operations.

In June 2009, the FASB issued SFAS No. 167, Amendments to FIN 46(R) (“SFAS No. 167”). SFAS No. 167 replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling interest in a VIE, with an approach focused on which enterprise has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant. SFAS No. 167 is effective for interim or annual financial periods beginning after November 15, 2009. We are currently assessing the impact of SFAS No. 167 on our consolidated financial position and results of operations.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles-a replacement of SFAS No. 162 (“SFAS No. 168”). The FASB Accounting Standards Codification TM (“Codification”) will become the source of authoritative GAAP recognized by the FASB. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS No. 168 is effective for interim or annual financial periods ending after September 15, 2009. SFAS No. 168 will not have any impact on our consolidated financial position and results of operations, but will have an impact on how we reference and disclose accounting literature in our interim and annual reports.

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

Common Stock

We did not repurchase any shares of our common stock for the three or six months ended June 30, 2009. We repurchased 1.0 million shares for the six months ended June 30, 2008 totaling $45.6 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; however, we are subject to certain stock repurchase restrictions in connection with our participation in the U.S. Treasury’s (“Treasury”) Capital Purchase Program (the “CPP”). At June 30, 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 CPP in the fourth quarter of 2008, for the six months ended June 30, 2009, we have paid or accrued dividends of $5.9 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 2003 Convertible Notes and related warrants, which matured in June 2008, our 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 and six months ended June 30, 2009 and 2008:

 

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     Three months ended June 30,    Six months ended June 30,

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

           2009                     2008                    2009                     2008        

Numerator:

         

Net income attributable to SVBFG

   $ 11,338      $ 21,014    $ 3,103      $ 48,254

Preferred stock dividend and discount accretion

     (3,545     —        (7,081     —  
                             

Net income (loss) available to common stockholders

   $ 7,793      $ 21,014    $ (3,978   $ 48,254
                             

Denominator:

         

Weighted average common shares outstanding-basic

     32,952        32,054      32,960        32,167

Weighted average effect of dilutive securities:

         

Stock options

     126        968      —          984

Restricted stock awards and units

     —          87      —          38

2003 Convertible Notes

     —          1,083      —          1,158
                             

Denominator for diluted calculation

     33,078        34,192      32,960        34,347
                             

Net income (loss) per common share:

         

Basic

   $ 0.24      $ 0.66    $ (0.12   $ 1.50
                             

Diluted

   $ 0.24      $ 0.61    $ (0.12   $ 1.40
                             

Due to the net loss applicable to common stockholders for the six months ended June 30, 2009, no potentially dilutive shares were included in the net loss per share calculation as including such shares would be anti-dilutive and reduce the reported net loss per share.

The following table summarizes the common shares excluded from the diluted EPS calculation as they were deemed to be anti-dilutive for the three and six months ended June 30, 2009 and 2008:

 

     Three months ended June 30,    Six months ended June 30,

(Shares in thousands)

           2009                    2008                    2009                    2008        

Stock options

   2,893    939    3,031    933

Restricted stock awards and units

   583    2    714    1

Warrant associated with Capital Purchase Program

   707    —      862    —  
                   

Total

   4,183    941    4,607    934
                   

In addition to the above, at June 30, 2009, 4.7 million shares of our 2008 Convertible Notes and associated warrants were outstanding but not included in the calculation of diluted earnings per common share because the exercise price was higher than the market price, and therefore were antidilutive. Concurrent with the issuance of our 2008 Convertible Notes, we entered into a convertible note hedge and warrant agreement. For information on our 2008 Convertible Notes and associated convertible note hedge and warrant agreement, see our Consolidated Financial Statements and Supplementary Data-Note 9- “Derivative Financial Instruments” and Note 12- “Short-Term Borrowings and Long-Term Debt” under Part II, Item 8 of our 2008 Form 10-K.

3. Share-Based Compensation

For the three and six months ended June 30, 2009, we recorded share-based compensation expense of $3.9 million and $7.8 million, respectively, resulting in the recognition of $0.9 million and $1.9 million, respectively, in related tax benefits. For the three and six months ended June 30, 2008, we recorded share-based compensation expense of $3.8 million and $7.4 million, respectively, resulting in the recognition of $1.0 million and $1.7 million, respectively, in related tax benefits.

