SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 08/06/2010 17:05:44)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 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   x     No   ¨

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

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

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

At July 30, 2010, 41,944,074 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page
PART I - FINANCIAL INFORMATION    3
Item 1.   Interim Consolidated Financial Statements (unaudited)    3
  Interim Consolidated Balance Sheets (unaudited) as of June 30, 2010 and December 31, 2009    3
  Interim Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2010 and 2009    4
  Interim Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2010 and 2009    5
  Interim Consolidated Statements of Stockholders’ Equity (unaudited) for the six months ended June 30, 2010 and 2009    6
  Interim Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 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    34
Item 3.   Quantitative and Qualitative Disclosures about Market Risk    65
Item 4.   Controls and Procedures    66
PART II - OTHER INFORMATION    67
Item 1.   Legal Proceedings    67
Item 1A.   Risk Factors    67
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    76
Item 3.   Defaults Upon Senior Securities    76
Item 4.   (Removed and Reserved)    76
Item 5.   Other Information    76
Item 6.   Exhibits    76
SIGNATURE    77
INDEX TO EXHIBITS    78

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

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

   June 30,
2010
    December 31,
2009
 

Assets

    

Cash and due from banks

   $ 4,146,737      $ 3,454,611   

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

     43,606        58,242   
                

Cash and cash equivalents

     4,190,343        3,512,853   
                

Available-for-sale securities

     5,338,233        3,938,188   

Non-marketable securities

     616,339        553,531   
                

Investment securities

     5,954,572        4,491,719   
                

Loans, net of unearned income

     4,450,189        4,548,094   

Allowance for loan losses

     (71,789     (72,450
                

Net loans

     4,378,400        4,475,644   
                

Premises and equipment, net of accumulated depreciation and amortization

     38,123        31,736   

Accrued interest receivable and other assets

     342,548        329,447   
                

Total assets

   $ 14,903,986      $ 12,841,399   
                

Liabilities and total equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 7,206,104      $ 6,298,988   

Negotiable order of withdrawal (NOW)

     34,365        53,200   

Money market

     1,771,999        1,292,215   

Money market deposits in foreign offices

     59,847        49,722   

Time

     405,080        332,310   

Sweep

     2,663,018        2,305,502   
                

Total deposits

     12,140,413        10,331,937   
                

Short-term borrowings

     44,735        38,755   

Other liabilities

     222,073        139,947   

Long-term debt

     869,810        856,650   
                

Total liabilities

     13,277,031        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; 41,886,197 shares and 41,338,389 shares outstanding, respectively

     42        41   

Additional paid-in capital

     404,521        389,490   

Retained earnings

     772,592        732,907   

Accumulated other comprehensive income

     59,948        5,905   
                

Total SVBFG stockholders’ equity

     1,237,103        1,128,343   

Noncontrolling interests

     389,852        345,767   
                

Total equity

     1,626,955        1,474,110   
                

Total liabilities and total equity

   $ 14,903,986      $ 12,841,399   
                

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

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

(Dollars in thousands, except per share amounts)

   2010     2009     2010     2009  

Interest income:

        

Loans

   $ 75,558      $ 84,248      $ 149,500      $ 172,499   

Investment securities:

        

Taxable

     36,851        16,794        69,118        31,645   

Non-taxable

     951        1,029        1,921        2,090   

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

     2,885        2,485        5,725        4,861   
                                

Total interest income

     116,245        104,556        226,264        211,095   
                                

Interest expense:

        

Deposits

     3,867        5,605        7,532        12,452   

Borrowings

     5,942        7,270        11,456        15,451   
                                

Total interest expense

     9,809        12,875        18,988        27,903   
                                

Net interest income

     106,436        91,681        207,276        183,192   

Provision for loan losses

     7,408        21,393        18,153        64,859   
                                

Net interest income after provision for loan losses

     99,028        70,288        189,123        118,333   
                                

Noninterest income:

        

Gains (losses) on investment securities, net

     4,805        (6,750     20,809        (41,795

Foreign exchange fees

     8,255        7,617        17,116        15,083   

Deposit service charges

     7,734        6,590        14,959        13,413   

Client investment fees

     4,941        5,580        8,881        11,828   

Credit card fees

     3,027        2,957        5,714        4,396   

Letters of credit and standby letters of credit income

     2,606        2,329        5,117        5,221   

Gains (losses) on derivative instruments, net

     1,326        (2,847     3,308        (1,033

Other

     7,463        12,799        13,526        15,581   
                                

Total noninterest income

     40,157        28,275        89,430        22,694   
                                

Noninterest expense:

        

Compensation and benefits

     59,993        46,947        119,823        95,227   

Professional services

     12,642        11,263        24,740        23,343   

Premises and equipment

     5,319        5,694        11,103        11,101   

FDIC assessments

     5,587        8,589        10,636        11,264   

Business development and travel

     5,103        3,403        9,389        6,676   

Net occupancy

     4,649        4,843        9,337        9,148   

Correspondent bank fees

     1,956        1,963        3,904        3,876   

Provision for (reduction of) unfunded credit commitments

     2,376        (1,147     869        (3,431

Impairment of goodwill

     —          —          —          4,092   

Other

     6,555        7,457        12,955        14,856   
                                

Total noninterest expense

     104,180        89,012        202,756        176,152   
                                

Income (loss) before income tax expense

     35,005        9,551        75,797        (35,125

Income tax expense

     13,819        7,174        25,401        4,726   
                                

Net income (loss) before noncontrolling interests

     21,186        2,377        50,396        (39,851

Net (income) loss attributable to noncontrolling interests

     (66     8,961        (10,719     42,954   
                                

Net income attributable to SVBFG

   $ 21,120      $ 11,338      $ 39,677      $ 3,103   
                                

Preferred stock dividend and discount accretion

     —          (3,545     —          (7,081
                                

Net income (loss) available to common stockholders

   $ 21,120      $ 7,793      $ 39,677      $ (3,978
                                

Earnings (loss) per common share—basic

   $ 0.51      $ 0.24      $ 0.95      $ (0.12

Earnings (loss) per common share—diluted

     0.50        0.24        0.94        (0.12

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

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

(Dollars in thousands)

