SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 05/07/2010 16:05:03)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2010

OR

 

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

For the transition period from              to             .

Commission File Number: 000-15637

 

 

SVB FINANCIAL GROUP

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   91-1962278

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3003 Tasman Drive, Santa Clara, California   95054-1191
(Address of principal executive offices)   (Zip Code)

(408) 654-7400

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

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

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

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

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

At April 30, 2010, 41,740,445 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 March 31, 2010 and December 31, 2009    3
  Interim Consolidated Statements of Income (unaudited) for the three months ended March 31, 2010 and 2009    4
  Interim Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2010 and 2009    5
  Interim Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended March 31, 2010 and 2009    6
  Interim Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2010 and 2009    7
  Notes to Interim Consolidated Financial Statements (unaudited)    8
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    32
Item 3.   Quantitative and Qualitative Disclosures about Market Risk    60
Item 4.   Controls and Procedures    61
PART II - OTHER INFORMATION    61
Item 1.   Legal Proceedings    61
Item 1A.   Risk Factors    61
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    70
Item 3.   Defaults Upon Senior Securities    70
Item 4.   (Removed and Reserved)    70
Item 5.   Other Information    70
Item 6.   Exhibits    70
SIGNATURE    71
INDEX TO EXHIBITS    72

 

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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)    March 31,
2010
    December 31,
2009
 

Assets

    

Cash and due from banks

   $ 4,614,434      $ 3,454,611   

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

     77,269        58,242   
                

Cash and cash equivalents

     4,691,703        3,512,853   
                

Investment securities

     4,939,084        4,491,752   

Loans, net of unearned income

     4,205,245        4,548,094   

Allowance for loan losses

     (68,271     (72,450
                

Net loans

     4,136,974        4,475,644   
                

Premises and equipment, net of accumulated depreciation and amortization

     34,966        31,736   

Accrued interest receivable and other assets

     322,522        329,414   
                

Total assets

   $ 14,125,249      $ 12,841,399   
                

Liabilities and total equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 7,012,310      $ 6,298,988   

Negotiable order of withdrawal (NOW)

     47,840        53,200   

Money market

     1,462,661        1,292,215   

Money market deposits in foreign offices

     73,326        49,722   

Time

     331,981        332,310   

Sweep

     2,585,176        2,305,502   
                

Total deposits

     11,513,294        10,331,937   
                

Short-term borrowings

     39,895        38,755   

Other liabilities

     163,187        139,947   

Long-term debt

     859,713        856,650   
                

Total liabilities

     12,576,089        11,367,289   
                

Commitments and contingencies (Note 12)

    

SVBFG stockholders’ equity:

    

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

     —          —     

Common stock, $0.001 par value, 150,000,000 shares authorized; 41,526,122 shares and 41,338,389 shares outstanding, respectively

     42        41   

Additional paid-in capital

     398,510        389,490   

Retained earnings

     751,472        732,907   

Accumulated other comprehensive income

     23,456        5,905   
                

Total SVBFG stockholders’ equity

     1,173,480        1,128,343   

Noncontrolling interests

     375,680        345,767   
                

Total equity

     1,549,160        1,474,110   
                

Total liabilities and total equity

   $ 14,125,249      $ 12,841,399   
                

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 March 31,  
(Dollars in thousands, except per share amounts)    2010     2009  

Interest income:

    

Loans

   $ 73,942      $ 88,251   

Investment securities:

    

Taxable

     32,267        14,851   

Non-taxable

     970        1,061   

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

     2,840        2,376   
                

Total interest income

     110,019        106,539   
                

Interest expense:

    

Deposits

     3,665        6,847   

Borrowings

     5,514        8,181   
                

Total interest expense

     9,179        15,028   
                

Net interest income

     100,840        91,511   

Provision for loan losses

     10,745        43,466   
                

Net interest income after provision for loan losses

     90,095        48,045   
                

Noninterest income:

    

Gains (losses) on investment securities, net

     16,004        (35,045

Foreign exchange fees

     8,861        7,466   

Deposit service charges

     7,225        6,823   

Client investment fees

     3,940        6,248   

Credit card fees

     2,687        1,439   

Letters of credit and standby letters of credit income

     2,511        2,892   

Gains on derivative instruments, net

     1,982        1,814   

Other

     6,063        2,782   
                

Total noninterest income (loss)

     49,273        (5,581
                

Noninterest expense:

    

Compensation and benefits

     59,830        48,280   

Professional services

     12,098        12,080   

Premises and equipment

     5,784        5,407   

FDIC assessments

     5,049        2,675   

Net occupancy

     4,688        4,305   

Business development and travel

     4,286        3,273   

Correspondent bank fees

     1,948        1,913   

Impairment of goodwill

     —          4,092   

Reduction of provision for unfunded credit commitments

     (1,507     (2,284

Other

     6,400        7,399   
                

Total noninterest expense

     98,576        87,140   
                

Income (loss) before income tax expense

     40,792        (44,676

Income tax expense (benefit)

     11,582        (2,448
                

Net income (loss) before noncontrolling interests

     29,210        (42,228

Net (income) loss attributable to noncontrolling interests

     (10,653     33,993   
                

Net income (loss) attributable to SVBFG

   $ 18,557      $ (8,235
                

Preferred stock dividend and discount accretion

     —          (3,536
                

Net income (loss) available to common stockholders

   $ 18,557      $ (11,771
                

Earnings (loss) per common share—basic

   $ 0.45      $ (0.36

Earnings (loss) per common share—diluted

     0.44        (0.36

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 March 31,  
(Dollars in thousands)    2010     2009  

Net income (loss) before noncontrolling interests

   $ 29,210      $ (42,228

Other comprehensive income, net of tax:

    

Cumulative translation gains (losses):

    

Foreign currency translation gains (losses)

     1,520        (1,431

Related tax (expense) benefit

     (620     365   

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

    

Unrealized holding gains

     27,226        6,268   

Related tax expense

     (10,559     (2,571

Reclassification adjustment for losses included in net income (loss)

     (27     (7

Related tax benefit

     11        3   
                

Other comprehensive income, net of tax

     17,551        2,627   
                

Comprehensive income (loss)

     46,761        (39,601

Comprehensive (income) loss attributable to noncontrolling interests

     (10,653     33,993   
                

Comprehensive income (loss) attributable to SVBFG

   $ 36,108      $ (5,608
                

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)

 

    Preferred Stock    Common Stock   Additional
Paid-in
    Retained     Accumulated
Other
Comprehensive
    Total SVBFG
Stockholders’
    Noncontrolling     Total Equity  
(Dollars in thousands)   Shares    Amount    Shares   Amount   Capital     Earnings     (Loss) Income     Equity     Interests    

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

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

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

  —        —      —       —       238        —          —          238        —          238   

Net (loss)

  —        —      —       —       —          (8,235     —          (8,235     (33,993     (42,228

Capital calls and (distributions), net

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

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

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

Foreign currency translation adjustments, net of tax

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

Stock-based compensation expense

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

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

  —        —      —       —       1,105        —          —          1,105        —          1,105   

Preferred stock dividend and discount accretion

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

Other-net

  —        —      —       —       223        1        —          224        —          224   
                                                                     

Balance at March 31, 2009

  235,000    $ 221,783    32,935,515   $ 33   $ 71,760      $ 697,956      $ (3,162   $ 988,370      $ 300,274      $ 1,288,644   
                                                                     

Balance at December 31, 2009

  —      $ —      41,338,389   $ 41   $ 389,490      $ 732,907      $ 5,905      $ 1,128,343      $ 345,767      $ 1,474,110   
                                                                     

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

  —        —      187,733     1     5,065        —          —          5,066        —          5,066   

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

  —        —      —       —       779        —          —          779        —          779   

Net income

  —        —      —       —       —          18,557        —          18,557        10,653        29,210   

Capital calls and (distributions), net

  —        —      —       —       —          —          —          —          19,260        19,260   

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

  —        —      —       —       —          —          16,651        16,651        —          16,651   

Foreign currency translation adjustments, net of tax

  —        —      —       —       —          —          900        900        —          900   

Stock-based compensation expense

  —        —      —       —       3,196        —          —          3,196        —          3,196   

Other-net

  —        —      —       —       (20     8        —          (12     —          (12
                                                                     

Balance at March 31, 2010

  —      $ —      41,526,122   $ 42   $ 398,510      $ 751,472      $ 23,456      $ 1,173,480      $ 375,680      $ 1,549,160   
                                                                     

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)

 

     Three months ended March 31,  
(Dollars in thousands)    2010     2009  

Cash flows from operating activities:

    

Net income (loss) before noncontrolling interests

   $ 29,210      $ (42,228

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

    