Unrecognized Compensation Expense

At June 30, 2009, unrecognized share-based compensation expense was as follows:

 

(Dollars in thousands)

   Unrecognized Expense    Average Expected
Recognition Period - in
Years

Stock options

   $ 9,288    1.93

Restricted stock units

     11,752    1.54
         

Total unrecognized share-based compensation expense

   $ 21,040   
         

 

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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 six months ended June 30, 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

   521,930        21.42      

Exercised

   (20,291     11.54      

Forfeited

   (8,367     47.96      

Expired

   (22,604     36.76      
              

Outstanding at June 30, 2009

   3,601,597        35.08    3.66    $ 6,885,462
              

Vested and expected to vest at June 30, 2009

   3,431,082        35.19    3.53      6,288,447
              

Exercisable at June 30, 2009

   2,548,766        34.93    2.67      3,784,425
              

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $27.22 as of June 30, 2009. The total intrinsic value of options exercised during the three and six months ended June 30, 2009 was $32 thousand and $0.2 million, respectively, compared to $5.2 million and $8.6 million for the comparable 2008 periods.

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 six months ended June 30, 2009:

 

     Shares     Weighted Average
Grant Date Fair
Value

Nonvested at December 31, 2008

   393,463      $ 46.49

Granted

   125,470        23.75

Vested

   (94,324     20.94

Forfeited

   (5,594     24.52
        

Nonvested at June 30, 2009

   419,015        45.73
        

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 June 30, 2009 and December 31, 2008, respectively:

 

(Dollars in thousands)

   June 30, 2009    December 31, 2008

Federal funds sold overnight

   $ 100,000    $ 250,000

Securities purchased under agreements to resell

     140,624      150,910

Interest-earning deposits

     184,275      169,022

Other short-term investment securities

     37,911      77,482
             

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

   $ 462,810    $ 647,414
             

In addition to the above, as of June 30, 2009 and December 31, 2008, $3.0 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.

 

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5. Investment Securities

The major components of our investment securities portfolio at June 30, 2009 and December 31, 2008 are as follows:

 

     June 30, 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. Treasury securities

   $ 25,671    $ 306    $ —        $ 25,977    $ —      $ —      $ —        $ —  

U.S. agency debentures

     700,412      4,952      (348     705,016      109,981      3,622      —          113,603

Residential mortgage-backed securities:

                     

Agency-issued mortgage-backed securities

     412,739      12,165      (516     424,388      438,688      9,910      (4     448,594

Agency-issued collateralized mortgage obligations

     745,135      11,999      (519     756,615      478,397      5,354      (476     483,275

Non-agency mortgage-backed securities

     109,989      3      (13,928     96,064      133,561      255      (18,486     115,330

Commercial mortgage-backed securities

     51,350      —        (3,512     47,838      54,202      —        (6,721     47,481

Municipal bonds and notes

     102,862      1,094      (991     102,965      109,405      1,384      (2,034     108,755

Marketable equity securities

     278      1      (4     275      157      —        (5     152

Venture capital fund investments

     —        1      —          1      —        1      —          1
                                                         

Total available-for-sale securities

   $ 2,148,436    $ 30,521    $ (19,818   $ 2,159,139    $ 1,324,391    $ 20,526    $ (27,726   $ 1,317,191
                                                         

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

             547              1,703

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

                     

Private equity fund investments (2)

             225,892              242,645

Other private equity investments (3)

             84,613              82,444

Other investments (4)

             1,348              1,547

Non-marketable securities (equity method accounting):

                     

Other investments (5)

             42,238              27,000

Low income housing tax credit funds

             29,217              31,510

Non-marketable securities (cost method accounting):

                     

Private equity fund investments (6)

             82,279              69,971

Other private equity investments

             13,107              12,089
                             

Total investment securities

           $ 2,638,380            $ 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 June 30, 2009 and December 31, 2008:

 

     June 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Partners for Growth, LP

   $ 55    50.0   $ 1,233    50.0

SVB India Capital Partners I, LP

     492    14.4        470    14.4   
                  

Total marketable securities

   $ 547      $ 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 June 30, 2009 and December 31, 2008:

 

     June 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

SVB Strategic Investors Fund, LP

   $ 53,110    12.6   $ 65,985    12.6

SVB Strategic Investors Fund II, LP

     81,396    8.6        94,161    8.6   

SVB Strategic Investors Fund III, LP

     87,045    5.9        80,780    5.9   

SVB Strategic Investors Fund IV, LP

     4,341    5.0        1,719    5.0   
                  

Total private equity fund investments

   $ 225,892      $ 242,645   
                  

 