   2010     2009     2010     2009  

Net income (loss) before noncontrolling interests

   $ 21,186      $ 2,377      $ 50,396      $ (39,851

Other comprehensive income, net of tax:

        

Cumulative translation (losses) gains:

        

Foreign currency translation (losses) gains

     (1,672     889        (152     (542

Related tax benefit (expense)

     682        (153     62        212   

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

        

Unrealized holding gains

     65,063        11,591        92,289        17,859   

Related tax expense

     (27,083     (4,719     (37,642     (7,290

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

     (841     41        (868     34   

Related tax benefit (expense)

     343        (17     354        (14
                                

Other comprehensive income, net of tax

     36,492        7,632        54,043        10,259   
                                

Comprehensive income (loss)

     57,678        10,009        104,439        (29,592

Comprehensive (income) loss attributable to noncontrolling interests

     (66     8,961        (10,719     42,954   
                                

Comprehensive income attributable to SVBFG

   $ 57,612      $ 18,970      $ 93,720      $ 13,362   
                                

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

    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     Income (Loss)     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

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

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

  —       —     —       —       (1,375     —          —          (1,375     —          (1,375

Net income (loss)

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

Capital calls and (distributions), net

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

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

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

Foreign currency translation adjustments, net of tax

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

Stock-based compensation expense

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

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

  —       —     —       —       10,745        —          —          10,745        —          10,745   

Preferred stock dividend and discount accretion

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

Other-net

  —       —     —       —       495        99        —          594        —          594   
                                                                   

Balance at June 30, 2009

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

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

  —       —     547,808     1     13,203        —          —          13,204        —          13,204   

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

  —       —     —       —       2,445        —          —          2,445        —          2,445   

Net income

  —       —     —       —       —          39,677        —          39,677        10,719        50,396   

Capital calls and (distributions), net

  —       —     —       —       —          —          —          —          33,366        33,366   

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

  —       —     —       —       —          —          54,133        54,133        —          54,133   

Foreign currency translation adjustments, net of tax

  —       —     —       —       —          —          (90     (90     —          (90

Stock-based compensation expense

  —       —     —       —       6,247        —          —          6,247        —          6,247   

Repurchase of warrant under Capital Purchase Program

  —       —     —       —       (6,820     —          —          (6,820     —          (6,820

Other-net

  —       —     —       —       (44     8        —          (36     —          (36
                                                                   

Balance at June 30, 2010

  —     $ —     41,886,197   $ 42   $ 404,521      $ 772,592      $ 59,948      $ 1,237,103      $ 389,852      $ 1,626,955   
                                                                   

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six months ended June 30,  

(Dollars in thousands)

   2010     2009  

Cash flows from operating activities:

    

Net income (loss) before noncontrolling interests

   $ 50,396      $ (39,851

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

    

Impairment of goodwill

     —          4,092   

Provision for loan losses

     18,153        64,859   

Provision for (reduction of) unfunded credit commitments

     869        (3,431

Changes in fair values of derivatives, net

     2,926        555   

(Gains) losses on investment securities, net

     (20,809     41,795   

Depreciation and amortization

     9,131        10,040   

Amortization of premiums on investment securities, net

     12,396        5,330   

Tax benefit of original issue discount

     —          10,745   

Tax expense from stock exercises

     (330     (1,436

Amortization of share-based compensation

     6,296        7,743   

Amortization of deferred warrant-related loan fees

     (3,192     (4,375

Deferred income tax expense (benefit)

     2,732        (6,647

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

     24        107   

Changes in other assets and liabilities:

    

Accrued interest, net

     (1,349     (4,021

Accounts receivable

     (667     (3,840

Income tax receivable, net

     (886     (24,458

Accrued compensation

     7,545        (11,003

Foreign exchange spot contracts, net

     13,215        33,914   

Other, net

     19,444        6,484   
                

Net cash provided by operating activities

     115,894        86,602   
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (2,371,038     (1,071,073

Proceeds from sales of available-for-sale securities

     160,350        189   

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

     892,588        244,141   

Purchases of nonmarketable securities (cost and equity method accounting)

     (20,103     (22,650

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

     6,691        2,120   

Purchases of nonmarketable securities (investment fair value accounting)

     (44,939     (31,067

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

     15,874        5,307   

Net decrease in loans

     69,077        597,309   

Proceeds from recoveries of charged-off loans

     9,499        2,129   

Proceeds from sale of other real estate owned

     196        693   

Payment for acquisition of intangibles, net of cash acquired

     (360     —     

Purchases of premises and equipment

     (13,220     (6,811
                

Net cash used for investing activities

     (1,295,385     (279,713
                

Cash flows from financing activities:

    

Net increase in deposits

     1,808,476        1,521,111   

Principal payments of other long-term debt

     —          (50,885

Increase (decrease) in short-term borrowings

     5,980        (30,780

Capital contributions from noncontrolling interests, net of distributions

     33,366        28,589   

Tax benefit from stock exercises

     2,775        61   

Dividends paid on preferred stock

     —          (4,994

Proceeds from issuance of common stock

     13,204        2,654   

Repurchase of warrant under Capital Purchase Program

     (6,820     —     
                

Net cash provided by financing activities

     1,856,981        1,465,756   
                

Net increase in cash and cash equivalents

     677,490        1,272,645   

Cash and cash equivalents at beginning of period

     3,512,853        2,436,725   
                

Cash and cash equivalents at end of period

   $ 4,190,343      $ 3,709,370   
                

Supplemental disclosures:

