SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 11/06/2009 17:12:35)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 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 October 30, 2009, 33,208,760 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 September 30, 2009 and December 31, 2008    3
  Interim Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2009 and 2008    4
  Interim Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2009 and 2008    5
  Interim Consolidated Statements of Stockholders’ Equity (unaudited) for the nine months ended September 30, 2009 and 2008    6
  Interim Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 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    34
Item 3.   Quantitative and Qualitative Disclosures about Market Risk    66
Item 4.   Controls and Procedures    67
PART II - OTHER INFORMATION    68
Item 1.   Legal Proceedings    68
Item 1A.   Risk Factors    68
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    76
Item 3.   Defaults Upon Senior Securities    76
Item 4.   Submission of Matters to a Vote of Security Holders    76
Item 5.   Other Information    76
Item 6.   Exhibits    76
SIGNATURE    77
INDEX TO EXHIBITS    78

 

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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)    September 30,
2009
    December 31,
2008 *
 

Assets

    

Cash and due from banks

   $ 4,062,298      $ 1,958,333   

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

     48,530        478,392   

Investment securities

     3,491,281        1,786,100   

Loans, net of unearned income

     4,655,817        5,506,253   

Allowance for loan losses

     (86,713     (107,396
                

Net loans

     4,569,104        5,398,857   
                

Premises and equipment, net of accumulated depreciation and amortization

     30,722        30,589   

Goodwill

     —          4,092   

Accrued interest receivable and other assets

     336,668        361,917   
                

Total assets

   $ 12,538,603      $ 10,018,280   
                

Liabilities and total equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 6,422,937      $ 4,419,965   

Negotiable order of withdrawal (NOW)

     39,818        58,133   

Money market

     1,198,611        1,213,086   

Money market deposits in foreign offices

     64,701        53,123   

Time

     333,870        379,200   

Sweep

     1,995,695        1,349,965   
                

Total deposits

     10,055,632        7,473,472   
                

Short-term borrowings

     52,285        62,120   

Other liabilities

     171,166        175,553   

Long-term debt

     866,748        995,423   
                

Total liabilities

     11,145,831        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

     223,009        221,185   

Common stock, $0.001 par value, 150,000,000 shares authorized;

    

33,202,387 and 32,917,007 shares outstanding, respectively

     33        33   

Additional paid-in capital

     92,367        66,201   

Retained earnings

     726,455        709,726   

Accumulated other comprehensive income (loss)

     25,513        (5,789
                

Total SVBFG stockholders’ equity

     1,067,377        991,356   

Noncontrolling interests

     325,395        320,356   
                

Total equity

     1,392,772        1,311,712   
                

Total liabilities and total equity

   $ 12,538,603      $ 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.

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

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

Interest income:

        

Loans

   $ 83,049      $ 94,256      $ 255,548      $ 268,530   

Investment securities:

        

Taxable

     21,562        15,321        53,207        43,677   

Non-taxable

     1,008        1,106        3,098        3,121   

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

     2,367        2,712        7,228        10,513   
                                

Total interest income

     107,986        113,395        319,081        325,841   
                                

Interest expense:

        

Deposits

     4,801        6,267        17,253        16,908   

Borrowings

     6,367        12,517        21,818        36,748   
                                

Total interest expense

     11,168        18,784        39,071        53,656   
                                

Net interest income

     96,818        94,611        280,010        272,185   

Provision for loan losses

     8,030        13,682        72,889        29,756   
                                

Net interest income after provision for loan losses

     88,788        80,929        207,121        242,429   
                                

Noninterest income:

        

Foreign exchange fees

     7,491        8,641        22,574        24,446   

Deposit service charges

     6,906        6,129        20,319        18,076   

Client investment fees

     5,527        13,636        17,355        41,006   

Letters of credit and standby letters of credit income

     3,019        3,050        8,240        9,138   

Credit card fees

     2,300        1,473        6,696        4,675   

Corporate finance fees

     —          —          —          3,640   

(Losses) gains on derivative instruments, net

     (1,090     6,472        (2,123     13,479   

Gains (losses) on investment securities, net

     3,905        (876     (37,890     (4,949

Other

     6,249        1,913        21,830        17,194   
                                

Total noninterest income

     34,307        40,438        57,001        126,705   
                                

Noninterest expense:

        