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(3) The following table shows the amount of investments by the following consolidated co-investment funds and our ownership of each fund at June 30, 2009 and December 31, 2008:

 

     June 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Silicon Valley BancVentures, LP

   $ 22,451    10.7   $ 24,188    10.7

SVB Capital Partners II, LP (i)

     37,290    5.1        38,234    5.1   

SVB India Capital Partners I, LP

     24,872    14.4        20,022    14.4   
                  

Total other private equity investments

   $ 84,613      $ 82,444   
                  

 

  (i) At June 30, 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 June 30, 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 debt funds and our ownership of each fund at June 30, 2009 and December 31, 2008:

 

     June 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Gold Hill Venture Lending 03, LP (i)

   $ 16,144    9.3   $ 18,234    9.3

Partners for Growth II, LP

     12,454    24.2        8,559    24.2   

Other fund investments

     13,640    N/A        207    N/A   
                  

Total other investments

   $ 42,238      $ 27,000   
                  

 

  (i) At June 30, 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 352 and 360 private equity funds at June 30, 2009 and December 31, 2008, respectively, where our ownership interest is less than 5% of the voting interests of each such fund. For the three months ended June 30, 2009, we concluded that 21 of our investments had declines in value that were determined to be other than temporary, and as a result, we recognized OTTI losses of $0.7 million. For the six months ended June 30, 2009 we recognized OTTI losses of $1.6 million resulting from other than temporary declines in value for 44 of the 352 investments. The OTTI losses are included in net (losses) gains on investment securities, a component of noninterest income. For the remaining 308 investments at June 30, 2009, we concluded that the declines in value were temporary and as such no OTTI was recognized. At June 30, 2009, the carrying value of these private equity fund investments (cost method accounting) was $82.3 million, and the estimated fair value was $74.1 million.

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 June 30, 2009:

 

    June 30, 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. agency debentures

  $ 213,472   $ (348   $ —     $ —        $ 213,472   $ (348

Residential mortgage-backed securities:

           

Agency-issued mortgage-backed securities

    24,312     (516     —       —          24,312     (516

Agency-issued collateralized mortgage obligations (1)

    81,626     (496     4,397     (23     86,023     (519

Non-agency mortgage-backed securities (1)

    13,872     (279     79,692     (13,649     93,564     (13,928

Commercial mortgage-backed securities (1)

    —       —          47,838     (3,512     47,838     (3,512

Municipal bonds and notes (1)

    21,149     (404     17,947     (587     39,096     (991

Marketable equity securities

    3     (4     —       —          3     (4
                                         

Total temporarily impaired securities

  $ 354,434   $ (2,047   $ 149,874   $ (17,771   $ 504,308   $ (19,818
                                         

 

(1)

As of June 30, 2009, we identified a total of 109 investments that were in unrealized loss positions, of which 54 investments totaling $149.9 million with unrealized losses of $17.8 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: Agency-issued collateralized mortgage obligations between May 2002 and March 2003, non-agency mortgage-backed securities between June 2003 and July

 

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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 grade 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 do not intend to sell any of our securities prior to recovery of our adjusted cost basis and as of June 30, 2009, it is more likely than not that we will not be required to sell any securities prior to recovery of our adjusted cost basis. As a result, all of our other-than-temporary impairments as of June 30, 2009 are included in other comprehensive income. Market valuations and impairment analyses on assets in the investment securities 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. agency debentures

   $ —      $ —        $ —      $ —        $ —      $ —     

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

     —        —          5,076      (4     5,076      (4

Agency-issued collateralized mortgage obligations

     13,559      (88     44,327      (388     57,886      (476

Non-agency mortgage-backed securities

     44,751      (4,237     64,386      (14,249     109,137      (18,486

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
                                             

The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on debt securities classified as available-for-sale as of June 30, 2009. Interest income on certain municipal bonds and notes (non-taxable investments) are presented on a fully taxable equivalent basis using the federal statutory tax rate of 35.0 percent. The weighted average yield is computed using the amortized cost of debt securities, which are reported at fair value. Expected remaining maturities of U.S. treasury securities, U.S. agency securities and mortgage-backed securities may differ significantly from their contractual maturities because borrowers have the right to prepay obligations with or without penalties. This is most apparent in mortgage-backed securities as contractual maturities are typically 15 to 30 years, whereas expected average lives of these securities are significantly shorter and vary based upon structure.