    

Cash paid during the period for:

    

Interest

   $ 18,991      $ 28,569   

Income taxes

     20,876        27,312   

Noncash items during the period:

    

Preferred stock dividends accrued, not yet paid

   $ —        $ 1,469   

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

     54,133        10,589   

Net change in fair value of interest rate swaps

     13,276        (44,403

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

SVB Financial Group (“SVB Financial” or the “Parent”) is a diversified financial services company, as well as a bank holding company and financial holding company. SVB Financial was incorporated in the state of Delaware in March 1999. Through our various subsidiaries and divisions, we offer a variety of banking and financial products and services to support our clients through all stages of their life cycles. In these notes to our interim consolidated financial statements, when we use or refer to “SVB Financial Group,” “SVBFG”, the “Company,” “we,” “our,” “us” or other similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the “Bank”), unless the context requires otherwise. When we use or refer to “SVB Financial” or the “Parent” we are referring only to the parent company, SVB Financial Group, unless the context requires otherwise.

The accompanying interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and six months ended June 30, 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 six months ended June 30, 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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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

No new accounting guidance was adopted during the second quarter of 2010.

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. However, we do engage from time to time in selling our loans. Historically, our participating interests in those sales have the same priority and are 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 effective for interim or annual reporting periods beginning after December 15, 2009 and were therefore 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.

Recent Accounting Pronouncements

In July 2010, the FASB issued a new accounting standard (ASU No. 2010-20), which requires the addition of new disclosures and enhances existing disclosure requirements already included in the guidance for credit quality and the allowance for credit losses. The statement requires enhancements to disclosures for the allowance for credit losses on a disaggregated basis. The statement defines two levels of disaggregation: 1) portfolio segment and 2) class of financing receivable. Additionally, the statement requires multiple new disclosures regarding an entity’s financing receivables, such as credit quality indicators, aging of past due receivables, troubled debt restructurings, and significant purchases and sales. The new disclosures and amendments to existing disclosures are effective for interim and annual reporting periods ending on or after December 15, 2010. This standard enhances and increases the disclosure requirements for credit quality and the allowance for credit losses and does not have an impact on our financial position, results of operations or stockholders’ equity.

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

On June 16, 2010, we repurchased in its entirety the warrant previously issued to the U.S. Treasury in connection with our previous participation in the U.S. Treasury’s Capital Purchase Program (“CPP”). The total cash repurchase price paid to the U.S.

 

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Treasury was $6.8 million for the aggregate warrant. At the time of issuance, the warrant was initially exercisable for 708,116 shares of our common stock at an exercise price of $49.78 per share. However, due to our completion of a qualified equity offering during the fourth quarter of 2009, the number of shares of common stock exercisable under the warrant was reduced to 354,058 pursuant to applicable CPP rules. The repurchase of the warrant reduced our stockholders’ equity by the total cash price of $6.8 million, and did not have any impact on our net income available to common stockholders or diluted earnings per share for the three or six months ended June 30, 2010.

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. Potentially dilutive common shares are excluded from the computation of dilutive earnings per share in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2010 and 2009, respectively:

 

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

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

       2010            2009             2010            2009      

Numerator:

          

Net income attributable to SVBFG

   $ 21,120    $ 11,338      $ 39,677    $ 3,103   

Preferred stock dividend and discount accretion

     —        (3,545     —        (7,081
                              

Net income (loss) available to common stockholders

   $ 21,120    $ 7,793      $ 39,677    $ (3,978
                              

Denominator:

          

Weighted average common shares outstanding-basic

     41,720      32,952        41,558      32,960   

Weighted average effect of dilutive securities:

          

Stock options

     694      126        712      —     

Restricted stock units

     62      —          70      —     
                              

Denominator for diluted calculation

     42,476      33,078        42,340      32,960   
                              

Net income (loss) per common share:

          

Basic

   $ 0.51    $ 0.24      $ 0.95    $ (0.12
                              

Diluted

   $ 0.50    $ 0.24      $ 0.94    $ (0.12
                              

Due to the loss applicable to common stockholders for the six months ended June 30, 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 and six month periods. Our warrant associated with 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 and six 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 and six months ended June 30, 2010 and 2009, respectively:

 

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

(Shares in thousands)

       2010            2009            2010            2009    

Stock options

   7    2,893    8    3,031

Restricted stock units

   1    583    7    714

Warrant associated with Capital Purchase Program (1)

   —      707    —      862
                   

Total

   8    4,183    15    4,607
                   

 

(1) On June 16, 2010, we repurchased in its entirety the warrant previously issued to the U.S. Treasury in connection with our previous participation in the CPP.

In addition to the above, at June 30, 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

 

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Supplementary Data- Note 12- “Short-Term Borrowings and Long-Term Debt” and Note 13- “Derivative Financial Instruments” and under Part II, Item 8 of our 2009 Form 10-K.

3. Share-Based Compensation

For the three and six months ended June 30, 2010, we recorded share-based compensation expense of $3.0 million and $6.3 million, respectively, resulting in the recognition of $0.7 million and $1.4 million, respectively, in related tax benefits. For the three and six months ended June 30, 2009, we recorded share-based compensation expense of $3.9 million and $7.8 million, respectively, resulting in the recognition of $0.9 million and $1.9 million, respectively, in related tax benefits.