Impairment of goodwill

     —          4,092   

Provision for loan losses

     10,745        43,466   

(Reduction of) provision for unfunded credit commitments

     (1,507     (2,284

Changes in fair values of derivatives, net

     518        (1,237

(Gains) losses on investment securities, net

     (16,004     35,045   

Depreciation and amortization

     4,547        5,245   

Amortization of premiums on investment securities, net

     7,008        1,994   

Tax benefit of original issue discount

     —          1,105   

Tax (expense) benefit from stock exercises

     (313     178   

Amortization of share-based compensation

     3,291        3,887   

Amortization of deferred warrant-related loan fees

     (1,614     (2,126

Deferred income tax expense (benefit)

     1,236        (2,937

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

     24        50   

Changes in other assets and liabilities:

    

Accrued interest, net

     4,114        5,503   

Accounts receivable

     1,370        (4,031

Income tax receivable, net

     8,550        (12,676

Accrued compensation

     (8,477     (16,313

Foreign exchange spot contracts, net

     12,258        (8,106

Other, net

     2,864        4,631   
                

Net cash provided by operating activities

     57,820        13,258   
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (878,579     (340,303

Proceeds from sales of available-for-sale securities

     714        7   

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

     489,932        86,882   

Purchases of nonmarketable securities (cost and equity method accounting)

     (8,332     (14,035

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

     1,769        648   

Purchases of nonmarketable securities (investment fair value accounting)

     (18,101     (12,381

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

     4,859        2,193   

Net decrease in loans

     321,525        460,629   

Proceeds from recoveries of charged-off loans

     6,256        1,161   

Proceeds from sale of other real estate owned

     196        —     

Payment for acquisition of intangibles, net of cash acquired

     (360     —     

Purchases of premises and equipment

     (6,763     (2,475
                

Net cash (used for) provided by investing activities

     (86,884     182,326   
                

Cash flows from financing activities:

    

Net increase in deposits

     1,181,357        1,008,852   

Principal payments of other long-term debt

     —          (505

Increase (decrease) in short-term borrowings

     1,140        (5,670

Capital contributions from noncontrolling interests, net of distributions

     19,260        13,911   

Tax benefit from stock exercises

     1,092        60   

Dividends paid on preferred stock

     —          (2,056

Proceeds from issuance of common stock

     5,065        85   
                

Net cash provided by financing activities

     1,207,914        1,014,677   
                

Net increase in cash and cash equivalents

     1,178,850        1,210,261   

Cash and cash equivalents at beginning of period

     3,512,853        2,436,725   
                

Cash and cash equivalents at end of period

   $ 4,691,703      $ 3,646,986   
                

Supplemental disclosures:

    

Cash paid during the period for:

    

Interest paid

   $ 5,618      $ 9,475   

Income taxes paid

     1,129        12,150   

Noncash items during the period:

    

Preferred stock dividends accrued, not yet paid

   $ —        $ 1,469   

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

     16,667        3,697   

Net change in fair value of interest rate swaps

     3,137        (31,629

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 months ended March 31, 2010 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, 2009 (“2009 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 2009 Form 10-K, and with the accounting pronouncements adopted during the three months ended March 31, 2010, 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 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 and our investments in which we have a majority owned voting interest. All significant intercompany accounts and transactions have been eliminated.

We determine whether we have a controlling financial interest in an entity by evaluating whether the entity is a VIE for which we are the primary beneficiary. We consider the following factors in evaluating whether our involvement with the VIE is significant and designates us as the primary beneficiary:

 

  1. We have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and,

 

  2. The aggregate indirect and direct variable interests held by the Company have the obligation to absorb losses or the right to receive benefits from the entity that could be significant to the VIE.

We reassess our initial evaluation of whether an entity is a VIE upon the occurrence of certain events, such as changes in an entity’s capital structure or in its activities, known as reconsideration events. Our evaluation of whether we are the primary beneficiary of a VIE is not limited to the occurrence of certain reconsideration events but is instead reassessed on an ongoing basis. We have not provided financial or other support during the periods presented to any VIE that we were not previously contractually required to provide. We are variable interest holders in certain partnerships for which we are the primary beneficiary.

Current Accounting Developments

In the first quarter of 2010, we adopted new guidance related to the following topics:

 

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Table of Contents
   

ASU No. 2009-16, Accounting for Transfers of Financial Assets

 

   

ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities

 

   

ASU No. 2010-06, Improving Disclosures about Fair Value Measurements

Information about these pronouncements is described in more detail below.

Impact of Adopting ASU No. 2009-16

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard which defines the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. This standard also removes the concept of a qualifying special-purpose entity (“QSPE”) for accounting purposes. Our adoption of this standard as of January 1, 2010 did not have a material impact on our financial position, results of operations or stockholders’ equity as we have not historically made sales or transfers of assets to QSPE’s. We do engage from time to time in selling our loans, however, historically our participating interests in those sales has the same priority and is not subordinated to the other participating interest holders’ interest. Therefore, the change in the standard of removing the QSPE concept and the new definition of participating interest did not have an impact on our sales treatment.

Impact of Adopting ASU No. 2009-17

In June 2009, the FASB issued a new accounting standard which 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 to the VIE. Our adoption of this standard as of January 1, 2010 required us to de-consolidate Gold Hill Venture Lending Partners 03, LLC (“GHLLC”), which resulted in a reduction of total assets and total equity of $1.1 million. The identification of VIE’s or changes in our consolidation of entities did not have a material impact on our financial position, results of operations or stockholder’s equity.

Impact of Adopting ASU No. 2010-06

In January 2010, the FASB issued a new accounting standard which requires the addition of new disclosures and clarifies existing disclosure requirements already included in the guidance for fair value measurements. The new disclosures related to significant transfers in and out of Level 1, Level 2 and Level 3 fair value measurements and the reasons for the transfers, as well as the clarifications of existing disclosures were adopted as of January 1, 2010. The new disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for interim or annual reporting periods beginning after December 15, 2010. This standard clarified and increased the disclosure requirements for fair value measurements and did not have an impact on our financial position, results of operations or stockholders’ equity. See Note 14- “Fair Value of Financial Instruments” for further details.

Reclassifications

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

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

Common Stock

In connection with our previous participation in the U.S. Treasury’s Capital Purchase Program (“CPP”), as of March 31, 2010, we have a warrant outstanding for 354,058 shares of our common stock at an exercise price of $49.78 per share. We have engaged in negotiations with the U.S. Treasury regarding the repurchase of our warrant, but have not reached an agreement on the repurchase. If we are unable to reach an agreement, the U.S. Treasury may decide to sell the warrant through an auction process.

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 pursuant to stock options and restricted stock units under our equity incentive plan, stock purchases under our employee stock purchase plan, our 3.875% convertible senior notes (“2008 Convertible Notes”) and related warrants and note hedge, and our warrant under the CPP. Potentially dilutive common shares are excluded from the computation of dilutive earnings per share in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three months ended March 31, 2010 and 2009, respectively:

 

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       Three months ended March 31,  

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

     2010    2009  

Numerator:

       

Net income (loss) attributable to SVBFG

     $ 18,557    $ (8,235

Preferred stock dividend and discount accretion

       —        (3,536
                 

Net income (loss) available to common stockholders

     $ 18,557    $ (11,771
                 

Denominator:

       

Weighted average common shares outstanding-basic

       41,405      32,932   

Weighted average effect of dilutive securities:

       

Stock options

       751      —     

Restricted stock units

       135      —     
                 

Denominator for diluted calculation

       42,291      32,932   
                 

Net income (loss) per common share:

       

Basic

     $ 0.45    $ (0.36
                 

Diluted

     $ 0.44    $ (0.36
                 

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

Any dilutive effect of our 2008 Convertible Notes are included in the calculation of diluted EPS using the treasury stock method. The 2008 Convertible Notes did not impact our weighted average diluted common shares total as the applicable conversion price was higher than the average daily closing price for the three month periods. Our warrants associated with the 2008 Convertible Notes and CPP also did not impact our weighted average diluted common shares total as the applicable conversion prices were higher than the average daily closing price for the three month periods.

The following table summarizes the common shares excluded from the diluted EPS calculation as they were deemed to be anti-dilutive for the three months ended March 31, 2010 and 2009, respectively:

 

     Three months ended March 31,

(Shares in thousands)

   2010    2009

Stock options

   7    2,933

Restricted stock units

   —      847

Warrant associated with CPP

   38    1,062
         

Total

   45    4,842
         

In addition to the above, at March 31, 2010, 4.7 million shares of our 2008 Convertible Notes and associated warrants were outstanding but also excluded from the diluted EPS calculation as they were deemed to be 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 13- “Derivative Financial Instruments” and Note 12- “Short-Term Borrowings and Long-Term Debt” under Part II, Item 8 of our 2009 Form 10-K.