Compensation and benefits

     45,815        49,598        141,042        153,438   

Professional services

     12,109        9,623        35,452        27,556   

Premises and equipment

     5,892        5,781        16,993        16,424   

FDIC assessments

     2,589        671        13,853        1,807   

Net occupancy

     4,198        4,135        13,346        12,825   

Business development and travel

     2,902        3,389        9,578        10,575   

Correspondent bank fees

     2,118        1,689        5,994        5,011   

Impairment of goodwill

     —          —          4,092        —     

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

     —          —          —          3,858   

Provision for (reduction of) unfunded credit commitments

     65        (990     (3,366     (355

Other

     4,119        6,535        18,975        19,918   
                                

Total noninterest expense

     79,807        80,431        255,959        251,057   
                                

Income before income tax expense

     43,288        40,936        8,163        118,077   

Income tax expense

     16,879        16,711        21,605        51,350   
                                

Net income (loss) before noncontrolling interests

     26,409        24,225        (13,442     66,727   

Net (income) loss attributable to noncontrolling interests

     (2,246     1,693        40,708        7,445   
                                

Net income attributable to SVBFG

   $ 24,163      $ 25,918      $ 27,266      $ 74,172   
                                

Preferred stock dividend and discount accretion

     (3,555     —          (10,636     —     
                                

Net income available to common stockholders

   $ 20,608      $ 25,918      $ 16,630      $ 74,172   
                                

Earnings per common share—basic

   $ 0.62      $ 0.80      $ 0.50      $ 2.30   

Earnings per common share—diluted

     0.61        0.77      $ 0.50        2.17   

 

* 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.

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
(Dollars in thousands)    2009     2008 *     2009     2008 *  

Net income (loss) before noncontrolling interests

   $ 26,409      $ 24,225      $ (13,442   $ 66,727   

Other comprehensive income (loss), net of tax:

        

Cumulative translation gains (losses):

        

Foreign currency translation gains (losses)

     455        (565     (87     (1,269

Related tax (expense) benefit

     (184     232        28        520   

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

        

Unrealized holding gains (losses)

     35,068        (9,666     52,927        (22,730

Related tax (expense) benefit

     (14,291     3,973        (21,581     9,321   

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

     (8     1,232        26        2,568   

Related tax benefit (expense)

     3        (506     (11     (1,054
                                

Other comprehensive income (loss), net of tax

     21,043        (5,300     31,302        (12,644
                                

Comprehensive income

     47,452        18,925        17,860        54,083   

Net (income) loss attributable to noncontrolling interests

     (2,246     1,693        40,708        7,445   
                                

Comprehensive income attributable to SVBFG

   $ 45,206      $ 20,618      $ 58,568      $ 61,528   
                                

 

* 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.

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

(Dollars in thousands)

  Preferred Stock    Common Stock     Additional
Paid-in
    Retained     Accumulated
Other
Comprehensive
    Total SVBFG
Stockholders’
    Noncontrolling    

Total Equity

 
  Shares    Amount    Shares     Amount     Capital     Earnings     (Loss) Income     Equity     Interests    

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

  —        —      1,069,803        1        29,813        —          —          29,814        —          29,814   

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

  —        —      —          —          5,728        —          —          5,728        —          5,728   

Net income (loss)

  —        —      —          —          —          74,172        —          74,172        (7,445     66,727   

Capital calls and (distributions), net

  —        —      —          —          —          —          —          —          92,341        92,341   

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

  —        —      —          —          —          —          (11,895     (11,895     —          (11,895

Foreign currency translation adjustments, net of tax

  —        —      —          —          —          —          (749     (749     —          (749

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

  —        —      —          —          12,848        —          —          12,848        —          12,848   

Common stock repurchases

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

Stock-based compensation expense under SFAS 123(R)

  —        —      —          —          10,786        —          —          10,786        —          10,786   

Other-net

  —        —      —          —          1,031        (16     —          1,015        —          1,015   
                                                                         

Balance at September 30, 2008 *

  —      $ —      32,735,732      $ 33      $ 44,359      $ 710,321      $ (18,934   $ 735,779      $ 324,998      $ 1,060,777   
                                                                         

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

  —        —      285,380        —          4,116        —          —          4,116        —          4,116   

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

  —        —      —          —          (584     —          —          (584     —          (584

Net income (loss)

  —        —      —          —          —          27,266        —          27,266        (40,708     (13,442

Capital calls and (distributions), net

  —        —      —          —          —          —          —          —          45,747        45,747   

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

  —        —      —          —          —          —          31,361        31,361        —          31,361   

Foreign currency translation adjustments, net of tax

  —        —      —          —          —          —          (59     (59     —          (59

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)

  —        —      —          —          11,051        —          —          11,051        —          11,051   

Preferred stock dividend and discount accretion

  —        1,824    —          —          —          (10,636     —          (8,812     —          (8,812

Other-net

  —        —      —          —          844        99        —          943        —          943   
                                                                         

Balance at September 30, 2009

  235,000    $ 223,009    33,202,387      $ 33      $ 92,367      $ 726,455      $ 25,513      $ 1,067,377      $ 325,395      $ 1,392,772   
                                                                         

 

* 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.