Unrecognized Compensation Expense

At June 30, 2010, unrecognized share-based compensation expense was as follows:

 

(Dollars in thousands)

   Unrecognized Expense    Average Expected
Recognition Period -  in

Years

Stock options

   $ 11,128    2.98

Restricted stock units

     12,289    2.53
         

Total unrecognized share-based compensation expense

   $ 23,417   
         

Share-Based Payment Award Activity

The table below provides stock option information related to the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the six months ended June 30, 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

   337,316        48.99      

Exercised

   (395,189     28.97      

Forfeited

   (65,895     38.35      

Expired

   (7,925     51.06      
              

Outstanding at June 30, 2010

   3,369,030        37.30    3.32    $ 24,823,826
              

Vested and expected to vest at June 30, 2010

   3,213,388        37.22    3.18      23,717,064
              

Exercisable at June 30, 2010

   2,361,808        36.84    2.24      17,312,199
              

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $41.23 as of June 30, 2010. The total intrinsic value of options exercised during the three and six months ended June 30, 2010 was $4.0 million and $7.2 million, respectively, compared to $32 thousand and $0.2 million for the comparable 2009 periods.

The table below provides information for restricted stock units under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the six months ended June 30, 2010:

 

     Shares     Weighted Average
Grant Date Fair
Value

Nonvested at December 31, 2009

   336,806      $ 39.55

Granted

   156,343        47.92

Vested

   (92,622     39.42

Forfeited

   (32,642     32.63
        

Nonvested at June 30, 2010

   367,885        43.81
        

 

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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 June 30, 2010 and December 31, 2009, respectively:

 

(Dollars in thousands)

   June 30, 2010    December 31, 2009

Securities purchased under agreements to resell

   $ 25,537    $ 58,242

Other short-term investment securities

     18,069      —  
             

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

   $ 43,606    $ 58,242
             

In addition, as of June 30, 2010 and December 31, 2009, $3.7 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 $234.6 million and $171.6 million, respectively.

5. Investment Securities

The major components of our investment securities portfolio at June 30, 2010 and December 31, 2009 are as follows:

 

     June 30, 2010    December 31, 2009

(Dollars in thousands)

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

Available-for-sale securities, at fair value:

                     

U.S. treasury securities

   $ 25,496    $ 1,082    $ —        $ 26,578    $ 25,583    $ 464    $ —        $ 26,047

U.S. agency debentures

     1,267,370      12,666      —          1,280,036      887,008      5,188      (443     891,753

Residential mortgage-backed securities:

                     

Agency-issued mortgage-backed securities

     1,519,265      48,410      —          1,567,675      1,413,817      14,050      (17,237     1,410,630

Agency-issued collateralized mortgage obligations - fixed rate

     1,263,073      34,587      (193     1,297,467      1,360,790      17,142      (5,557     1,372,375

Agency-issued collateralized mortgage obligations - variable rate

     1,063,043      2,909      (288     1,065,664      —        —        —          —  

Non-agency mortgage-backed securities (1)

     —        —        —          —        89,155      48      (5,507     83,696

Commercial mortgage-backed securities (1)

     —        —        —          —        48,440      468      (107     48,801

Municipal bonds and notes

     96,997      3,484      (50     100,431      100,504      2,429      (56     102,877

Marketable equity securities

     445      5      (68     382      1,795      219      (5     2,009
                                                         

Total available-for-sale securities

   $ 5,235,689    $ 103,143    $ (599   $ 5,338,233    $ 3,927,092    $ 40,008    $ (28,912   $ 3,938,188
                                                         

Non-marketable securities:

                     

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

                     

Private equity fund investments (2)

             322,159              271,316

Other private equity investments (3)

             94,980              96,577

Other investments (4)

             960              1,143

Non-marketable securities (equity method accounting):

                     

Other investments (5)

             59,655              59,660

Low income housing tax credit funds

             24,740              26,797

Non-marketable securities (cost method accounting):

                     

Private equity fund investments (6)

             101,488              86,019

Other private equity investments

             12,357              12,019
                             

Total non-marketable securities

             616,339              553,531
                             

Total investment securities

           $ 5,954,572            $ 4,491,719
                             

 

(1) During the three months ended June 30, 2010, we sold all of our remaining non-agency residential and commercial mortgage-backed securities of $123.3 million. In addition, we sold all of our remaining agency-issued collateralized mortgage obligations of $34.6 million. The sales of these securities resulted in net gains of $1.1 million.

 

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(2) The following table shows the amount of private equity fund investments by the following consolidated funds and our ownership of each fund at June 30, 2010 and December 31, 2009:

 

     June 30, 2010     December 31, 2009  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

SVB Strategic Investors Fund, LP

   $ 49,226    12.6   $ 50,508    12.6

SVB Strategic Investors Fund II, LP

     92,141    8.6        85,820    8.6   

SVB Strategic Investors Fund III, LP

     125,388    5.9        102,568    5.9   

SVB Strategic Investors Fund IV, LP

     23,986    5.0        13,677    5.0   

SVB Capital Preferred Return Fund, LP

     13,622    20.0        8,330    20.0   

SVB Capital—NT Growth Partners, LP

     15,121    33.0        10,413    33.0   

SVB Capital Partners II, LP (i)

     2,675    5.1        —      N/A   
                  

Total private equity fund investments

   $ 322,159      $ 271,316   
                  

 

  (i) At June 30, 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.

 

(3) The following table shows the amount of private equity investments by the following consolidated funds and our ownership of each fund at June 30, 2010 and December 31, 2009:

 

     June 30, 2010     December 31, 2009  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Silicon Valley BancVentures, LP

   $ 20,058    10.7   $ 24,023    10.7

SVB Capital Partners II, LP

     38,317    5.1        36,847    5.1   

SVB India Capital Partners I, LP

     36,605    14.4        35,707    14.4   
                  

Total other private equity investments

   $ 94,980      $ 96,577   
                  

 

(4) Other investments within non-marketable securities (investment company fair value accounting) include our ownership in Partners for Growth, LP, a consolidated sponsored debt fund. At June 30, 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.