 

    June 30, 2009  
    Total     One Year
or Less
    After One
Year to
Five Years
    After Five
Years to
to Ten Years
    After
Ten Years
 

(Dollars in thousands)

  Carrying
Value
  Weighted-
Average
Yield
    Carrying
Value
  Weighted-
Average
Yield
    Carrying
Value
  Weighted-
Average
Yield
    Carrying
Value
  Weighted-
Average
Yield
    Carrying
Value
  Weighted-
Average
Yield
 

U.S. Treasury securities

  $ 25,977   2.06   $ —     —     $ 25,977   2.06   $ —     —     $ —     —  

U.S. agency debentures

    705,016   2.30        111,197   0.47        475,184   1.96        118,635   5.37        —     —     

Residential mortgage-backed securities:

                   

Agency-issued mortgage-backed securities

    424,388   4.77        —     —          2,597   6.30        71,930   4.22        349,861   4.88   

Agency-issued collateralized mortgage obligations

    756,615   4.18        —     —          —     —          84,984   4.48        671,631   4.14   

Non-agency mortgage-backed securities

    96,064   4.83        —     —          —     —          22,452   4.74        73,612   4.85   

Commercial mortgage-backed securities

    47,838   4.67        —     —          —     —          —     —          47,838   4.67   

Municipal bonds and notes

    102,965   3.76        4,814   1.46        5,045   3.03        24,799   3.49        68,307   4.06   
                                                           

Total

  $ 2,158,863   3.68      $ 116,011   0.51      $ 508,803   2.00      $ 322,800   4.69      $ 1,211,249   4.41   
                                                           

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 and six months ended June 30, 2009 and 2008:

 

     Three months ended June 30,     Six months ended June 30,  

(Dollars in thousands)

       2009             2008             2009             2008      

Gross gains on investment securities:

        

Available-for-sale securities, at fair value

   $ —        $ 139      $ 7      $ 205   

Marketable securities (investment company fair value accounting)

     691        612        1,179        612   

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

        

Private equity fund investments

     654        6,715        1,269        16,815   

Other private equity investments

     141        3,722        193        5,440   

Other investments

     249        155        613        155   

Non-marketable securities (equity method accounting):

        

Other investments

     2,245        1,162        2,809        1,531   

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     235        126        301        410   

Other private equity investments

     —          81        22        81   
                                

Total gross gains on investment securities

     4,215        12,712        6,393        25,249   
                                

Gross losses on investment securities:

        

Available-for-sale securities, at fair value

     (41     (654     (41     (1,541

Marketable securities (investment company fair value accounting)

     (197     (13     (393     (1,926

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

        

Private equity fund investments

     (5,950     (8,432     (36,760     (15,749

Other private equity investments

     (2,883     (880     (8,032     (2,533

Other investments

     —          —          —          (5,514

Non-marketable securities (equity method accounting):

        

Other investments

     (1,163     (2     (1,283     (1,093

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     (701     (434     (1,649     (708

Other private equity investments

     (30     (258     (30     (258
                                

Total gross losses on investment securities

     (10,965     (10,673     (48,188     (29,322
                                

(Losses) gains on investment securities, net

   $ (6,750   $ 2,039      $ (41,795   $ (4,073
                                

(Losses) gains attributable to noncontrolling interests, including carried interest

   $ (6,933   $ 452      $ (37,371   $ (1,447
                                

 

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6. Loans and Allowance for Loan Losses

The composition of loans, net of unearned income of $41.8 million and $45.4 million at June 30, 2009 and December 31, 2008, respectively, is presented in the following table:

 

(Dollars in thousands)

   June 30, 2009    December 31, 2008

Commercial loans

   $ 3,895,631    $ 4,515,019

Premium wine (1)

     400,237      419,539

Community development loans (2)

     57,639      48,293

Consumer and other (3)

     490,746      523,402
             

Total loans, net of unearned income

   $ 4,844,253    $ 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 June 30, 2009 and December 31, 2008, $267.4 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.
(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 June 30, 2009, and December 31, 2008 were comprised of the following:

 

(Dollars in thousands)