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Nine months ended September 30,  
(Dollars in thousands)    2009     2008 *  

Cash flows from operating activities:

    

Net (loss) income before noncontrolling interests

   $ (13,442   $ 66,727   

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

     72,889        29,756   

(Reduction of) provision for unfunded credit commitments

     (3,366     (355

Changes in fair values of derivatives, net

     6,201        (6,888

Losses on investment securities, net

     37,890        4,949   

Depreciation and amortization

     25,796        21,492   

Tax benefit of original issue discount

     10,745        3,899   

Tax (expense) benefit from stock exercises

     (927     1,419   

Amortization of share-based compensation

     11,177        10,870   

Amortization of deferred warrant-related loan fees

     (6,125     (6,105

Deferred income tax (benefit) expense

     (1,859     16,357   

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

     117        236   

Changes in other assets and liabilities:

    

Accrued interest, net

     (2,235     1,815   

Accounts receivable

     3,378        851   

Income tax receivable, net

     (21,169     (5,919

Accrued compensation

     (5,742     (19,821

Foreign exchange spot contracts, net

     (9,282     4,689   

Other, net

     (5,337     (11,842
                

Net cash provided by operating activities

     102,801        115,988   
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (2,115,015     (302,346

Proceeds from sales of available-for-sale securities

     195        4,432   

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

     499,493        194,158   

Purchases of nonmarketable securities (cost and equity method accounting)

     (33,882     (43,674

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

     3,363        7,422   

Proceeds from nonmarketable securities (cost and equity method accounting)

     —          1,498   

Purchases of nonmarketable securities (investment fair value accounting)

     (43,849     (85,997

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

     11,760        22,083   

Net decrease (increase) in loans

     729,876        (1,156,978

Proceeds from recoveries of charged-off loans

     16,892        5,547   

Proceeds from sale of other real estate owned

     693        287   

Purchases of premises and equipment

     (11,545     (5,959
                

Net cash used for investing activities

     (942,019     (1,359,527
                

Cash flows from financing activities:

    

Net increase in deposits

     2,582,160        821,406   

Repayments of other long-term debt

     (101,272     (901

(Decrease) increase in short-term borrowings

     (9,835     335,000   

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

     45,747        92,341   

Tax benefit from stock exercises

     337        5,882   

Dividends paid on preferred stock

     (7,932     —     

Proceeds from issuance of common stock and Employee Stock Purchase Plan

     4,116        29,813   

Repurchases of common stock

     —          (45,617
                

Net cash provided by financing activities

     2,513,321        1,310,878   
                

Net increase in cash and cash equivalents

     1,674,103        67,339   

Cash and cash equivalents at beginning of period

     2,436,725        683,174   
                

Cash and cash equivalents at end of period

   $ 4,110,828      $ 750,513   
                

Supplemental disclosures:

    

Cash paid during the period for:

    

Interest paid

   $ 35,852      $ 46,116   

Income taxes paid

     35,824        31,843   

Noncash items during the period:

    

Preferred stock dividends accrued, not yet paid

   $ 1,469      $ —     

Unrealized gains (losses) on available-for-sale securities, net of tax

     31,346        (13,409

Net change in fair value of interest rate swaps

     (37,914     7,157   

 

* 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.

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 nine months ended September 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 unaudited 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 nine months ended September 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 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 nine months ended September 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 Financial Accounting Standards Board (“FASB”) Issued Guidance Over Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 ( ASC 810-10-65)

In December 2007, the FASB issued new accounting standards (Accounting Standards Codification (“ASC”) 810-10-65, formerly known as Statement of Financial Accounting Standards (“SFAS”) No. 160). This standard 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. This standard 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 this standard 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 financial position, results of operations or stockholders’ equity.

 

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Impact of Adopting FASB Issued Guidance Over Disclosures about Derivative Instruments and Hedging Activities (ASC 815-10-65)

In March 2008, the FASB issued new accounting standards (ASC 815-10-65, formerly known as SFAS No. 161). This standard requires companies with derivative instruments to provide enhanced disclosure of information that should enable financial statement users to better understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB issued guidance over accounting for derivative instruments and hedging activities (ASC 815, formerly known as 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 this standard 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 FASB Issued Guidance Over Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (ASC 470-20)

In May 2008, the FASB issued new accounting standards (ASC 470-20, formerly known as FASB Staff Position (“FSP”) Accounting Principles Board (“APB”) Opinion No. 14-1), which 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 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 this standard, our net income available to common stockholders for the three and nine months ended September 30, 2009 decreased by $0.3 million and $0.9 million, respectively. Details of certain items revised in prior periods related to the adoption of this standard are provided below under the section “Changes to Prior Period Balances”.

Impact of Adopting FASB Issued Guidance Over 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 (ASC 820-10-65)

In April 2009, the FASB issued new accounting standards (ASC 820-10-65, formerly known as FSP SFAS No. 157-4 ) , which 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. This standard also provides guidance on identifying circumstances that may indicate that a transaction is not orderly. Our adoption of this standard on April 1, 2009 did not have a material effect on our financial position, results of operations or stockholders’ equity.

Impact of Adopting FASB Issued Guidance Over Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”) ( ASC 320-10-65)

In April 2009, the FASB issued new accounting standards (ASC 320-10-65, formerly known as FSP SFAS No. 115-2 and SFAS No. 124-2), which changes the methodology for determining whether OTTI exists for debt securities. This standard requires 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 this standard 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 this standard.