 

(5) The following table shows the amount of investments and our ownership of each fund at June 30, 2010 and December 31, 2009:

 

     June 30, 2010     December 31, 2009  

(Dollars in thousands)

   Amount    Ownership %     Amount    Ownership %  

Gold Hill Venture Lending 03, LP (i)

   $ 18,527    9.3   $ 16,134    9.3

Partners for Growth II, LP

     10,459    24.2        13,059    24.2   

Other investments

     30,669    N/A        30,467    N/A   
                  

Total other investments

   $ 59,655      $ 59,660   
                  

 

  (i) At June 30, 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 343 and 349 venture capital/private equity funds at June 30, 2010 and December 31, 2009, respectively, where our ownership interest is less than 5% of the voting interests of each such fund. For the three months ended June 30, 2010, we recognized other-than-temporary impairment (“OTTI”) losses of $0.6 million resulting from other-than-temporary declines in value for 24 of the 343 investments. For the six months ended June 30, 2010, we recognized OTTI losses of $0.9 million resulting from other-than-temporary declines in value for 38 of the 343 investments. The OTTI losses are included in net gains (losses) on investment securities, a component of noninterest income. For the remaining 305 investments at June 30, 2010, we concluded that declines in value, if any, were temporary and as such, no OTTI was required to be recognized. At June 30, 2010, the carrying value of these venture capital/private equity fund investments (cost method accounting) was $101.5 million, and the estimated fair value was $101.0 million.

 

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The following table summarizes our unrealized losses on our available-for-sale investment securities into categories of less than 12 months, or 12 months or longer, at June 30, 2010:

 

     June 30, 2010  
     Less than 12 months     12 months or longer    Total  
     Fair Value of
Investments
   Unrealized
Losses
    Fair Value of
Investments
   Unrealized
Losses
   Fair Value of
Investments
   Unrealized
Losses
 

(Dollars in thousands)

                

Residential mortgage-backed securities:

                

Agency-issued collateralized mortgage obligations—fixed rate

   $ 29,229    $ (193   $ —      $ —      $ 29,229    $ (193

Agency-issued collateralized mortgage obligations—variable rate

     143,367      (288     —        —        143,367      (288

Municipal bonds and notes

     10,962      (50     —        —        10,962      (50

Marketable equity securities

     301      (68     —        —        301      (68
                                            

Total temporarily impaired securities (1)

   $ 183,859    $ (599   $ —      $ —      $ 183,859    $ (599
                                            

 

(1) As of June 30, 2010, we identified a total of 28 investments that were in unrealized loss positions. There were no investments with unrealized losses that have been in an impaired position for a period of time greater than 12 months. 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 June 30, 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 June 30, 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.

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

(Dollars in thousands)

               

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—fixed rate

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

Non-agency mortgage-backed securities

     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 June 30, 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.

 

    June 30, 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

  $ 26,578   2.39   $ —     —     $ 26,578   2.39   $ —     —     $ —     —  

U.S. agency debentures

    1,280,036   2.18        30,415   3.08        1,219,574   2.12        30,047   3.48        —     —     

Residential mortgage-backed securities:

                   

Agency-issued mortgage-backed securities

    1,567,675   3.92        136   6.15        1,204   6.46        116,767   4.40        1,449,568   3.88   

Agency-issued collateralized mortgage obligations—fixed rate

    1,297,467   3.61        —     —          11,502   5.06        55,128   4.38        1,230,837   3.56   

Agency-issued collateralized mortgage obligations—variable rate

    1,065,664   0.76        —     —          —     —          —     —          1,065,664   0.76   

Municipal bonds and notes

    100,431   6.03        1,150   6.50        6,385   5.40        32,996   5.83        59,900   6.18   
                                       

Total

  $ 5,337,851   2.83      $ 31,701   3.22      $ 1,265,243   2.17      $ 234,938   4.48      $ 3,805,969   2.94   
                                       

 

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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 and six months ended June 30, 2010 and 2009:

 

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

(Dollars in thousands)

   2010     2009     2010     2009  

Gross gains on investment securities:

        

Available-for-sale securities, at fair value

   $ 3,101      $ —        $ 3,132      $ 7   

Marketable securities (investment company fair value accounting)

     —          691        51        1,179   

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

        

Private equity fund investments

     8,853        654        28,645        1,269   

Other private equity investments

     4,453        141        4,937        193   

Other investments

     —          249        27        613   

Non-marketable securities (equity method accounting):

        

Other investments

     598        2,245        2,141        2,809   

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     243        235        558        301   

Other private equity investments

     —          —          —          22   

Other investments

     102        —          102        —     
                                

Total gross gains on investment securities

     17,350        4,215        39,593        6,393   
                                

Gross losses on investment securities:

        

Available-for-sale securities, at fair value

     (2,260     (41     (2,264     (41

Marketable securities (investment company fair value accounting)

     (57     (197     (57     (393

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

        

Private equity fund investments

     (4,784     (5,950     (9,120     (36,760

Other private equity investments

     (4,151     (2,883     (5,712     (8,032

Other investments

     (79     —          (79     —     

Non-marketable securities (equity method accounting):

        

Other investments

     (612     (1,163     (613     (1,283

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     (602     (701     (939     (1,649

Other private equity investments

     —          (30     —          (30
                                

Total gross losses on investment securities

     (12,545     (10,965     (18,784     (48,188
                                

Gains (losses) on investment securities, net

   $ 4,805      $ (6,750   $ 20,809      $ (41,795
                                

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

   $ 3,564      $ (6,933   $ 16,342      $ (37,371
                                

6. Loans and Allowance for Loan Losses

The composition of loans, net of unearned income of $35.4 million and $34.9 million at June 30, 2010 and December 31, 2009, respectively, is presented in the following table:

 

(Dollars in thousands)

   June 30, 2010    December 31, 2009

Commercial loans (1)

   $ 3,496,695    $ 3,603,639

Premium wine (2)