3. Share-Based Compensation

For the three months ended March 31, 2010 and 2009, we recorded share-based compensation expense of $3.3 million and $3.9 million, respectively, resulting in the recognition of $0.8 million and $1.0 million, respectively, in related tax benefits.

Unrecognized Compensation Expense

At March 31, 2010, unrecognized share-based compensation expense was as follows:

 

(Dollars in thousands)

   Unrecognized Expense    Average Expected
Recognition Period - in
Years

Stock options

   $ 6,997    2.46

Restricted stock units

     7,452    1.97
         

Total unrecognized share-based compensation expense

   $ 14,449   
         

 

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Share-Based Payment Award Activity

The table below provides stock option information related to the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the three months ended March 31, 2010:

 

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

Outstanding at December 31, 2009

   3,500,723      $ 35.31      

Granted

   2,997        44.33      

Exercised

   (188,019     27.76      

Forfeited

   (38,975     43.57      
              

Outstanding at March 31, 2010

   3,276,726        35.64    3.08    $ 39,217,347
              

Vested and expected to vest at March 31, 2010

   3,103,979        35.95    2.93      36,257,469
              

Exercisable at March 31, 2010

   2,267,880        35.89    2.06      26,217,920
              

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $46.66 as of March 31, 2010. The total intrinsic value of options exercised during the three months ended March 31, 2010 was $3.2 million compared to $0.2 million for the comparable 2009 period.

The table below provides information for restricted stock units under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the three months ended March 31, 2010:

 

     Shares     Weighted Average
Grant Date Fair
Value

Nonvested at December 31, 2009

   336,806      $ 39.55

Granted

   6,583        45.66

Vested

   (5,468     45.83

Forfeited

   (5,025     30.05
        

Nonvested at March 31, 2010

   332,896        39.77
        

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

The following table details the securities purchased under agreements to resell and other short-term investment securities at March 31, 2010 and December 31, 2009, respectively:

 

(Dollars in thousands)

   March 31, 2010    December 31, 2009

Securities purchased under agreements to resell

   $ 55,470    $ 58,242

Other short-term investment securities

     21,799      —  
             

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

   $ 77,269    $ 58,242
             

In addition, as of March 31, 2010 and December 31, 2009, $4.3 billion and $3.1 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 $148.1 million and $171.6 million, respectively.

 

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5. Investment Securities

The major components of our investment securities portfolio at March 31, 2010 and December 31, 2009 are as follows:

 

     March 31, 2010    December 31, 2009

(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

   $ 25,540    $ 593    $ —        $ 26,133    $ 25,583    $ 464    $ —        $ 26,047

U.S. agency debentures

     1,194,106      5,981      (2,207     1,197,880      887,008      5,188      (443     891,753

Residential mortgage-backed securities:

                     

Agency-issued mortgage-backed securities

     1,548,582      17,362      (9,085     1,556,859      1,413,817      14,050      (17,237     1,410,630

Agency-issued collateralized mortgage obligations

     1,312,124      27,504      (377     1,339,251      1,360,790      17,142      (5,557     1,372,375

Non-agency mortgage-backed securities

     82,469      147      (4,792     77,824      89,155      48      (5,507     83,696

Commercial mortgage-backed securities

     47,399      1,255      —          48,654      48,440      468      (107     48,801

Municipal bonds and notes

     97,566      2,344      (177     99,733      100,504      2,429      (56     102,877

Marketable equity securities

     1,231      7      (263     975      1,795      219      (5     2,009
                                                         

Total available-for-sale securities

   $ 4,309,017    $ 55,193    $ (16,901   $ 4,347,309    $ 3,927,092    $ 40,008    $ (28,912   $ 3,938,188
                                                         

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

             84              33

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

                     

Private equity fund investments (2)

             301,445              271,316

Other private equity investments (3)

             96,517              96,577

Other investments (4)

             996              1,143

Non-marketable securities (equity method accounting):

                     

Other investments (5)

             63,175              59,660

Low income housing tax credit funds

             25,745              26,797

Non-marketable securities (cost method accounting):

                     

Private equity fund investments (6)

             91,793              86,019

Other private equity investments

             12,020              12,019
                             

Total investment securities

           $ 4,939,084            $ 4,491,752
                             

 

(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.

 

(2) The following table shows the amount of investments by the following consolidated funds of funds and our ownership of each fund at March 31, 2010 and December 31, 2009:

 

     March 31, 2010     December 31, 2009  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

SVB Strategic Investors Fund, LP

   $ 49,693    12.6   $ 50,508    12.6

SVB Strategic Investors Fund II, LP

     92,510    8.6        85,820    8.6   

SVB Strategic Investors Fund III, LP

     118,294    5.9        102,568    5.9   

SVB Strategic Investors Fund IV, LP

     17,068    5.0        13,677    5.0   

SVB Capital Preferred Return Fund, LP

     11,460    20.0        8,330    20.0   

SVB Capital—NT Growth Partners, LP

     12,420    33.0        10,413    33.0   
                  

Total private equity fund investments

   $ 301,445      $ 271,316   
                  

 

(3) The following table shows the amount of investments by the following consolidated co-investment funds and our ownership of each fund at March 31, 2010 and December 31, 2009:

 

     March 31, 2010     December 31, 2009  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Silicon Valley BancVentures, LP

   $ 23,705    10.7   $ 24,023    10.7

SVB Capital Partners II, LP (i)

     36,213    5.1        36,847    5.1   

SVB India Capital Partners I, LP

     36,599    14.4        35,707    14.4   
                  

Total other private equity investments

   $ 96,517      $ 96,577   
                  

 

  (i) At March 31, 2010, we had a direct ownership interest of 1.3% and an indirect ownership interest of 3.8% in the fund through our ownership interest of SVB Strategic Investors Fund II, LP.

 

(4) Other investments within non-marketable securities (investment company fair value accounting) include our ownership in Partners for Growth, LP, a consolidated sponsored debt fund. At March 31, 2010 and December 31, 2009 we had a majority ownership interest of slightly more than 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.

 

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(5) The following table shows the amount of investments in the following funds and our ownership of each fund at March 31, 2010 and December 31, 2009:

 

     March 31, 2010     December 31, 2009  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Gold Hill Venture Lending 03, LP (i)

   $ 19,176    9.3   $ 16,134    9.3

Partners for Growth II, LP

     13,184    24.2        13,059    24.2   

Other investments

     30,815    N/A        30,467    N/A   
                  

Total other investments

   $ 63,175      $ 59,660   
                  

 

  (i) At March 31, 2010, we had a direct ownership interest of 4.8% in the fund and an indirect interest in the fund through our investment in GHLLC of 4.5%. Our aggregate direct and indirect ownership in the fund is 9.3%.

 

(6) Represents investments in 350 and 349 venture capital/private equity funds at March 31, 2010 and December 31, 2010, respectively, where our ownership interest is less than 5% of the voting interests of each such fund. For the three months ended March 31, 2010, we recognized other-than-temporary impairment (“OTTI”) losses of $0.3 million resulting from other-than-temporary declines in value for 14 of the 350 investments. The OTTI losses are included in net gains (losses) on investment securities, a component of noninterest income. For the remaining 336 investments at March 31, 2010, we concluded that any declines in value were temporary and as such, no OTTI was required to be recognized. At March 31, 2010, the carrying value of these private equity fund investments (cost method accounting) was $91.8 million, and the estimated fair value was $90.9 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 March 31, 2010:

 

     March 31, 2010  
     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

   $ 452,695    $ (2,207   $ —      $ —        $ 452,695    $ (2,207

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

     1,013,180      (9,085     —        —          1,013,180      (9,085

Agency-issued collateralized mortgage obligations (1)

     119,856      (367     562      (10     120,418      (377

Non-agency mortgage-backed securities (1)

     21,210      (1,487     48,840      (3,305     70,050      (4,792

Municipal bonds and notes

     15,448      (177     —        —          15,448      (177

Marketable equity securities

     651      (263     —        —          651      (263
                                             

Total temporarily impaired securities

   $ 1,623,040    $ (13,586   $ 49,402    $ (3,315   $ 1,672,442    $ (16,901
                                             

 

(1) As of March 31, 2010, we identified a total of 96 investments that were in unrealized loss positions, of which 18 investments totaling $49.4 million with unrealized losses of $3.3 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 were originally purchased in November 2002, and non-agency mortgage-backed securities between June 2003 and July 2005. All investments with unrealized losses for a period of time greater than 12 months were issued by a government-sponsored enterprise or had an investment grade credit rating issued by either Moody’s or S&P, or in some cases, both. Unrealized losses are due primarily to increases in market spreads 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 March 31, 2010, it is more likely than not that we will not be required to sell any securities prior to recovery of our adjusted cost basis. Based on our analysis we deem all impairments to be temporary and changes in value for our temporarily impaired securities as of March 31, 2010 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.