Impact of Adopting FASB Issued Guidance Over Interim Disclosures about Fair Value of Financial Instruments (ASC 825-10-65)

In April 2009, the FASB issued new accounting standards (ASC 825-10-65, formerly known as FSP SFAS No. 107-1 and APB Opinion No. 28-1), which requires interim disclosures regarding the fair values of all financial instruments within the scope of FASB issued guidance over disclosures about fair value of financial instruments (ASC 825-10-50 and ASC 825-10-55, formerly known as SFAS No. 107 ) as well as the methods and significant assumptions used to estimate the fair value of those financial instruments. Our adoption of this standard 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.

 

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Impact of Adopting FASB Issued Guidance Over Subsequent Events (ASC 855-10)

In May 2009, the FASB issued new accounting standards ( ASC 855-10, formerly known as SFAS No. 165), which 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 this standard on July 1, 2009 required us to disclose the date through which we have evaluated subsequent events and had no effect on our results of operations or stockholders’ equity this quarter.

Impact of Adopting The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles TM (ASC 105-10)

In June 2009, the FASB issued new accounting standards (ASC 105-10, formerly known as SFAS No. 168), which has 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 has superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. Our adoption of this standard on July 1, 2009 did not have any impact on our consolidated financial position and results of operations, but did have an impact on how we reference and disclose accounting literature in our interim and annual reports.

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 the results of the quarter ended June 30, 2009, we applied the guidance of ASC 250-10-S99-1 and S99-2 (formerly known as SAB 99 and 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”.

 

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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 ASC 470-20:

 

     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 ASC 470-20

            

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 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 August 2009, the FASB issued Measuring Liabilities at Fair Value (ASC 820) Accounting Standards Update (“ASU”) No. 2009-05. ASU No. 2009-05 clarifies that a quoted price for the identical liability in an active market for a level 1 liability is the best evidence of fair value for that liability. ASU No. 2009-05 is effective beginning in the fourth quarter of 2009. We are currently

 

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assessing the impact of ASU No. 2009-05 on our consolidated financial position and results of operations and do not expect any material changes.

In September 2009, the FASB issued Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASC 820) ASU No. 2009-12. ASU No. 2009-12 permits an investor to estimate the fair value of an investment without further adjustment if the net asset value is calculated in accordance with the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies. ASU No. 2009-12 is effective beginning in the fourth quarter of 2009. We are currently assessing the impact of ASU No. 2009-12 on our consolidated financial position and results of operations and do not expect any material changes.

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

Common Stock

We did not repurchase any shares of our common stock for the three or nine months ended September 30, 2009. We repurchased 1.0 million shares for the nine months ended September 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 September 30, 2009, $150.0 million of shares remain authorized for repurchase under our current stock repurchase program. For more information regarding the CPP, please refer to our “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources” under Part II, Item 7 of our 2008 Form 10-K.

Preferred Stock

In connection with our participation in the CPP in the fourth quarter of 2008, for the nine months ended September 30, 2009, we have paid or accrued dividends of $8.8 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 nine months ended September 30, 2009 and 2008, respectively:

 

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

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

   2009     2008    2009     2008

Numerator:

         

Net income attributable to SVBFG

   $ 24,163      $ 25,918    $ 27,266      $ 74,172

Preferred stock dividend and discount accretion

     (3,555     —        (10,636     —  
                             

Net income available to common stockholders

   $ 20,608      $ 25,918    $ 16,630      $ 74,172
                             

Denominator:

         

Weighted average common shares outstanding-basic

     33,177        32,535      33,033        32,296

Weighted average effect of dilutive securities:

         

Stock options

     495        994      215        998

Restricted stock units

     —          106      —          93

2003 Convertible Notes

     —          —        —          868

2008 Convertible Notes

     —          143      —          —  
                             

Denominator for diluted calculation

     33,672        33,778      33,248        34,255
                             

Net income per common share:

         

Basic

   $ 0.62      $ 0.80    $ 0.50      $ 2.30
                             

Diluted

   $ 0.61      $ 0.77    $ 0.50      $ 2.17
                             

 

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

 

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

(Shares in thousands)

   2009    2008    2009    2008

Stock options

   1,718    827    2,485    822

Restricted stock units

   90    2    499    1

Warrant associated with CPP

   275    —      597    —  
                   

Total

   2,083    829    3,581    823
                   

In addition to the above, at September 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 anti-dilutive. 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 nine months ended September 30, 2009, we recorded share-based compensation expense of $3.4 million and $11.2 million, respectively, resulting in the recognition of $0.8 million and $2.7 million, respectively, in related tax benefits. For the three and nine months ended September 30, 2008, we recorded share-based compensation expense of $3.5 million and $10.9 million, respectively, resulting in the recognition of $1.0 million and $2.7 million, respectively, in related tax benefits.

Unrecognized Compensation Expense

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

 

(Dollars in thousands)

   Unrecognized Expense    Average Expected
Recognition Period - in
Years

Stock options

   $ 8,353    1.70

Restricted stock units

     10,163    1.31
         

Total unrecognized share-based compensation expense

   $ 18,516   
         

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 nine months ended September 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

   533,561        21.70      

Exercised

   (77,877     20.69      

Forfeited

   (18,385     40.43      

Expired

   (30,931     38.51      
              

Outstanding at September 30, 2009

   3,537,297        35.24    3.44    $ 35,334,682
              

Vested and expected to vest at September 30, 2009

   3,387,019        35.37    3.33      33,349,450
              

Exercisable at September 30, 2009

   2,491,910        35.21    2.44      23,904,431
              

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $43.27 as of September 30, 2009. The total intrinsic value of options exercised during the three and nine months ended September 30, 2009 was $0.8 million and $1.0 million, respectively, compared to $13.4 million and $22.0 million for the comparable 2008 periods.