     448,854      441,901

Community development loans (3)

     59,802      59,926

Consumer and other (4)

     444,838      442,628
             

Total loans, net of unearned income

   $ 4,450,189    $ 4,548,094
             

 

(1) Included within our commercial loans portfolio are business credit card loans to commercial clients. At June 30, 2010 and December 31, 2009, our business credit card loans portfolio totaled $29.5 million and $24.6 million, respectively.
(2) Premium wine consists of loans for vineyard development, as well as working capital and equipment term loans to meet the needs of our clients’ premium wineries and vineyards. At June 30, 2010 and December 31, 2009, $310.5 million and $298.9 million, respectively, of such loans were secured by real estate.
(3) 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.
(4) Consumer and other loans consist primarily of loans to targeted high-net-worth individuals. These products and services include home equity lines of credit, loans for personal residences, secured lines of credit, restricted stock purchase loans and capital call lines of credit. This category also includes loans made to eligible employees through our Employee Home Ownership Plan (“EHOP”). Loans secured by real estate at June 30, 2010, and December 31, 2009 were comprised of the following:

 

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(Dollars in thousands)

   June 30, 2010    December 31, 2009

Loans for personal residence (i)

   $ 88,912    $ 64,678

Home equity lines of credit (ii)

     87,226      90,459

Loans to eligible employees (iii)

     82,693      86,147
             

Consumer loans secured by real estate

   $ 258,831    $ 241,284
             

 

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

The activity in the allowance for loan losses for the three and six months ended June 30, 2010 and 2009 was as follows:

 

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

(Dollars in thousands)

   2010     2009     2010     2009  

Allowance for loan losses, beginning balance

   $ 68,271      $ 110,010      $ 72,450      $ 107,396   

Provision for loan losses

     7,408        21,393        18,153        64,859   

Gross loan charge-offs

     (7,133     (21,898     (28,313     (63,911

Loan recoveries

     3,243        968        9,499        2,129   
                                

Allowance for loan losses, ending balance

   $ 71,789      $ 110,473      $ 71,789      $ 110,473   
                                

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 $50.9 million and $50.2 million at June 30, 2010 and December 31, 2009, respectively. The recorded investment in impaired loans for which there was a related allowance for loan losses was $47.9 million and $47.0 million at June 30, 2010 and December 31, 2009, respectively, with related allowance for loan losses of $8.3 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 June 30, 2010 and December 31, 2009, respectively. Average impaired loans for the three and six months ended June 30, 2010 totaled $50.9 million and $50.6 million, respectively. Cash payments received related to these loans totaled $0.5 million and $0.9 million for the three and six months ended June 30, 2010, respectively. Average impaired loans for the three and six months ended June 30, 2009 totaled $105.8 million and $100.4 million, respectively. Cash payments received related to these loans totaled $0.5 million and $0.7 million for the three and six months ended June 30, 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 and six months ended June 30, 2010 or 2009 during the time period that the loans were impaired. Loans past due 90 days or more still accruing interest were $0.3 million and $2.5 million at June 30, 2010 and December 31, 2009, respectively.

Included in the $50.9 million of impaired loans at June 30, 2010 are loans modified in troubled debt restructurings (“TDR’s”), where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. As of June 30, 2010, we had TDR’s of $28.5 million, which were comprised of $20.3 million in our consumer and other category, $7.1 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 June 30, 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 June 30, 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 June 30, 2010 and December 31, 2009:

 

(Dollars in thousands)

  

Maturity

   June 30, 2010    December 31, 2009

Short-term borrowings:

        

Other short-term borrowings

   (1)    $ 44,735    $ 38,755
                

Total short-term borrowings

      $ 44,735    $ 38,755
                

Long-term debt:

        

5.70% senior notes (2)

   June 1, 2012    $ 269,168    $ 269,793

6.05% subordinated notes (3)

   June 1, 2017      290,487      276,541

3.875% convertible senior notes

   April 15, 2011      248,134      246,991

7.0% junior subordinated debentures

   October 15, 2033      55,636      55,986

4.99% long-term notes payable

   (4)      6,385      7,339
                

Total long-term debt

      $ 869,810    $ 856,650
                

 

(1) Represents cash collateral received from counterparties for our interest rate swap agreements related to our senior and subordinated notes.
(2) At June 30, 2010 and December 31, 2009, included in the carrying value of our 5.70% senior notes are $19.3 million and $19.9 million, respectively, related to the fair value of the interest rate swap associated with the notes.
(3) At June 30, 2010 and December 31, 2009, included in the carrying value of our 6.05% subordinated notes are $40.9 million and $27.0 million, respectively, related to the fair value of the interest rate swap associated with the notes.
(4) Represents long-term notes payable related to one of our debt fund investments beginning April 30, 2009 with the last payment due in April 2012.

Interest expense related to short-term borrowings and long-term debt was $5.9 million and $11.5 million for the three and six months ended June 30, 2010, respectively, and $7.3 million and $15.5 million for the three and six months ended June 30, 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 June 30, 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 and six months ended June 30, 2010, the effective interest rate for our 2008 Convertible Notes was 5.72 percent and 5.75 percent, respectively, and interest expense was $3.5 million and $7.1 million, respectively. For the three and six months ended June 30, 2009, the effective interest rate for our 2008 Convertible Notes was 5.73 percent and 5.77 percent, respectively, and interest expense was $3.5 million and $7.0 million, respectively. At June 30, 2010, the unamortized debt discount totaled $1.8 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 available-for-sale securities as collateral) and an unsecured basis. These include repurchase agreements and uncommitted federal funds lines with various financial

 

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institutions. As of June 30, 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 (comprised entirely of agency-issued mortgage securities) at June 30, 2010 totaled $908.6 million, all of which was unused and available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank at June 30, 2010 totaled $86.6 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 (losses) 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 (losses) 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 and six months ended June 30, 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.