 

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

 

     December 31, 2009  
     Less than 12 months     12 months or longer     Total  

(Dollars in thousands)

   Fair Value of
Investments
   Unrealized
Losses
    Fair Value of
Investments
   Unrealized
Losses
    Fair Value of
Investments
   Unrealized
Losses
 

U.S. agency debentures

   $ 287,621    $ (443   $ —      $ —        $ 287,621    $ (443

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

     1,034,781      (17,237     —        —          1,034,781      (17,237

Agency-issued collateralized mortgage obligations (1)

     321,388      (5,535     1,392      (22     322,780      (5,557

Non-agency mortgage-backed securities (1)

     23,966      (195     51,276      (5,312     75,242      (5,507

Commercial mortgage-backed securities

     14,968      (107     —        —          14,968      (107

Municipal bonds and notes

     11,908      (56     —        —          11,908      (56

Marketable equity securities

     3      (5     —        —          3      (5
                                             

Total temporarily impaired securities

   $ 1,694,635    $ (23,578   $ 52,668    $ (5,334   $ 1,747,303    $ (28,912
                                             

The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on debt securities classified as available-for-sale as of March 31, 2010. 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 debentures 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 tend to be significantly shorter and vary based upon structure.

 

    March 31, 2010  
    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

  $ 26,133   2.39   $ —     —     $ 26,133   2.39   $ —     —     $ —     —  

U.S. agency debentures

    1,197,880   2.20        30,553   3.08        1,137,524   2.14        29,803   3.48        —     —     

Residential mortgage-backed securities:

                   

Agency-issued mortgage-backed securities

    1,556,859   3.93        111   6.16        1,500   6.45        104,478   4.33        1,450,770   3.90   

Agency-issued collateralized mortgage obligations

    1,339,251   3.73        —     —          12,101   5.06        60,217   4.36        1,266,933   3.69   

Non-agency mortgage-backed securities

    77,824   4.87        —     —          —     —          17,916   4.75        59,908   4.91   

Commercial mortgage-backed securities

    48,654   4.67        —     —          —     —          —     —          48,654   4.67   

Municipal bonds and notes

    99,733   6.02        1,135   6.20        3,970   5.25        31,282   5.77        63,346   6.17   
                                       

Total

  $ 4,346,334   3.46      $ 31,799   3.20      $ 1,181,228   2.19      $ 243,696   4.45      $ 2,889,611   3.89   
                                       

 

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The cost of investment securities is determined on a specific identification basis. The following table presents the components of gains and losses on investment securities for the three months ended March 31, 2010 and 2009:

 

     Three months ended March 31,  

(Dollars in thousands)

   2010     2009  

Gross gains on investment securities:

    

Available-for-sale securities, at fair value

   $ 31      $ 7   

Marketable securities (investment company fair value accounting)

     51        488   

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

    

Private equity fund investments

     19,792        615   

Other private equity investments

     484        52   

Other investments

     27        364   

Non-marketable securities (equity method accounting):

    

Other investments

     1,543        564   

Non-marketable securities (cost method accounting):

    

Private equity fund investments

     315        66   

Other private equity investments

     —          22   
                

Total gross gains on investment securities

     22,243        2,178   
                

Gross losses on investment securities:

    

Available-for-sale securities, at fair value

     (4     —     

Marketable securities (investment company fair value accounting)

     —          (196

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

    

Private equity fund investments

     (4,336     (30,810

Other private equity investments

     (1,561     (5,149

Non-marketable securities (equity method accounting):

    

Other investments

     (1     (120

Non-marketable securities (cost method accounting):

    

Private equity fund investments

     (337     (948
                

Total gross losses on investment securities

     (6,239     (37,223
                

Gains (losses) on investment securities, net

   $ 16,004      $ (35,045
                

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

   $ 12,778      $ (30,438
                

6. Loans and Allowance for Loan Losses

The composition of loans, net of unearned income of $33.6 million and $34.9 million at March 31, 2010 and December 31, 2009, respectively, is presented in the following table:

 

(Dollars in thousands)

   March 31, 2010    December 31, 2009

Commercial loans

   $ 3,307,898    $ 3,603,639

Premium wine (1)

     434,620      441,901

Community development loans (2)

     49,891      59,926

Consumer and other (3)

     412,836      442,628
             

Total loans, net of unearned income

   $ 4,205,245    $ 4,548,094
             

 

(1) Premium wine consists of loans for vineyard development, as well as working capital and equipment term loans to meet the needs of our clients’ premium wineries and vineyards. At March 31, 2010 and December 31, 2009, $298.7 million and $298.9 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 primarily of loans to targeted high-net-worth individuals. These products and services include home equity lines of credit, secured lines of credit, restricted stock purchase loans and capital call lines of credit. This category also includes loans made to eligible employees through our Employee Home Ownership Plan (“EHOP”). Loans secured by real estate at March 31, 2010, and December 31, 2009 were comprised of the following:

 

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(Dollars in thousands)

   March 31, 2010    December 31, 2009

Home equity lines of credit (i)

   $ 90,021    $ 90,459

Loans to eligible employees (ii)

     78,852      86,147

Loans for personal residence (iii)

     66,219      64,678
             

Consumer loans secured by real estate

   $ 235,092    $ 241,284
             

 

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

The activity in the allowance for loan losses for the three months ended March 31, 2010 and 2009 was as follows:

 

     Three months ended March 31,  

(Dollars in thousands)

   2010     2009  

Allowance for loan losses, beginning balance

   $ 72,450      $ 107,396   

Provision for loan losses

     10,745        43,466   

Gross loan charge-offs

     (21,180     (42,013

Loan recoveries

     6,256        1,161   
                

Allowance for loan losses, ending balance

   $ 68,271      $ 110,010   
                

Impaired Loans and Troubled Debt Restructurings

A loan is considered impaired when, based upon currently known information, it is deemed probable that we will be unable to collect all amounts due according to the contractual terms of the agreement. The recorded investment in impaired loans totaled $50.6 million and $50.2 million at March 31, 2010 and December 31, 2009, respectively. The recorded investment in impaired loans for which there was a related allowance for loan losses was $47.6 million and $47.0 million at March 31, 2010 and December 31, 2009, respectively, with related allowance for loan losses of $9.5 million and $8.9 million, respectively. The recorded investment in impaired loans for which there was no related allowance for loan losses was $3.0 million and $3.2 million at March 31, 2010 and December 31, 2009, respectively. Average impaired loans for the three months ended March 31, 2010 and March 31, 2009 totaled $50.4 million and $95.0 million, respectively. Cash payments received related to these loans totaled $0.4 million and $0.2 million for the three months ended March 31, 2010 and 2009, respectively. These payments were applied against the outstanding principal balance of the loans. We did not recognize any interest income related to impaired loans in either of the three months ended March 31, 2010 or 2009 during the time period that the loans were impaired. Our accruing loans past due 90 days or more were $0.2 million and $2.5 million at March 31, 2010 and December 31, 2009, respectively.

Included in the $50.6 million of impaired loans at March 31, 2010 are loans modified in troubled debt restructurings (“TDR’s”), where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, or other actions intended to maximize collection. As of March 31, 2010, we had TDR’s of $28.9 million, which were comprised of $20.3 million in our consumer and other category, $7.5 million in our commercial loans category and $1.1 million in our community development loans category. In order for these loan balances to return to accrual status, the borrower must demonstrate a sustained period of timely payments. There were no commitments available for funding to the clients associated with these TDR’s as of March 31, 2010.

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, 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 was no remaining goodwill on our balance sheet as of March 31, 2010 or December 31, 2009.

 

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8. Short-Term Borrowings and Long-Term Debt

The following table represents outstanding short-term borrowings and long-term debt at March 31, 2010 and December 31, 2009:

 

(Dollars in thousands)

  

Maturity

   March 31, 2010    December 31, 2009

Short-term borrowings:

        

Other short-term borrowings

   (1)    $ 39,895    $ 38,755
                

Total short-term borrowings

      $ 39,895    $ 38,755
                

Long-term debt:

        

5.70% senior notes

   June 1, 2012      270,031      269,793

6.05% subordinated notes

   June 1, 2017      279,462      276,541

3.875% convertible senior notes

   April 15, 2011      247,559      246,991

7.0% junior subordinated debentures

   October 15, 2033      55,680      55,986

4.99% long-term notes payable

   (2)      6,981      7,339
                

Total long-term debt

      $ 859,713    $ 856,650
                

 

(1) Represents cash collateral received from counterparties for our interest rate swap agreements related to our senior and subordinated notes.
(2) 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.