 

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The table below provides information for restricted stock units under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the nine months ended September 30, 2009:

 

     Shares     Weighted Average
Grant Date Fair
Value

Nonvested at December 31, 2008

   393,463      $ 46.49

Granted

   128,441        23.96

Vested

   (97,444     21.56

Forfeited

   (10,906     30.38
        

Nonvested at September 30, 2009

   413,554        45.80
        

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

 

(Dollars in thousands)

   September 30, 2009    December 31, 2008

Federal funds sold overnight

   $ —      $ 250,000

Securities purchased under agreements to resell

     34,599      150,910

Other short-term investment securities

     13,931      77,482
             

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

   $ 48,530    $ 478,392
             

In addition to the above, as of September 30, 2009 and December 31, 2008, $3.7 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, and interest-earning deposits in other financial institutions were $160.3 million and $169.0 million, respectively.

5. Investment Securities

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

 

     September 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

   $ 25,627    $ 623    $ —        $ 26,250    $ —      $ —      $ —        $ —  

U.S. agency debentures

     899,634      7,668      (20     907,282      109,981      3,622      —          113,603

Residential mortgage-backed securities:

                     

Agency-issued mortgage-backed securities

     474,416      17,848      (125     492,139      438,688      9,910      (4     448,594

Agency-issued collateralized mortgage obligations

     1,283,563      19,179      (758     1,301,984      478,397      5,354      (476     483,275

Non-agency mortgage-backed securities

     98,051      196      (5,774     92,473      133,561      255      (18,486     115,330

Commercial mortgage-backed securities

     49,984      749      (124     50,609      54,202      —        (6,721     47,481

Municipal bonds and notes

     101,768      6,287      —          108,055      109,405      1,384      (2,034     108,755

Marketable equity securities

     3,946      74      (53     3,967      157      —        (5     152

Venture capital fund investments

     —        —        —          —        —        1      —          1
                                                         

Total available-for-sale securities

   $ 2,936,989    $ 52,624    $ (6,854   $ 2,982,759    $ 1,324,391    $ 20,526    $ (27,726   $ 1,317,191
                                                         

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

             643              1,703

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

                     

Private equity fund investments (2)

             232,294              242,645

Other private equity investments (3)

             89,968              82,444

Other investments (4)

             1,241              1,547

Non-marketable securities (equity method accounting):

                     

Other investments (5)

             51,975              27,000

Low income housing tax credit funds

             28,052              31,510

Non-marketable securities (cost method accounting):

                     

Private equity fund investments (6)

             91,330              69,971

Other private equity investments

             13,019              12,089
                             

Total investment securities

           $ 3,491,281            $ 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 September 30, 2009 and December 31, 2008:

 

     September 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

     588    14.4        470    14.4   
                  

Total marketable securities

   $ 643      $ 1,703   
                  

 

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(2) The following table shows the amount of investments by the following consolidated funds of funds and our ownership of each fund at September 30, 2009 and December 31, 2008:

 

     September 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

SVB Strategic Investors Fund, LP

   $ 52,224    12.6   $ 65,985    12.6

SVB Strategic Investors Fund II, LP

     82,250    8.6        94,161    8.6   

SVB Strategic Investors Fund III, LP

     91,845    5.9        80,780    5.9   

SVB Strategic Investors Fund IV, LP

     5,975    5.0        1,719    5.0   
                  

Total private equity fund investments

   $ 232,294      $ 242,645   
                  

 

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

 

     September 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Silicon Valley BancVentures, LP

   $ 21,113    10.7   $ 24,188    10.7

SVB Capital Partners II, LP (i)

     41,148    5.1        38,234    5.1   

SVB India Capital Partners I, LP

     27,707    14.4        20,022    14.4   
                  

Total other private equity investments

   $ 89,968      $ 82,444   
                  

 

  (i) At September 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 September 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 in the following funds and our ownership of each fund at September 30, 2009 and December 31, 2008:

 

     September 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Gold Hill Venture Lending 03, LP (i)

   $ 15,628    9.3   $ 18,234    9.3

Partners for Growth II, LP

     11,525    24.2        8,559    24.2   

Other fund investments

     24,822    N/A        207    N/A   
                  

Total other investments

   $ 51,975      $ 27,000   
                  

 

  (i) At September 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 351 and 360 private equity funds at September 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 September 30, 2009, we concluded that 33 of our investments had declines in value that were determined to be other-than-temporary, and as a result, we recognized OTTI losses of $2.1 million. For the nine months ended September 30, 2009 we recognized OTTI losses of $3.7 million resulting from other-than-temporary declines in value for 74 of the 351 investments. The OTTI losses are included in net gains (losses) on investment securities, a component of noninterest income. For the remaining 277 investments at September 30,