 

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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 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 (losses) 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 (losses) 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 June 30, 2010 and December 31, 2009, respectively, were as follows:

 

(Dollars in thousands)

  Balance sheet
location
  June 30, 2010     December 31, 2009  
    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   $ 60,171      $ 44,735   $ 15,436      $ 500,000   $ 46,895      $ 38,755   $ 8,140   
                                                 

Derivatives not designated as hedging instruments:

                 

Currency Exchange Risks:

                 

Foreign exchange forwards

  Other assets     34,178     1,570        —       1,570        48,276     1,472        —       1,472   

Foreign exchange forwards

  Other liabilities     45,816     (885     —       (885     9,828     (85     —       (85
                                                 

Net exposure

        685        —       685          1,387        —       1,387   
                                                 

Other Derivative Instruments:

                 

Equity warrant assets

  Other assets     116,354     40,597        —       40,597        120,192     41,292        —       41,292   
                                                 

Other derivatives:

                 

Foreign exchange forwards

  Other assets     344,158     8,859        —       8,859        316,759     16,772        —       16,772   

Foreign exchange forwards

  Other liabilities     327,107     (9,004     —       (9,004     326,116     (15,593     —       (15,593

Foreign currency options

  Other assets     161,594     1,945        —       1,945        1,819     192        —       192   

Foreign currency options

  Other liabilities     161,594     (1,945     —       (1,945     1,819     (192     —       (192
                                                 

Net exposure

        (145     —       (145       1,179        —       1,179   
                                                 

Net

      $ 101,308      $ 44,735   $ 56,573        $ 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 June 30, 2010 remain at “A” or higher and there were no material changes in their credit ratings during the six months ended June 30, 2010.

 

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A summary of our derivative activity and the related impact on our consolidated statements of income for the three and six months ended June 30, 2010 and 2009, respectively, is as follows:

 

(Dollars in thousands)

  

Statement of income location

   Three months ended
June 30,
    Six months ended
June 30,
 
      2010     2009     2010     2009  

Derivatives designated as hedging instruments:

           

Interest Rate Risks:

           

Net cash benefit associated with interest rate swaps

   Interest expense -borrowings    $ 6,087      $ 4,929      $ 12,588      $ 9,133   

Changes in fair value of interest rate swap

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

Net gains associated with interest rate risk derivatives

      $ 6,087      $ 4,929      $ 12,588      $ 8,963   
                                   

Derivatives not designated as hedging instruments:

           

Currency Exchange Risks:

           

(Losses) gains on foreign currency loan revaluations, net

   Other noninterest income    $ (916   $ 4,657      $ (2,946   $ 1,980   

Gains (losses) on foreign exchange forward contracts, net

   Net gains (losses) on derivative instruments      1,332        (4,479     3,378        (2,536
                                   

Net gains (losses) associated with currency risk

      $ 416      $ 178      $ 432      $ (556
                                   

Other Derivative Instruments:

           

(Losses) gains on equity warrant assets

   Net gains (losses) on derivative instruments    $ (333   $ 1,184      $ (689   $ 729   
                                   

Gains on client foreign exchange forward contracts, net

   Net gains (losses) on derivative instruments    $ 327      $ 448      $ 619      $ 944   
                                   

10. Other Noninterest Income and Other Noninterest Expense

A summary of other noninterest income for the three and six months ended June 30, 2010 and 2009, respectively, is as follows:

 

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

(Dollars in thousands)

   2010     2009    2010     2009

Fund management fees

   $ 2,698      $ 2,471    $ 5,396      $ 5,188

Service-based fee income (1)

     2,622        2,116      4,618        3,945

Currency revaluation (losses) gains

     (692     1,068      326        108

(Losses) gains on foreign currency loans revaluation, net

     (916     4,657      (2,946     1,980

Other

     3,751        2,487      6,132        4,360
                             

Total other noninterest income

   $ 7,463      $ 12,799    $ 13,526      $ 15,581
                             

 

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

A summary of other noninterest expense for the three and six months ended June 30, 2010 and 2009, respectively, is as follows:

 

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

(Dollars in thousands)

   2010    2009    2010    2009

Telephone

   $ 1,090    $ 1,337    $ 2,230    $ 2,717

Tax credit fund amortization

     1,005      1,164      2,057      2,293

Data processing services

     925      1,118      1,902      2,130

Postage and supplies

     603      905      1,074      2,163

Other

     2,932      2,933      5,692      5,553
                           

Total other noninterest expense

   $ 6,555    $ 7,457    $ 12,955    $ 14,856
                           

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 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

 

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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, which is subject to change from time to time, 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 June 30, 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 (i) 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 (ii) 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 available-for-sale securities 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 available-for-sale securities portfolio balances.

 

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Our segment information for the three and six months ended June 30, 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 June 30, 2010

           

Net interest income (loss)

  $ 85,873      $ 8,247      $ —        $ (17   $ 12,333      $ 106,436   

Provision for loan losses

    (6,729     (549     —          —          (130     (7,408

Noninterest income

    30,083        374        3,272        2,221        4,207        40,157   

Noninterest expense (2)

    (56,954     (5,214     (3,498     (3,935     (34,579     (104,180
                                               

Income (loss) before income tax expense (3)

  $ 52,273      $ 2,858      $ (226   $ (1,731   $ (18,169   $ 35,005   
                                               

Total average loans, net of unearned income

  $ 3,183,912      $ 920,859      $ —        $ —        $ 7,269      $ 4,112,040   

Total average assets

    3,455,741        922,143        100,159        92,332        9,983,887        14,554,262   

Total average deposits

    11,706,549        214,446        —          —          (15,554     11,905,441   

Three months ended June 30, 2009

           