Interest expense related to short-term borrowings and long-term debt was $5.5 million and $8.2 million for the three months ended March 31, 2010, and 2009, respectively. Interest expense shown is net of the cash flow impact from our interest rate swap agreements. The weighted average interest rates associated with our short-term borrowings as of March 31, 2010 and December 31, 2009 were 0.09 percent and 0.05 percent, respectively.

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. 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 conversion of a note, we will pay the outstanding principal amount in cash as required by the terms of the notes, and to the extent that the conversion value exceeds the principal amount, we have the option to pay cash or shares of our common stock (or a combination of cash and shares) in respect of the excess amount.

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

For the three months ended March 31, 2010 and 2009, the effective interest rate for our 2008 Convertible Notes was 5.78 percent and 5.81 percent, respectively, and interest expense for both the three months ended March 31, 2010 and 2009 was $3.5 million. At March 31, 2010, the unamortized debt discount totaled $2.4 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 March 31, 2010, 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 March 31, 2010 totaled $180.6 million, all of which was unused and available to support additional

 

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borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank at March 31, 2010 totaled $85.5 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, in connection with negotiating credit facilities and certain other services, we frequently obtain equity warrant assets giving us the right to acquire stock 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 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 2009 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 loans 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. Changes in currency rates on the loans are included in other noninterest income, a component of noninterest income. We may experience ineffectiveness in the economic hedging relationship, because the loans are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in “Other Assets” and loss positions in “Other Liabilities”, while net changes in fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Equity Market Price Risk

We have convertible debt instruments that contain conversion options that enable the holders to convert the instruments, subject to certain conditions. Specifically, we currently have outstanding our 2008 Convertible Notes. Upon conversion of a note, we will pay the outstanding principal amount in cash as required by the terms of the notes, and to the extent that the conversion value exceeds the principal amount, we have the option to pay cash or shares of our common stock (or a combination of cash and shares) in respect of the excess amount. The conversion option represents an equity risk exposure for the excess conversion value and is an equity derivative classified in stockholders’ equity. We manage equity market price risk of our convertible debt instruments by entering into convertible note hedge and warrant agreements to increase the economic conversion price of our convertible debt instruments and to decrease potential dilution to stockholders resulting from the conversion option.

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. Similar to the conversion option of the excess value of the note, the hedge and warrant agreements are equity derivatives classified in stockholders’ equity. For the three months ended March 31, 2010 and 2009, there were no note conversions or exercises under the warrant agreement as the notes were not convertible.

For more information on 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 2009 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. These warrant agreements contain net share settlement provisions, which permit us to pay the warrant exercise price using shares

 

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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

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

Counterparty Credit Risk

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

The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at March 31, 2010 and December 31, 2009, respectively, were as follows:

 

        March 31, 2010     December 31, 2009  

(Dollars in thousands)

  Balance sheet
location
  Notional or
contractual
amount
  Fair value     Collateral
(1)
  Net
exposure
(2)
    Notional or
contractual
amount
  Fair value     Collateral
(1)
  Net
exposure
(2)
 

Derivatives designated as hedging instruments:

                 

Interest Rate Risks:

                 

Interest rate swaps

  Other assets   $ 500,000   $ 50,032      $ 39,895   $ 10,137      $ 500,000   $ 46,895      $ 38,755   $ 8,140   

Derivatives not designated as hedging instruments:

                 

Currency Exchange Risks:

                 

Foreign exchange forwards

  Other assets     39,141     1,855        —       1,855        48,276     1,472        —       1,472   

Foreign exchange forwards

  Other liabilities     5,589     (65     —       (65     9,828     (85     —       (85
                                                 

Net exposure

        1,790        —       1,790          1,387        —       1,387   
                                                 

Other Derivative Instruments:

                 

Equity warrant assets

  Other assets     115,903     40,845        —       40,845        120,192     41,292        —       41,292   
                                                     

Other derivatives:

                 

Foreign exchange forwards

  Other assets     273,195     10,045        —       10,045        316,759     16,772        —       16,772   

Foreign exchange forwards

  Other liabilities     276,858     (9,419     —       (9,419     326,116     (15,593     —       (15,593

Foreign currency options

  Other assets     107,209     836        —       836        1,819     192        —       192   

Foreign currency options

  Other liabilities     107,209     (836     —       (836     1,819     (192     —       (192

Net exposure

        626        —       626          1,179        —       1,179   
                                                 

Net

      $ 93,293      $ 39,895   $ 53,398        $ 90,753      $ 38,755   $ 51,998   
                                                 

 

 

(1) Cash collateral received from counterparties for our interest rate swap agreements is recorded as a component of “short-term borrowings” on our consolidated balance sheets.
(2) Net exposure for contracts in a gain position reflects the replacement cost in the event of nonperformance by all such counterparties. The credit ratings of our institutional counterparties as of March 31, 2010 remain at “A” or higher and there were no material changes in their credit ratings during the three months ended March 31, 2010.

 

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A summary of our derivative activity and the related impact on our consolidated statements of income for the three months ended March 31, 2010 and 2009, respectively, is as follows:

 

          Three months ended March 31,  

(Dollars in thousands)

  

Statement of income location

   2010     2009  

Derivatives designated as hedging instruments:

       

Interest Rate Risks:

       

Net cash benefit associated with interest rate swaps

   Interest expense - borrowings    $ 6,501      $ 4,204   

Changes in fair value of interest rate swap

   Net gains on derivative instruments      —          (170
                   

Net gains associated with interest rate risk derivatives

      $ 6,501      $ 4,034   
                   

Derivatives not designated as hedging instruments:

       

Currency Exchange Risks:

       

Losses on foreign currency loan revaluations, net

   Other noninterest income    $ (2,030   $ (2,677

Gains on foreign exchange forward contracts, net

   Net gains on derivative instruments      2,046        1,943   
                   

Net gains (losses) associated with currency risk

      $ 16      $ (734
                   

Other Derivative Instruments:

       

Losses on equity warrant assets

   Net gains on derivative instruments    $ (356   $ (455
                   

Gains on client foreign exchange forward contracts, net

   Net gains on derivative instruments    $ 292      $ 496   
                   

10. Other Noninterest Income and Other Noninterest Expense

A summary of other noninterest income for the three months ended March 31, 2010 and 2009, respectively, is as follows:

 

     Three months ended March 31,  

(Dollars in thousands)

   2010     2009  

Fund management fees

   $ 2,698      $ 2,717   

Service-based fee income (1)

     1,996        1,829   

Currency revaluation gains (losses)

     1,018        (960

Losses on foreign currency loans revaluation, net

     (2,030     (2,677

Other

     2,381        1,873   
                

Total other noninterest income

   $ 6,063      $ 2,782   
                

 

(1) Includes income from SVB Analytics and its subsidiary, eProsper.

A summary of other noninterest expense for the three months ended March 31, 2010 and 2009, respectively, is as follows:

 

     Three months ended March 31,

(Dollars in thousands)

   2010    2009

Telephone

   $ 1,140    $ 1,380

Tax credit fund amortization

     1,052      1,129

Data processing services

     977      1,012

Postage and supplies

     471      1,258

Other

     2,760      2,620
             

Total other noninterest expense

   $ 6,400    $ 7,399
             

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.

Our primary source of revenue is from net interest income, which is primarily the difference between interest earned on loans, net of funds transfer pricing (“FTP”), and interest paid on deposits, net of FTP. Accordingly, our segments are reported using net interest income, net of FTP. FTP is an internal measurement framework designed to assess the financial impact of a financial institution’s sources and uses of funds. It is the mechanism by which an earnings credit is given for deposits raised, and an earnings charge is made for funded loans. FTP is calculated by applying a transfer rate to pooled, or aggregated, loan and deposit volumes.

We also evaluate performance based on provision for loan losses, noninterest income and noninterest expense, which are presented as components of segment operating profit or loss. In calculating each operating segment’s noninterest expense, we consider the direct costs incurred by the operating segment as well as certain allocated direct costs. As part of this review, we allocate certain

 

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corporate overhead costs to a corporate account. We do not allocate income taxes to our segments. Additionally, our management reporting model is predicated on average asset balances; therefore, period-end asset balances are not presented for segment reporting purposes. 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.

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.

With respect to our operating segments, only Global Commercial Bank, Relationship Management and SVB Capital were determined to be separate reportable segments as of March 31, 2010.