 

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2009, we concluded that any declines in value were temporary and as such, no OTTI was recognized. At September 30, 2009, the carrying value of these private equity fund investments (cost method accounting) was $91.3 million, and the estimated fair value was $84.2 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 September 30, 2009:

 

     September 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

   $ 30,103    $ (20   $ —      $ —        $ 30,103    $ (20

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

     20,429      (125     —        —          20,429      (125

Agency-issued collateralized mortgage obligations (1)

     173,542      (733     2,431      (25     175,973      (758

Non-agency mortgage-backed securities (1)

     8,391      (151     66,222      (5,623     74,613      (5,774

Commercial mortgage-backed securities (1)

     —        —          14,950      (124     14,950      (124

Marketable equity securities

     3,946      (53     —        —          3,946      (53
                                             

Total temporarily impaired securities

   $ 236,411    $ (1,082   $ 83,603    $ (5,772   $ 320,014    $ (6,854
                                             

 

(1) As of September 30, 2009, we identified a total of 44 investments that were in unrealized loss positions, of which 25 investments totaling $83.6 million with unrealized losses of $5.8 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 November 2002 and March 2003, non-agency mortgage-backed securities between June 2003 and July 2005, commercial mortgage-backed securities between May 2005 and July 2005. 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 spread relative to 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 September 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. Impaired investments are recognized and presented according to FASB guidance over other-than-temporary impairments (ASC 320-10-65, formerly known as FSP SFAS No. 115-2 and 124-2). Based on the analysis under current accounting guidance we deem all impairments to be temporary and changes in value for our temporarily impaired securities as of September 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 a quarterly 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
 

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
                                             

 

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The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on debt securities classified as available-for-sale as of September 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.

 

    September 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

  $ 26,250   2.39   $ —     $ —     $ 26,250   2.39   $ —     —     $ —     —  

U.S. agency debentures

    907,282   2.41        35,393     4.32        812,067   2.18        59,822   4.41        —     —     

Residential mortgage-backed securities:

                   

Agency-issued mortgage-backed securities

    492,139   4.70        —       —          2,216   6.43        137,694   4.40        352,229   4.80   

Agency-issued collateralized mortgage obligations

    1,301,984   3.87        —       —          —     —          80,444   4.48        1,221,540   3.83   

Non-agency mortgage-backed securities

    92,473   4.93        —       —          —     —          21,060   4.75        71,413   4.98   

Commercial mortgage-backed securities

    50,609   4.67        —       —          —     —          —     —          50,609   4.67   

Municipal bonds and notes

    108,055   6.08        4,778     7.34        4,183   5.68        35,252   5.80        63,842   6.17   
                                                             

Total

  $ 2,978,792   3.68      $ 40,171     4.68      $ 844,716   2.22      $ 334,272   4.59      $ 1,759,633   4.18   
                                                             

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 nine months ended September 30, 2009 and 2008:

 

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

(Dollars in thousands)

   2009     2008     2009     2008  

Gross gains on investment securities:

        

Available-for-sale securities, at fair value

   $ 8      $ 1      $ 15      $ 206   

Marketable securities (investment company fair value accounting)

     111        18        1,290        630   

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

        

Private equity fund investments

     7,101        1,723        8,370        18,538   

Other private equity investments

     4,531        4,694        4,724        10,134   

Other investments

     71        41        684        196   

Non-marketable securities (equity method accounting):

        

Other investments

     2,361        148        5,170        1,679   

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     15        318        316        728   

Other private equity investments

     —          4        22        85   
                                

Total gross gains on investment securities

     14,198        6,947        20,591        32,196   
                                

Gross losses on investment securities:

        

Available-for-sale securities, at fair value

     —          (1,234     (41     (2,775

Marketable securities (investment company fair value accounting)

     (16     (1,348     (409     (3,274

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

        

Private equity fund investments

     (4,321     (3,585     (41,081     (19,334

Other private equity investments

     (2,072     (393     (10,104     (2,926

Other investments

     —          (132     —          (5,646

Non-marketable securities (equity method accounting):

        

Other investments

     (1,690     (1     (2,973     (1,094

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     (2,105     (1,130     (3,754     (1,838

Other private equity investments

     (89     —          (119     (258
                                

Total gross losses on investment securities

     (10,293     (7,823     (58,481     (37,145
                                

Gains (losses) on investment securities, net

   $ 3,905      $ (876   $ (37,890   $ (4,949
                                

Gains (losses) attributable to noncontrolling interests, including carried interest

   $ 4,880      $ 1,220      $ (32,491   $ (227
                                

 

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6. Loans and Allowance for Loan Losses

The composition of loans, net of unearned income of $36.7 million and $45.4 million at September 30, 2009 and December 31, 2008, respectively, is presented in the following table:

 

(Dollars in thousands)

   September 30, 2009    December 31, 2008

Commercial loans

   $ 3,714,075    $ 4,515,019

Premium wine (1)