   June 30, 2009    December 31, 2008

Home equity lines of credit (i)

   $ 95,065    $ 89,544

Loans to eligible employees (ii)

     86,307      74,759

Loans for personal residence (iii)

     61,260      58,700
             

Consumer loans secured by real estate

   $ 242,632    $ 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 and six months ended June 30, 2009 and 2008 was as follows:

 

     Three months ended June 30,     Six months ended June 30,  

(Dollars in thousands)

   2009     2008     2009     2008  

Allowance for loan losses, beginning balance

   $ 110,010      $ 49,636      $ 107,396      $ 47,293   

Provision for loan losses

     21,393        8,351        64,859        16,074   

Gross loan charge-offs

     (21,898     (9,098     (63,911     (15,306

Loan recoveries

     968        3,999        2,129        4,827   
                                

Allowance for loan losses, ending balance

   $ 110,473      $ 52,888      $ 110,473      $ 52,888   
                                

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 $111.4 million and $84.9 million at June 30, 2009 and December 31, 2008, respectively. There were no commitments available for funding to any clients with nonaccrual loans at June 30, 2009 and at December 31, 2008. The allocation of the allowance for loan losses related to impaired loans was $44.6 million and $25.9 million at June 30, 2009 and December 31, 2008, respectively. Our accruing loans past due 90 days or more were $0.1 million and $2.3 million at June 30, 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 which we own a 65% interest, 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 June 30, 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 June 30, 2009 and December 31, 2008:

 

(Dollars in thousands)

  

Maturity

   June 30, 2009    December 31, 2008

Short-term borrowings:

        

Other short-term borrowings

   (1)    $ 31,340    $ 62,120
                

Total short-term borrowings

      $ 31,340    $ 62,120
                

Long-term debt:

        

FHLB advances

   (2)    $ 50,000    $ 100,000

5.70% senior notes

   June 1, 2012      270,583      279,370

6.05% subordinated notes

   June 1, 2017      278,550      313,953

3.875% convertible senior notes (3)

   April 15, 2011      245,876      244,783

7.0% junior subordinated debentures

   October 15, 2033      55,950      55,914

4.99% long-term notes payable

   (4)      8,032      —  

8.0% long-term notes payable

   (5)      650      1,403
                

Total long-term debt

      $ 909,641    $ 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 November 2009. Balance as of December 31, 2008 included $50 million in FHLB advances that matured in May 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 related to one of our debt fund investments beginning April 30, 2009 with the last payment due in April 2012.
(5) 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 $7.3 million and $15.5 million for the three and six months ended June 30, 2009, respectively, and $11.7 million and $24.2 million for the three and six months ended June 30, 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 no longer designated as a hedging instrument. Additionally, interest expense for the three and six months ended June 30, 2008 reflects retrospective adjustments 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 2003 Convertible Notes, which matured in June 2008, and $20.6 million to purchase a call spread associated with the 2008 Convertible Notes. All remaining proceeds were used or set aside 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.

 

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For the three and six months ended June 30, 2009, the effective interest rate for our 2008 Convertible Notes was 5.73 percent and 5.77 percent, respectively, and interest expense was $3.5 million and $7.0 million, respectively. For the three and six months ended June 30, 2008, the effective interest rate for our 2008 Convertible Notes was 5.60 percent and 5.68 percent, respectively, and interest expense was $3.1 million for each of the three and six months ended June 30, 2008. At June 30, 2009, the unamortized debt discount totaled $4.1 million, and will be amortized over the remaining contractual term of the debt.

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 June 30, 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 June 30, 2009 totaled $588.1 million, of which $537.1 million was available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank at June 30, 2009 totaled $84.4 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, equity market price risk and to assist customers with their risk management objectives. 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 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 economic 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. Specifically, we currently have outstanding our 2008 Convertible Notes. We intend to settle any conversions in cash up to the principal amount of these 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

 

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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.

Concurrent with the issuance of our 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 six months ended June 31, 2009 and 2008, there were no note conversions or exercises under the warrant agreement as the notes were not convertible. Concurrent with the issuance of our 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.

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.

Counterparty Credit Risk

We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We minimize counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate.