Changes to Segment Reporting Effective January 1, 2010

Effective January 1, 2010, we changed the way we monitor performance and results for certain of our business lines. We made certain changes to the items reported under our Global Commercial Bank, Relationship Management and Other Business Services segments. These changes do not change the four operating segments we currently report. As a result of these changes, our Global Commercial Bank segment’s income before income tax expense for 2009 was reduced by $41.0 million. Changes to other operating segments were not significant. 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, where applicable. Effective January 1, 2010, Global Commercial Bank also includes the results of certain other business units that were previously reported as part of Relationship Management and Reconciling Items.

 

   

Relationship Management provides banking products and a range of credit services to targeted high-net-worth individuals using both long-term secured and short-term unsecured lines of credit.

 

   

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 of funds and co-investment funds.

 

   

Other Business Services includes the results of our Sponsored Debt Funds & Strategic Investments segment, which is comprised of our sponsored debt funds; Gold Hill Funds, which provide secured debt to private companies of all stages, 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. Other Business Services also includes the results of SVB Analytics, which provides equity valuation and equity management services to private companies and venture capital firms. Effective January 1, 2010, SVB Analytics also includes the results of certain other business units that were previously reported as part of Reconciling Items.

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 (loss) in the Reconciling Items column is primarily interest income recognized from our fixed income investment portfolio, partially offset by interest income transferred to the segments as part of FTP. Noninterest income in the Reconciling Items column is primarily attributable to noncontrolling 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 cash and cash equivalents and our fixed income investment portfolio balances.

 

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Our segment information for the three months ended March 31, 2010 and 2009 is as follows:

 

(Dollars in thousands)

  Global
Commercial
Banking
    Relationship
Management
    SVB
Capital (1)
    Other Business
Services (1)
    Reconciling
Items
    Total  

Three months ended March 31, 2010

           

Net interest income (loss)

  $ 82,396      $ 8,227      $ (1   $ (75   $ 10,293      $ 100,840   

Provision for loan losses

    (10,751     (18     —          —          24        (10,745

Noninterest income

    27,641        313        4,580        3,427        13,312        49,273   

Noninterest expense (2)

    (55,377     (4,453     (3,404     (3,359     (31,983     (98,576
                                               

Income (loss) before income tax expense (3)

  $ 43,909      $ 4,069      $ 1,175      $ (7   $ (8,354   $ 40,792   
                                               

Total average loans, net of unearned income

  $ 3,168,171      $ 927,832      $ —        $ —        $ 19,555      $ 4,115,558   

Total average assets

    3,444,510        929,462        105,908        92,786        8,992,771        13,565,437   

Total average deposits

    10,781,929        188,033        —          —          (2,738     10,967,224   

Three months ended March 31, 2009

           

Net interest income (loss)

  $ 94,256      $ 8,887      $ (2   $ (26   $ (11,604   $ 91,511   

Provision for loan losses

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

Noninterest income (loss)

    26,454        303        (2,358     1,597        (31,577     (5,581

Noninterest expense, excluding
impairment of goodwill (2)

    (41,973     (3,502     (3,346     (3,112     (31,115     (83,048

Impairment of goodwill

    —          —          —          (4,092     —          (4,092
                                               

Income (loss) before income tax expense (3)

  $ 35,922      $ 5,039      $ (5,706   $ (5,633   $ (74,298   $ (44,676
                                               

Total average loans, net of unearned income

  $ 4,115,564      $ 989,842      $ —        $ —        $ 10,846      $ 5,116,252   

Total average assets

    4,219,487        991,605        85,626        74,232        5,085,457        10,456,407   

Total average deposits

    7,750,433        172,661        —          —          4,612        7,927,706   

 

(1) SVB Capital’s and Other Business Services’ components of net interest loss, noninterest income (loss), noninterest expense and total average assets are shown net of noncontrolling interests for all periods presented.
(2) The Global Commercial Bank segment includes direct depreciation and amortization of $1.1 million and $0.9 million for the three months ended March 31, 2010 and 2009, respectively.
(3) The internal reporting model used by management to assess segment performance does not calculate income tax expense by segment. Our effective tax rate is a reasonable approximation of the segment rates.

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

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

Commitments to Extend Credit

The following table summarizes information related to our commitments to extend credit at March 31, 2010 and December 31, 2009, respectively:

 

(Dollars in thousands)

   March 31, 2010    December 31, 2009

Commitments available for funding: (1)

     

Fixed interest rate commitments

   $ 436,747    $ 539,986

Variable interest rate commitments

     4,814,589      4,798,740
             

Total commitments available for funding

   $ 5,251,336    $ 5,338,726
             

Commitments unavailable for funding (2)

   $ 1,081,252    $ 1,103,489

Maximum lending limits for accounts receivable
factoring arrangements (3)

   $ 591,213    $ 535,257

Reserve for unfunded credit commitments

     11,824      13,331

 

(1) Represents commitments which are available for funding, due to clients meeting all collateral, compliance, and financial covenants required under loan commitment agreements.

 

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(2) Represents commitments which are currently unavailable for funding, due to clients failing to meet all collateral, compliance, and financial covenants required under loan commitment agreements.
(3) We extend credit under accounts receivable factoring arrangements when our clients’ sales invoices are deemed creditworthy under existing underwriting practices.

Commercial and Standby Letters of Credit

The table below summarizes our commercial and standby letters of credit at March 31, 2010. The maximum potential amount of future payments represents the amount that could be remitted under letters of credit if there was a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.

 

(Dollars in thousands)

   Expires In One
Year or Less
   Expires After
One Year
   Total Amount
Outstanding
   Maximum Amount
of Future Payments

Financial standby letters of credit

   $ 543,726    $ 19,919    $ 563,645    $ 563,645

Performance standby letters of credit

     27,921      8,810      36,731      36,731

Commercial letters of credit

     6,620      —        6,620      6,620
                           

Total

   $ 578,267    $ 28,729    $ 606,996    $ 606,996
                           

At March 31, 2010 and December 31, 2009, deferred fees related to financial and performance standby letters of credit were $4.2 million and $3.9 million, respectively. At March 31, 2010, collateral in the form of cash of $205.1 million and investment securities of $19.2 million were available to us to reimburse losses, if any, under financial and performance standby letters of credit.

Commitments to Invest in Venture Capital/Private Equity Funds

We make commitments to invest in venture capital and private equity funds, which in turn make investments generally in, or in some cases make loans to, privately-held companies. Commitments to invest in these funds are generally made for a ten-year period from the inception of the fund. Although the limited partnership agreements governing these investments typically do not restrict the general partners from calling 100% of committed capital in one year, it is customary for these funds to generally call most of the capital commitments over 5 to 7 years. The actual timing of future cash requirements to fund these commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate. The following table details our total capital commitments, unfunded capital commitments, and our ownership in each fund at March 31, 2010:

 

Our Ownership in Limited Partnership (Dollars in thousands)

  SVBFG Capital
Commitments
  SVBFG Unfunded
Commitments
  SVBFG Ownership
of each Fund
 

Silicon Valley BancVentures, LP

  $ 6,000   $ 270   10.7

SVB Capital Partners II, LP (1)

    1,200     456   5.1   

SVB India Capital Partners I, LP

    7,750     2,945   14.4   

SVB Capital Shanghai Yangpu Venture Capital Fund, LP

    850     850   6.8   

SVB Strategic Investors Fund, LP

    15,300     1,530   12.6   

SVB Strategic Investors Fund II, LP

    15,000     3,750   8.6   

SVB Strategic Investors Fund III, LP

    15,000     7,050   5.9   

SVB Strategic Investors Fund IV, LP

    12,239     10,526   5.0   

SVB Capital Preferred Return Fund, LP

    10,688     —     20.0   

SVB Capital—NT Growth Partners, LP

    24,670     10,190   33.0   

Partners for Growth, LP

    25,000     9,750   50.0   

Partners for Growth II, LP

    15,000     4,950   24.2   

Gold Hill Venture Lending 03, LP (2)

    20,000     —     9.3   

Other Fund Investments (3)

    149,235     45,472   N/A   

New Fund Commitments (4)

    212,208     153,230   N/A   
             

Total

  $ 530,140   $ 250,969  
             

 

(1) Our ownership includes 1.3% direct ownership through SVB Capital Partners II, LLC and SVB Financial Group, and 3.8% indirect ownership through our investment in SVB Strategic Investors Fund II, LP.
(2) Our ownership includes 4.8% direct ownership and 4.5% indirect ownership interest through GHLLC.
(3) Represents commitments to 336 venture capital/private equity funds where our ownership interest is generally less than 5% of the voting interests of each such fund.
(4) Represents the investment commitments made by SVB Financial on behalf of certain new managed funds of funds that we have formed or plan to form in the future.