     415,468      419,539

Community development loans (2)

     66,526      48,293

Consumer and other (3)

     459,748      523,402
             

Total loans, net of unearned income

   $ 4,655,817    $ 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 September 30, 2009 and December 31, 2008, $275.3 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 September 30, 2009, and December 31, 2008 were comprised of the following:

 

(Dollars in thousands)

   September 30, 2009    December 31, 2008

Home equity lines of credit (i)

   $ 88,453    $ 89,544

Loans to eligible employees (ii)

     85,239      74,759

Loans for personal residence (iii)

     58,355      58,700
             

Consumer loans secured by real estate

   $ 232,047    $ 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 nine months ended September 30, 2009 and 2008 was as follows:

 

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

(Dollars in thousands)

   2009     2008     2009     2008  

Allowance for loan losses, beginning balance

   $ 110,473      $ 52,888      $ 107,396      $ 47,293   

Provision for loan losses

     8,030        13,682        72,889        29,756   

Gross loan charge-offs

     (46,553     (7,000     (110,464     (22,306

Loan recoveries

     14,763        720        16,892        5,547   
                                

Allowance for loan losses, ending balance

   $ 86,713      $ 60,290      $ 86,713      $ 60,290   
                                

Nonaccrual Loans

The aggregate investment in loans for which impairment has been determined totaled $72.2 million and $84.9 million at September 30, 2009 and December 31, 2008, respectively. There were no commitments available for funding to any clients with nonaccrual loans at September 30, 2009 and at December 31, 2008. The allocation of the allowance for loan losses related to impaired loans was $23.4 million and $25.9 million at September 30, 2009 and December 31, 2008, respectively. We did not have any accruing loans past due 90 days or more at September 30, 2009, compared to $2.3 million at December 31, 2008.

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 ASC 350 (formerly known as 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 September 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 September 30, 2009 and December 31, 2008:

 

(Dollars in thousands)

  

Maturity

   September 30, 2009    December 31, 2008

Short-term borrowings:

        

Other short-term borrowings

   (1)    $ 52,285    $ 62,120
                

Total short-term borrowings

      $ 52,285    $ 62,120
                

Long-term debt:

        

FHLB advances

   (2)    $ —      $ 100,000

5.70% senior notes

   June 1, 2012      271,715      279,370

6.05% subordinated notes

   June 1, 2017      283,929      313,953

3.875% convertible senior notes (3)

   April 15, 2011      246,430      244,783

7.0% junior subordinated debentures

   October 15, 2033      55,968      55,914

4.99% long-term notes payable

   (4)      8,443      —  

8.0% long-term notes payable

   (5)      263      1,403
                

Total long-term debt

      $ 866,748    $ 995,423
                

 

(1) Represents cash collateral received from counterparties for our interest rate swap agreements related to our senior and subordinated notes.
(2) Balance as of December 31, 2008 included Federal Home Loan Bank (“FHLB”) advances of $50 million that matured in May 2009, and $50 million that was repaid in September 2009.
(3) Balance as of December 31, 2008 reflects a retrospective adjustment resulting from our adoption of ASC 470-20 (formerly known as 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. SVBFG purchased a 65% interest in eProsper in 2006.

Interest expense related to short-term borrowings and long-term debt was $6.4 million and $21.8 million for the three and nine months ended September 30, 2009, respectively, and $12.5 million and $36.7 million for the comparable 2008 periods. 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. Additionally, interest expense for the three and nine months ended September 30, 2008 reflects retrospective adjustments resulting from our adoption of ASC 470-20 (formerly known as 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 nine months ended September 30, 2009, the effective interest rate for our 2008 Convertible Notes was 5.66 percent and 5.73 percent, respectively, and interest expense was $3.5 million and $10.5 million, respectively. For the three and nine months ended September 30, 2008, the effective interest rate for our 2008 Convertible Notes was 5.69 percent and 5.65 percent, respectively, and interest expense was $3.5 million and $6.6 million respectively. At September 30, 2009, the unamortized debt discount totaled $3.6 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 September 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 (primarily comprised of agency-issued mortgage securities) at September 30, 2009 totaled $540.9 million, all of which was unused and available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank at September 30, 2009 totaled $89.9 million, all of which was unused and available to support additional borrowings.

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 swap agreements at the time of debt issuance based upon London Interbank Offered Rates (“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 ASC 815 (formerly known as SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities) , 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. In accordance with ASC 830 (formerly known as 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 (losses) 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 nine months ended September 30, 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 (losses) 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 September 30, 2009 and December 31, 2008, respectively, were as follows:

 

          September 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    $ 56,228      $ 52,285    $ 3,943      $ 550,000    $ 94,142      $ 62,120    $ 32,022   
                                                       

Derivatives not designated as hedging instruments:

                       

Currency Exchange Risks:

                       

Foreign exchange forwards

   Other assets      29,994      1,434        —        1,434        50,393      4,212        —        4,212   

Foreign exchange forwards

   Other liabilities      19,639      (693     —        (693     23,193      (1,092     —        (1,092
                                                       