Net interest income (loss)

  $ 91,105      $ 8,428      $ (1   $ (54   $ (7,797   $ 91,681   

Provision for loan losses

    (14,894     (6,475     —          —          (24     (21,393

Noninterest income (loss)

    27,207        308        2,359        2,761        (4,360     28,275   

Noninterest expense

    (46,948     (3,384     (3,290     (3,045     (32,345     (89,012
                                               

Income (loss) before income tax expense (3)

  $ 56,470      $ (1,123   $ (932   $ (338   $ (44,526   $ 9,551   
                                               

Total average loans, net of unearned income

  $ 3,779,983      $ 965,767      $ —        $ —        $ 34,216      $ 4,779,966   

Total average assets

    3,887,478        967,229        92,621        75,723        5,904,915        10,927,966   

Total average deposits

    8,277,402        148,296        —          —          6,899        8,432,597   

Six months ended June 30, 2010

           

Net interest income (loss)

  $ 168,269      $ 16,474      $ (1   $ (92   $ 22,626      $ 207,276   

Provision for loan losses

    (17,480     (567     —          —          (106     (18,153

Noninterest income

    57,724        687        7,852        5,648        17,519        89,430   

Noninterest expense (2)

    (112,331     (9,667     (6,902     (7,294     (66,562     (202,756
                                               

Income (loss) before income tax expense (3)

  $ 96,182      $ 6,927      $ 949      $ (1,738   $ (26,523   $ 75,797   
                                               

Total average loans, net of unearned income

  $ 3,176,085      $ 924,326      $ —        $ —        $ 13,378      $ 4,113,789   

Total average assets

    3,450,157        925,782        103,018        92,557        9,491,067        14,062,581   

Total average deposits

    11,246,793        201,313        —          —          (9,182     11,438,924   

Six months ended June 30, 2009

           

Net interest income (loss)

  $ 185,361      $ 17,315      $ (3   $ (80   $ (19,401   $ 183,192   

Provision for loan losses

    (57,709     (7,124     —          —          (26     (64,859

Noninterest income (loss)

    53,661        611        1        4,358        (35,937     22,694   

Noninterest expense, excluding impairment of goodwill (2)

    (88,921     (6,886     (6,636     (6,157     (63,460     (172,060

Impairment of goodwill

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

Income (loss) before income tax expense (3)

  $ 92,392      $ 3,916      $ (6,638   $ (5,971   $ (118,824   $ (35,125
                                               

Total average loans, net of unearned income

  $ 3,946,846      $ 977,738      $ —        $ —        $ 22,596      $ 4,947,180   

Total average assets

    4,052,566        979,350        89,112        75,013        5,497,448        10,693,489   

Total average deposits

    8,015,374        160,412        —          —          5,760        8,181,546   

 

(1) SVB Capital’s and Other Business Services’ components of net interest income (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 $1.0 million and $0.8 million for the three months ended June 30, 2010 and 2009, respectively, and $2.1 million and $1.6 million for the six months ended June 30, 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

 

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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 June 30, 2010 and December 31, 2009, respectively:

 

(Dollars in thousands)

   June 30, 2010    December 31, 2009

Commitments available for funding: (1)

     

Fixed interest rate commitments

   $ 501,296    $ 539,986

Variable interest rate commitments

     4,778,068      4,798,740
             

Total commitments available for funding

   $ 5,279,364    $ 5,338,726
             

Commitments unavailable for funding (2)

   $ 1,275,232    $ 1,103,489
             

Maximum lending limits for accounts receivable factoring arrangements (3)

   $ 627,749    $ 535,257

Reserve for unfunded credit commitments

     14,200      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.
(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 June 30, 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

   $ 554,891    $ 38,157    $ 593,048    $ 593,048

Performance standby letters of credit

     28,767      7,641      36,408      36,408

Commercial letters of credit

     5,764      —        5,764      5,764
                           

Total

   $ 589,422    $ 45,798    $ 635,220    $ 635,220
                           

At June 30, 2010 and December 31, 2009, deferred fees related to financial and performance standby letters of credit were $4.5 million and $3.9 million, respectively. At June 30, 2010, collateral in the form of cash of $220.3 million and investment securities of $17.5 million were available to us to reimburse losses, if any, under financial and performance standby letters of credit.

 

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Commitments to Invest in 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 June 30, 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      396    5.1   

SVB India Capital Partners I, LP

     7,750      2,852    14.4   

SVB Capital Shanghai Yangpu Venture Capital Fund, LP

     853      853    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      6,450    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      5,256    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)

     148,811      44,009    N/A   

New Fund Commitments (4)

     210,871      142,684    N/A   
                

Total

   $ 528,382    $ 233,276   
                

 

(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 329 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.

The following table details the remaining unfunded commitments to venture capital/private equity funds by our consolidated managed funds of funds at June 30, 2010, which includes SVBFG’s unfunded commitments detailed above:

 

Limited Partnership (Dollars in thousands)

   Unfunded
Commitments

SVB Strategic Investors Fund, LP

   $ 3,397

SVB Strategic Investors Fund II, LP

     20,984

SVB Strategic Investors Fund III, LP

     111,289

SVB Strategic Investors Fund IV, LP

     170,845

SVB Capital Preferred Return Fund, LP

     49,889

SVB Capital—NT Growth Partners, LP

     38,502
      

Total

   $ 394,906
      

13. Income Taxes

At June 30, 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 June 30, 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.

 

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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 available-for-sale 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 available-for-sale 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.

 

  - 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: Valuations incorporate observable market spreads over an estimated average life after considering inputs such as coupon rate, tenor, geographic location, loan size and origination vintage, and estimated prepayment speeds. In the second quarter of 2010, we sold all of our remaining non-agency mortgage-backed securities.

 

  - Commercial mortgage-backed securities: Valua