 

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The following table details the remaining unfunded commitments to venture capital/private equity funds by our consolidated managed funds of funds at March 31, 2010, which includes SVBFG’s unfunded commitments detailed above:

 

Limited Partnership (Dollars in thousands)

   Unfunded
Commitments

SVB Strategic Investors Fund, LP

   $ 3,663

SVB Strategic Investors Fund II, LP

     23,054

SVB Strategic Investors Fund III, LP

     119,372

SVB Strategic Investors Fund IV, LP

     154,013

SVB Capital Preferred Return Fund, LP

     40,865

SVB Capital—NT Growth Partners, LP

     52,603
      

Total

   $ 393,570
      

13. Income Taxes

At March 31, 2010, our unrecognized tax benefit was $0.4 million, the recognition of which would reduce our income tax expense by $0.3 million. Total accrued interest and penalties at March 31, 2010 were $0.1 million. We expect that our unrecognized tax benefit will change in the next 12 months, however, we do not expect the change to have a material impact on our financial position or our results of operations.

We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions and have identified our federal tax return and tax returns in California and Massachusetts as “major” tax filings. U.S. federal tax examinations through 1998 have been concluded. The U.S. federal tax return for 2006 and subsequent years remain open to examination by the Internal Revenue Service. Our California and Massachusetts tax returns for the years 2005 and 2006, respectively, and subsequent years remain open to examination.

14. Fair Value of Financial Instruments

Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Our marketable investment securities, derivative instruments and certain non-marketable investment securities are financial instruments recorded at fair value on a recurring basis.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The three levels for measuring fair value are based on the reliability of inputs and are as follows:

 

Level 1

Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to instruments utilizing Level 1 inputs. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.

Assets utilizing Level 1 inputs include exchange-traded equity securities.

 

Level 2

Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Valuations for the marketable investment securities are provided by independent external pricing service providers. We review the methodologies used to determine the fair value, including understanding the nature and observability of the inputs used to determine the price. Additional corroboration, such as obtaining a non-binding price from a broker, may be required depending on the frequency of trades of the security and the level of liquidity or depth of the market. The valuation methodology that is generally used for the Level 2 assets is the income approach. Below is a summary of the significant inputs used for each class of Level 2 assets and liabilities:

 

  - U.S. treasury securities: U.S. treasury securities are considered by most investors to be the most liquid fixed income investments available. These securities are priced relative to market prices on similar U.S. treasury securities.

 

  - U.S. agency debentures: Valuations of U.S. agency debentures are based on the characteristics specific to bonds held, such as issuer name, coupon rate, maturity date and any applicable issuer call option features. Valuations are based on market spreads relative to similar term benchmark market interest rates, generally U.S. treasury securities.

 

  - Agency-issued mortgage-backed securities: Agency-issued mortgage-backed securities are pools of individual conventional mortgage loans underwritten to U.S. agency standards with similar coupon rates, tenor, and other attributes such as geographic location, loan size and origination vintage. Valuations of these securities are based on observable price adjustments relative to benchmark market interest rates taking into consideration estimated loan prepayment speeds.

 

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  - Agency-issued collateralized mortgage obligations: Agency-issued collateralized mortgage obligations are structured into classes or tranches with defined cash flow characteristics and are collateralized by U.S. agency-issued mortgage pass-through securities. Valuations of these securities incorporate similar characteristics of mortgage pass-through securities such as coupon rate, tenor, geographic location, loan size and origination vintage, in addition to incorporating the effect of estimated prepayment speeds on the cash flow structure of the class or tranche. Valuations incorporate observable market spreads over an estimated average life after considering the inputs listed above.

 

  - Non-agency mortgage-backed securities: Non-agency mortgage-backed securities can be structured as pass-through securities or collateralized mortgage-backed securities and are supported by conventional mortgage loans that are underwritten to standards that are considered Prime or Alternative-A. These loans have similar characteristics to loans underwritten to U.S. agency standards but may deviate from those standards in terms of loan size, loan documentation and the ratio of the loan amount to the value of the mortgaged property. Valuations of these securities incorporate similar characteristics of U.S. agency mortgage pass-through securities such as coupon rate, tenor, geographic location, loan size and origination vintage, in addition to incorporating the effect of estimated prepayment speeds on the cash flow structure of the class or tranche. Principal and interest payments from non-agency securities are not guaranteed by the U.S. government or its agencies. Therefore, pricing adjustments may incorporate the potential for adverse credit performance of the underlying mortgage loans. All non-agency mortgage-backed securities are in the senior most position in the securitization capital structure. Valuations incorporate observable market spreads over an estimated average life after considering the inputs listed above.

 

  - Commercial mortgage-backed securities: Commercial mortgage-backed securities are collateralized obligations supported by pools of commercial mortgage loans. Commercial mortgage loans are underwritten to standards which consider debt service coverage ratios, loan to property values, real estate capitalization rates and occupancy rates. Valuations of commercial mortgage-backed securities consider estimated cash flows, subordination levels and deal over-collateralization levels. All commercial mortgage-backed securities held by the Company are the senior-most classes in each deal securitization. Valuations of these securities are based on spreads to benchmark market interest rates (usually U.S. treasury rates or rates observable in the swaps market), prepayment speeds, loan default rate assumptions and loan loss severity assumptions on underlying loans.

 

  - Municipal bonds and notes: Bonds issued by municipal governments generally have stated coupon rates, final maturity dates and are subject to being called ahead of the final maturity date at the option of the issuer. Valuations of these securities are priced based on spreads to other municipal benchmark bonds with similar characteristics; or, relative to market rates on U.S. treasury bonds of similar maturity.

 

  - Interest rate swap assets: Valuations of interest rate swaps are priced considering the coupon rate of the fixed leg of the contract and the variable coupon on the floating leg of the contract. Valuation is based on both spot and forward rates on the swap yield curve.

 

  - Foreign exchange forward and option contract assets and liabilities: Valuations of these assets and liabilities are priced based on spot and forward foreign currency rates and option volatility assumptions.

 

  - Equity warrant assets (public portfolio): Valuations of equity warrant assets of public portfolio companies are priced based on the Black-Scholes option pricing model that use the publicly-traded equity prices (underlying stock value), stated strike prices, option expiration dates, the risk-free interest rate and market-observable option volatility assumptions.

 

Level 3

Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions market participants would use in pricing the asset or liability. Below is a summary of the valuation techniques used for each class of Level 3 assets:

 

  - Private equity fund investments: Valuations are based on the information provided by the investee funds’ management, which reflects our share of the fair value of the net assets of the investment fund on the valuation date. We account for differences between our measurement date and the date of the fund investment’s net asset value by using the most recent available financial information available from the investee general partner, adjusted for any contributions paid during the quarter, distributions received from the investment during the quarter, or significant fund transactions or market events.

 

  - Other private equity investments: Valuations are based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, and as it relates to the private company issue, the current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment.

 

  - Other investments: Valuations are based on pricing models that use observable inputs, such as yield curves and publicly-traded equity prices, and unobservable inputs, such as private company equity prices.

 

  -

Equity warrant assets (private portfolio): Valuations of equity warrant assets of private portfolio companies are priced based on a modified Black-Scholes option pricing model to estimate the underlying asset value, by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the modified Black-Scholes model are based on public market indices whose members operate in similar industries as

 

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  companies in our private company portfolio. Option expiration dates are modified to account for estimates of actual life relative to stated expiration. Overall model asset values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company.

For the three months ended March 31, 2010 and 2009, there were no transfers between Level 1 and Level 2 and no material transfers in or out of Level 3.

It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves, prepayment speeds, option volatilities and currency rates. Substantially all of our financial instruments use either of the foregoing methodologies, collectively Level 1 and Level 2 measurements, to determine fair value adjustments recorded to our financial statements. However, in certain cases, when market observable inputs for model based valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. For inactive markets, there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring and provide more weighting to price quotes that are based upon orderly transactions. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement. Accordingly, the degree of judgment exercised by management in determining fair value is greater for financial assets and liabilities categorized as Level 3.