 

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The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at June 30, 2009 and December 31, 2008, respectively, were as follows:

 

        June 30, 2009     December 31, 2008  

(Dollars in thousands)

  Balance sheet
location
  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   $ 49,739      $ 31,340   $ 18,399      $ 550,000   $ 94,142      $ 62,120   $ 32,022   
                                                 
                 

Derivatives not designated as hedging instruments:

                 

Currency Exchange Risks:

                 

Foreign exchange forwards

  Other assets     16,515     925        —       925        50,393     4,212        —       4,212   

Foreign exchange forwards

  Other liabilities     28,767     (1,617     —       (1,617     23,193     (1,092     —       (1,092
                                                 

Net exposure

        (692     —       (692       3,120        —       3,120   
                                                 

Other Derivative Instruments:

                 

Equity warrant assets

  Other assets     128,066     47,704        —       47,704        130,401     43,659        —       43,659   
                                                 

Other derivatives:

                 

Foreign exchange forwards

  Other assets     304,586     20,217        —       20,217        354,399     32,476        —       32,476   

Foreign exchange forwards

  Other liabilities     303,622     (20,257     —       (20,257     344,703     (31,039     —       (31,039

Foreign currency options

  Other assets     76,928     980        —       979        25,848     501        —       501   

Foreign currency options

  Other liabilities     76,928     (980     —       (979     25,848     (501     —       (501
                                                 

Net exposure

        (40     —       (40       1,437        —       1,437   
                                                 

Net

      $ 96,711      $ 31,340   $ 65,371        $ 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 June 30, 2009 remain at “A” or higher and there have been no material changes in their credit ratings for the six months ended June 30, 2009.

A summary of our derivative activity and the related impact on our consolidated statements of income for the three and six months ended June 30, 2009 and 2008 is as follows:

 

        Three months
ended June 30,
    Six months
ended June 30,
 

(Dollars in thousands)

  Statement of income location   2009     2008     2009     2008  

Derivatives designated as hedging instruments:

         

Interest Rate Risks:

         

Net cash benefit associated with interest rate swaps

  Interest expense -borrowings   $ 4,929      $ 2,976      $ 9,133      $ 3,785   

Changes in fair value of interest rate swap

  Net (losses) gains on
derivative instruments
    —          879        (170     386   
                                 

Net gains associated with interest rate risk derivatives

    $ 4,929      $ 3,855      $ 8,963      $ 4,171   
                                 

Derivatives not designated as hedging instruments:

         

Currency Exchange Risks:

         

Gains (losses) on foreign currency loan revaluations, net

  Other noninterest income   $ 4,657      $ (1,992   $ 1,980      $ 1,915   

(Losses) gains on foreign exchange forward contracts, net

  Net (losses) gains on
derivative instruments
    (4,479     624        (2,536     (2,467
                                 

Net gains (losses) associated with currency risk

    $ 178      $ (1,368   $ (556   $ (552
                                 

Other Derivative Instruments:

         

Equity warrant assets

  Net (losses) gains on
derivative instruments
  $ 1,184      $ 2,050      $ 729      $ 7,505   
                                 

Gains on client foreign exchange forward contracts, net

  Net (losses) gains on
derivative instruments
  $ 448      $ 478      $ 944      $ 1,206   
                                 

Gains on covered call options, net

  Net (losses) gains on
derivative instruments
  $ —        $ 377      $ —        $ 377   
                                 

 

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10. Other Noninterest Income and Other Noninterest Expense

A summary of other noninterest income for the three and six months ended June 30, 2009 and 2008, respectively, is as follows:

 

     Three months ended June 30,      Six months ended June 30,

(Dollars in thousands)

   2009    2008 *      2009    2008 *

Fund management fees

   $ 2,471    $ 1,957       $ 5,188    $ 3,877

Service-based fee income (1)

     2,116      2,266         3,945      4,256

Gains (losses) on foreign currency loans revaluation, net

     4,657      (1,992      1,980      1,915

Other

     3,555      3,528         4,468      5,233
                             

Total other noninterest income

   $ 12,799    $ 5,759       $ 15,581    $ 15,281
                             

 

* Certain amounts have been revised to reflect the correction of immaterial errors associated with previously recognized gains and losses on foreign exchange contracts. Refer to Note 1- “Basis of Presentation” for more details. Amounts for the three and six months ended June 30, 2008 have been revised.
(1) Includes income from SVB Analytics and eProsper.