Net exposure

           741        —        741           3,120        —        3,120   
                                                       

Other Derivative Instruments:

                       

Equity warrant assets

   Other assets      122,123      42,446        —        42,446        130,401      43,659        —        43,659   
                                                       

Other derivatives:

                       

Foreign exchange forwards

   Other assets      362,258      20,370        —        20,370        354,399      32,476        —        32,476   

Foreign exchange forwards

   Other liabilities      346,668      (19,038     —        (19,038     344,703      (31,039     —        (31,039

Foreign currency options

   Other assets      7,726      429        —        429        25,848      501        —        501   

Foreign currency options

   Other liabilities      7,726      (429     —        (429     25,848      (501     —        (501
                                                       

Net exposure

           1,332        —        1,332           1,437        —        1,437   
                                                       

Net

         $ 100,747      $ 52,285    $ 48,462         $ 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 September 30, 2009 remain at “A” or higher and there were no material changes in their credit ratings during the nine months ended September 30, 2009.

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

 

          Three months
ended September 30,
    Nine months
ended September 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    $ 5,741      $ 3,497      $ 14,874      $ 7,282   

Changes in fair value of interest rate swap

   Net (losses) gains on derivative instruments      —          (10     (170     376   
                                   

Net gains associated with interest rate risk derivatives

      $ 5,741      $ 3,487      $ 14,704      $ 7,658   
                                   

Derivatives not designated as hedging instruments:

           

Currency Exchange Risks:

           

(Losses) gains on foreign currency loan revaluations, net

   Other noninterest income    $ (94   $ (4,740   $ 1,886      $ (2,825

(Losses) gains on foreign exchange forward contracts, net

   Net (losses) gains on derivative instruments      (128     4,452        (2,664     1,985   
                                   

Net losses associated with currency risk

      $ (222   $ (288   $ (778   $ (840
                                   

Other Derivative Instruments:

           

(Losses) gains on equity warrant assets

   Net (losses) gains on derivative instruments    $ (1,322   $ 1,445      $ (593   $ 8,949   
                                   

Gains on client foreign exchange forward contracts, net

   Net (losses) gains on derivative instruments    $ 360      $ 561      $ 1,304      $ 1,767   
                                   

Gains on covered call options, net

   Net (losses) gains on derivative instruments    $ —        $ 24      $ —        $ 402   
                                   

10. Other Noninterest Income and Other Noninterest Expense

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

 

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

(Dollars in thousands)

   2009     2008 *     2009    2008 *  

Fund management fees

   $ 2,437      $ 2,228      $ 7,625    $ 6,105   

Service-based fee income (1)

     1,700        2,073        5,645      6,329   

(Losses) gains on foreign currency loans revaluation, net

     (94     (4,740     1,886      (2,825

Other

     2,206        2,352        6,674      7,585   
                               

Total other noninterest income

   $ 6,249      $ 1,913      $ 21,830    $ 17,194   
                               

 

* 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.
(1) Includes income from SVB Analytics and eProsper.

 

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

 

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

(Dollars in thousands)

   2009    2008    2009    2008

Tax credit fund amortization

   $ 1,165    $ 1,036    $ 3,458    $ 3,077

Telephone

     324      1,373      3,042      3,870

Postage and supplies

     165      1,032      2,328      2,810

Other

     2,465      3,094      10,147      10,161
                           

Total other noninterest expense

   $ 4,119    $ 6,535    $ 18,975    $ 19,918
                           

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 ASC 280 (formerly known as 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 September 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:

 

   

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 and Partners for Growth funds, and certain strategic investments held by SVB Financial.

 

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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, which provide secured debt, typically to early-stage and mid-stage clients, and Partners for Growth funds, which provide secured debt primarily to mid-stage and late-stage clients, 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.

Additionally, we made certain changes effective January 1, 2009 as follows: (i) FDIC and state bank assessments are reported in noninterest expense within Global Commercial Bank, whereas previously these were recognized in noninterest expense under the Reconciling Items column; and (ii) we report the provision for loan losses by reportable segments, whereas previously the provision for loan losses was recognized under the Reconciling Items column. We have reclassified all prior period amounts to conform to the current period’s presentation.

 

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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 September 30, 2009

            

Net interest income (loss)

   $ 88,494      $ 8,582      $ (10   $ (76   $ (172   $ 96,818   

Provision for loan losses

     (3,153     (4,855     —          —          (22     (8,030

Noninterest income

     25,938        333        3,014        41        4,981        34,307   

Noninterest expense (2)

     (31,961     (3,114     (3,355     (2,726     (38,651     (79,807
                                                

Income (loss) before income tax expense (3)

   $ 79,318      $ 946      $ (351   $ (2,761   $ (33,864   $ 43,288   
                                                

Total average loans, net of unearned income

   $ 3,575,026      $ 945,694      $ —        $ —        $ 23,790      $ 4,544,510   

Total average assets

     3,683,824        946,811        96,077        87,396        6,596,518        11,410,626   

Total average deposits

     8,757,097        146,367        —          —          6,958        8,910,422