The following fair value hierarchy tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2010:

 

(Dollars in thousands)

   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
   Balance as of
March 31, 2010

Assets

           

Marketable securities:

           

Available-for-sale securities:

           

U.S. treasury securities

   $ —      $ 26,133    $ —      $ 26,133

U.S. agency debentures

     —        1,197,880      —        1,197,880

Residential mortgage-backed securities:

           

Agency-issued mortgage-backed securities

     —        1,556,859      —        1,556,859

Agency-issued collateralized mortgage obligations

     —        1,339,251      —        1,339,251

Non-agency mortgage-backed securities

     —        77,824      —        77,824

Commercial mortgage-backed securities

     —        48,654      —        48,654

Municipal bonds and notes

     —        99,733      —        99,733

Marketable equity securities

     975      —        —        975
                           

Total available-for-sale securities

     975      4,346,334      —        4,347,309

Marketable securities (investment company fair value accounting)

     84      —        —        84
                           

Total marketable securities

     1,059      4,346,334      —        4,347,393
                           

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

           

Private equity fund investments

     —        —        301,445      301,445

Other private equity investments

     —        —        96,517      96,517

Other investments

     —        —        996      996
                           

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

     —        —        398,958      398,958
                           

Other assets:

           

Interest rate swaps

     —        50,032      —        50,032

Foreign exchange forward and option contracts

     —        12,736      —        12,736

Equity warrant assets

        2,086      38,759      40,845
                           

Total assets (1)

   $ 1,059    $ 4,411,188    $ 437,717    $ 4,849,964
                           

Liabilities

           

Foreign exchange forward and option contracts

   $ —      $ 10,320    $ —      $ 10,320
                           

Total liabilities

   $ —      $ 10,320    $ —      $ 10,320
                           

 

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(1) Included in Level 2 and Level 3 assets are $0.1 million and $345.0 million, respectively, attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.

The following fair value hierarchy tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2009:

 

(Dollars in thousands)

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

Assets

           

Marketable securities:

           

Available-for-sale securities:

           

U.S. treasury securities

   $ —      $ 26,047    $ —      $ 26,047

U.S. agency debentures

     —        891,753      —        891,753

Residential mortgage-backed securities:

           

Agency-issued mortgage-backed securities

     —        1,410,630      —        1,410,630

Agency-issued collateralized mortgage obligations

     —        1,372,375      —        1,372,375

Non-agency mortgage-backed securities

     —        83,696      —        83,696

Commercial mortgage-backed securities

     —        48,801      —        48,801

Municipal bonds and notes

     —        102,877      —        102,877

Marketable equity securities

     2,009      —        —        2,009
                           

Total available-for-sale securities

     2,009      3,936,179      —        3,938,188

Marketable securities (investment company fair value accounting)

     33      —        —        33
                           

Total marketable securities

     2,042      3,936,179      —        3,938,221
                           

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

           

Private equity fund investments

     —        —        271,316      271,316

Other private equity investments

     —        —        96,577      96,577

Other investments

     —        —        1,143      1,143
                           

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

     —        —        369,036      369,036
                           

Other assets:

           

Interest rate swaps

     —        46,895      —        46,895

Foreign exchange forward and option contracts

     —        18,436      —        18,436

Equity warrant assets

     —        1,173      40,119      41,292
                           

Total assets (1)

   $ 2,042    $ 4,002,683    $ 409,155    $ 4,413,880
                           

Liabilities

           

Foreign exchange forward and option contracts

   $ —      $ 15,870    $ —      $ 15,870
                           

Total liabilities

   $ —      $ 15,870    $ —      $ 15,870
                           

 

(1) Included in Level 3 assets are $319.9 million attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.

 

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The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2010 and 2009, respectively:

 

        Total Realized and Unrealized Gains
(Losses) Included in Income
                           

(Dollars in thousands)

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

Three months ended March 31, 2010:

               

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

               

Private equity fund investments

  $ 271,316   $ 3,002      $ 12,453      $ 15,455      $ 14,674      $ —     $ —        $ 301,445

Other private equity investments

    96,577     (1,966     1,781        (185     125        —       —          96,517

Other investments

    1,143     —          27        27        (174     —       —          996
                                                         

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

    369,036     1,036        14,261        15,297        14,625        —       —          398,958

Other assets:

               

Equity warrant assets (2)

    40,119     849        (1,979     (1,130     (91     —       (139     38,759
                                                         

Total assets

  $ 409,155   $ 1,885      $ 12,282      $ 14,167      $ 14,534      $ —     $ (139   $ 437,717
                                                         

Three months ended March 31, 2009:

               

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

               

Private equity fund investments

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

Other private equity investments

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

Other investments

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

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

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

Other assets:

               

Equity warrant assets (2)

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

Total assets

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

 

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

The following table presents the amount of unrealized gains (losses) included in earnings attributable to Level 3 assets still held at March 31, 2010:

 

     Three months ended
March 31, 2010
 

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

  

Private equity fund investments

   $ 12,453   

Other private equity investments

     (219

Other investments

     27   
        

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

     12,261   

Other assets:

  

Equity warrant assets (2)

     (142
        

Total unrealized gains

   $ 12,119   
        

 

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

 

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Financial Instruments not Carried at Fair Value

FASB issued guidance over financial instruments (ASC 825-10-65) requires that we disclose estimated fair values for our financial instruments not carried at fair value. Fair value estimates, methods and assumptions, set forth below for our financial instruments, are made solely to comply with the requirements of ASC 825.

Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for many of our financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management’s estimates of the values, and they are calculated based on indicator prices corroborated by observable market quotes or pricing models, the economic and competitive environment, the characteristics of the financial instruments, expected losses, and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment, and do not include tax ramifications; therefore, the results cannot be determined with precision or substantiated by comparison to independent markets, and they may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein does not represent, and should not be construed to represent, the underlying value of the Company.

The following describes the methods and assumptions used in estimating the fair values of financial instruments, excluding financial instruments already recorded at fair value as described above.

Short-Term Financial Assets

Short-term financial assets include cash on hand, cash balances due from banks, interest-earning deposits, securities purchased under agreement to resell and other short-term investment securities. The carrying amount is a reasonable estimate of fair value because of the insignificant risk of changes in fair value due to changes in market interest rates, and purchased in conjunction with our cash management activities.

Investment Securities—Non-Marketable (Cost and Equity Method Accounting)

Non-marketable investment securities (cost and equity method accounting) includes other investments (equity method accounting), low income housing tax credit funds (equity method accounting), private equity fund investments (cost method accounting), and other private equity investments (cost method accounting). The fair value of other investments (equity method accounting), private equity fund investments (cost method accounting), and other private equity investments (cost method accounting) is based on financial information obtained as the investor or obtained from the fund investments’ or debt fund investments’ respective general partner. For private company investments, fair value is based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. For our private equity fund investments and debt fund investments, we utilize the net asset value per share as obtained from the general partners of the fund investments. We adjust the net asset value per share for differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example December 31st, for our March 31st interim consolidated financial statements, adjusted for any contributions paid during the first quarter, distributions received from the investment during the first quarter, or significant fund transactions or market events, if any. The fair value of our low income housing tax credit funds (equity method accounting) is based on carrying value.

Loans

The fair value of fixed and variable rate loans is estimated by discounting contractual cash flows using discount rates that reflect our current pricing for loans and the forward yield curve.

Deposits

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking accounts, money market accounts and interest-bearing sweep deposits is equal to the amount payable on demand at the measurement date. The fair value of time deposits is estimated by discounting the balances using our cost of borrowings and the forward yield curve over their remaining contractual term.

Short-Term Borrowings

Short-term borrowings at March 31, 2010 and December 31, 2009 include cash collateral received from counterparties for our interest rate swap agreements related to our senior and subordinated notes. The carrying amount is a reasonable estimate of fair value.

 

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Long-Term Debt

Long-term debt includes our 2008 Convertible Notes, junior subordinated debentures, senior and subordinated notes, and other long-term debt (see Note 8- “Short-Term Borrowings and Long-Term Debt”). The fair value of long-term debt is generally based on quoted market prices, when available, or is estimated based on calculations utilizing third-party pricing services and current market spread, price indications from reputable dealers or observable market prices of the underlying instrument(s), whichever is deemed more reliable.

Off-Balance Sheet Financial Instruments

The fair value of unfunded commitments to extend credit is estimated based on the average amount we would receive or pay to execute a new agreement with identical terms, considering current interest rates and taking into account the remaining terms of the agreement and counterparties’ credit standing.

Letters of credit are carried at their fair value, which is equivalent to the residual premium or fee at March 31, 2010 and December 31, 2009. Commitments to extend credit and letters of credit typically result in loans with a market interest rate if funded.

The information presented herein is based on pertinent information available to us as of March 31, 2010 and December 31, 2009. The following table is a summary of the estimated fair values of our financial instruments that are not carried at fair value at March 31, 2010 and December 31, 2009.

 

     March 31, 2010    December 31, 2009

(Dollars in thousands)

   Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value

Financial assets:

           

Investment securities-non-marketable (cost and equity method accounting)

   $ 192,734    $ 198,206    $ 184,495