A summary of other noninterest expense for the three and six months ended June 30, 2009 and 2008, respectively, is as follows:

 

     Three months ended June 30,    Six months ended June 30,

(Dollars in thousands)

   2009    2008    2009    2008

Telephone

   $ 1,337    $ 1,345    $ 2,717    $ 2,497

Tax credit fund amortization

     1,164      1,059      2,293      2,041

Data processing services

     1,089      1,116      2,101      2,193

Postage and supplies

     821      1,024      2,079      1,778

Other

     3,583      2,719      6,203      4,874
                           

Total other noninterest expense

   $ 7,994    $ 7,263    $ 15,393    $ 13,383
                           

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 in the future may 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 June 30, 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 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 results 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:

 

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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 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 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.

Effective January 1, 2009, we report Federal Deposit Insurance Corporation (“FDIC”) assessments in noninterest expense within Global Commercial Bank. Prior to January 1, 2009, FDIC assessments were recognized in noninterest expense under the Reconciling Items column. Additionally, effective January 1, 2009, we report the provision for loan losses by reportable segments. Prior to January 1, 2009, the provision for loan losses was recognized under the Reconciling Items column. All prior periods presented have been revised to reflect these changes.

 

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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
(1)
    Other Business
Services (1)
    Reconciling
Items
    Total  

Three months ended June 30, 2009

            

Net interest income (loss)

   $ 90,987      $ 8,428      $ (1   $ (54   $ (7,679   $ 91,681   

Provision for loan losses

     (14,915     (6,470     —          —          (8     (21,393

Noninterest income (loss)

     26,813        308        2,359        2,761        (3,966     28,275   

Noninterest expense (2)

     (39,308     (3,525     (3,290     (2,933     (39,956     (89,012
                                                

Income (loss) before income tax expense (3)

   $ 63,577      $ (1,259   $ (932   $ (226   $ (51,609   $ 9,551   
                                                

Total average loans, net of unearned income

   $ 3,775,198      $ 965,767      $ —        $ —        $ 39,001      $ 4,779,966   

Total average assets

     3,870,134        967,229        92,621        75,723        5,922,259        10,927,966   

Total average deposits

     8,276,795        148,296        —          —          7,506        8,432,597   

Three months ended June 30, 2008

            

Net interest income

   $ 78,654      $ 7,439      $ 17      $ 9      $ 677      $ 86,796   

Provision for loan losses

     (8,106     (241     —          —          (4     (8,351

Noninterest income

     33,955        429        2,997        3,294        3,840        44,515   

Noninterest expense (2)

     (30,033     (3,701     (4,723     (2,977     (45,755     (87,189
                                                

Income (loss) before income tax expense (3)

   $ 74,470      $ 3,926      $ (1,709   $ 326      $ (41,242   $ 35,771   
                                                

Total average loans, net of unearned income

   $ 3,342,907      $ 882,006      $ —        $ —        $ 94,984      $ 4,319,897   

Total average assets

     3,389,293        886,091        51,580        62,608        2,768,458        7,158,030   

Total average deposits

     4,481,342        169,598        —          —          (2,117     4,648,823   

Six months ended June 30, 2009

            

Net interest income (loss)

   $ 185,246      $ 17,315      $ (3   $ (80   $ (19,286   $ 183,192   

Provision for loan losses

     (57,730     (7,119     —          —          (10     (64,859

Noninterest income (loss)

     53,053        611        1        4,358        (35,329     22,694   

Noninterest expense (2)

     (71,545     (7,174     (6,636     (9,959     (80,838     (176,152
                                                

Income (loss) before income tax expense (3)

   $ 109,024      $ 3,633      $ (6,638   $ (5,681   $ (135,463   $ (35,125
                                                

Total average loans, net of unearned income

   $ 3,943,712      $ 977,738      $ —        $ —        $ 25,730      $ 4,947,180   

Total average assets

     4,033,681        979,350        89,113        75,012        5,516,333        10,693,489   

Total average deposits

     8,014,766        160,411        —          —          6,369        8,181,546   

Six months ended June 30, 2008

            

Net interest income (loss)

   $ 163,303      $ 14,847      $ 30      $ 43      $ (649   $ 177,574   

(Provision for) recovery of loan losses

     (16,255     214        —          —          (33     (16,074

Noninterest income

     67,612        838        5,076        1,438        11,303        86,267   

Noninterest expense (2)

     (60,685     (7,837     (8,950     (5,262     (87,892     (170,626