SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 11/05/2010 16:45:56)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 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 October 29, 2010, 41,992,519 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

         Page  
PART I - FINANCIAL INFORMATION      3   
Item 1.   Interim Consolidated Financial Statements (unaudited)      3   
  Interim Consolidated Balance Sheets (unaudited) as of September 30, 2010 and December 31, 2009      3   
  Interim Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2010 and 2009      4   
  Interim Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2010 and 2009      5   
  Interim Consolidated Statements of Stockholders’ Equity (unaudited) for the nine months ended September 30, 2010 and 2009      6   
  Interim Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 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      36   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      70   
Item 4.   Controls and Procedures      71   
PART II - OTHER INFORMATION      72   
Item 1.   Legal Proceedings      72   
Item 1A.   Risk Factors      72   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      80   
Item 3.   Defaults Upon Senior Securities      81   
Item 4.   (Removed and Reserved)      81   
Item 5.   Other Information      81   
Item 6.   Exhibits      81   
SIGNATURES      82   
INDEX TO EXHIBITS      83   

 

2


Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

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

   September 30,
2010
    December 31,
2009
 

Assets

    

Cash and due from banks

   $ 3,387,204      $ 3,454,611   

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

     391,165        58,242   
                

Cash and cash equivalents

     3,778,369        3,512,853   
                

Available-for-sale securities

     6,003,198        3,938,188   

Non-marketable securities

     656,067        553,531   
                

Investment securities

     6,659,265        4,491,719   
                

Loans, net of unearned income

     4,859,205        4,548,094   

Allowance for loan losses

     (74,369     (72,450
                

Net loans

     4,784,836        4,475,644   
                

Premises and equipment, net of accumulated depreciation and amortization

     41,917        31,736   

Accrued interest receivable and other assets

     395,682        329,447   
                

Total assets

   $ 15,660,069      $ 12,841,399   
                

Liabilities and total equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 7,449,081      $ 6,298,988   

Negotiable order of withdrawal (NOW)

     38,134        53,200   

Money market

     2,067,620        1,292,215   

Money market deposits in foreign offices

     76,795        49,722   

Time

     378,687        332,310   

Sweep

     2,404,628        2,305,502   
                

Total deposits

     12,414,945        10,331,937   
                

Short-term borrowings

     59,735        38,755   

Other liabilities

     263,283        139,947   

Long-term debt

     1,225,810        856,650   
                

Total liabilities

     13,963,773        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; 41,964,764 shares and 41,338,389 shares outstanding, respectively

     42        41   

Additional paid-in capital

     410,590        389,490   

Retained earnings

     810,379        732,907   

Accumulated other comprehensive income

     47,600        5,905   

Total SVBFG stockholders’ equity

     1,268,611        1,128,343   

Noncontrolling interests

     427,685        345,767   
                

Total equity

     1,696,296        1,474,110   
                

Total liabilities and total equity

   $ 15,660,069      $ 12,841,399   
                

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

 

3


Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

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

(Dollars in thousands, except per share amounts)

   2010     2009     2010     2009  

Interest income:

        

Loans

   $ 80,716      $ 83,049      $ 230,216      $ 255,548   

Available-for-sale securities:

        

Taxable

     32,375        21,562        101,493        53,207   

Non-taxable

     948        1,008        2,869        3,098   

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

     2,719        2,367        8,444        7,228   
                                

Total interest income

     116,758        107,986        343,022        319,081   
                                

Interest expense:

        

Deposits

     3,783        4,801        11,315        17,253   

Borrowings

     6,634        6,367        18,090        21,818   
                                

Total interest expense

     10,417        11,168        29,405        39,071   
                                

Net interest income

     106,341        96,818        313,617        280,010   

Provision for loan losses

     10,971        8,030        29,124        72,889   
                                

Net interest income after provision for loan losses

     95,370        88,788        284,493        207,121   
                                

Noninterest income:

        

Gains (losses) on investment securities, net

     46,611        3,905        67,420        (37,890

Foreign exchange fees

     9,091        7,491        26,207        22,574   

Deposit service charges

     7,324        6,906        22,283        20,319   

Client investment fees

     4,681        5,527        13,562        17,355   

Credit card fees

     3,139        2,300        8,853        6,696   

Letters of credit and standby letters of credit income

     2,752        3,019        7,869        8,240   

Gains (losses) on derivative instruments, net

     1,257        (1,090     4,565        (2,123

Other

     11,381        6,249        24,907        21,830   
                                

Total noninterest income

     86,236        34,307        175,666        57,001   
                                

Noninterest expense:

        

Compensation and benefits

     62,170        45,815        181,993        141,042   

Professional services

     12,618        12,109        37,358        35,452   

Premises and equipment

     5,548        5,892        16,651        16,993   

Business development and travel

     5,153        2,902        14,542        9,578   

Net occupancy

     5,131        4,198        14,468        13,346   

FDIC assessments

     2,637        2,589        13,273        13,853   

Correspondent bank fees

     2,228        2,118        6,132        5,994   

Provision for (reduction of) unfunded credit commitments

     1,692        65        2,561        (3,366

Impairment of goodwill

     —          —          —          4,092   

Other

     6,994        4,119        19,949        18,975   
                                

Total noninterest expense

     104,171        79,807        306,927        255,959   
                                

Income before income tax expense

     77,435        43,288        153,232        8,163   

Income tax expense

     24,996        16,879        50,397        21,605   
                                

Net income (loss) before noncontrolling interests

     52,439        26,409        102,835        (13,442

Net (income) loss attributable to noncontrolling interests

     (14,652     (2,246     (25,371     40,708   
                                

Net income attributable to SVBFG

   $ 37,787      $ 24,163      $ 77,464      $ 27,266   
                                

Preferred stock dividend and discount accretion

     —          (3,555     —          (10,636
                                

Net income available to common stockholders

   $ 37,787      $ 20,608      $ 77,464      $ 16,630   
                                

Earnings per common share—basic

   $ 0.90      $ 0.62      $ 1.86      $ 0.50   

Earnings per common share—diluted

     0.89        0.61        1.83        0.50   

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

 

4


Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

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

(Dollars in thousands)

   2010     2009     2010     2009  

Net income (loss) before noncontrolling interests

   $ 52,439      $ 26,409      $ 102,835      $ (13,442

Other comprehensive income, net of tax:

        

Change in cumulative translation gains (losses):

        

Foreign currency translation gains (losses)

     2,113        455        1,961        (87

Related tax (expense) benefit

     (862     (184     (800     28   

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

        

Unrealized holding gains

     634        35,068        92,923        52,927   

Related tax expense

     (259     (14,291     (37,901     (21,581

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

     (23,605     (8     (24,473     26   

Related tax benefit (expense)

     9,631        3        9,985        (11
                                

Other comprehensive (loss) income, net of tax

     (12,348     21,043        41,695        31,302   
                                

Comprehensive income

     40,091        47,452        144,530        17,860   

Comprehensive (income) loss attributable to noncontrolling interests

     (14,652     (2,246     (25,371     40,708   
                                

Comprehensive income attributable to SVBFG

   $ 25,439      $ 45,206      $ 119,159      $ 58,568   
                                

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

 

5


Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

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

(Dollars in thousands)

  Shares     Amount     Shares     Amount       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

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

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

    —          —          —          —          (590     —          —          (590     —          (590

Net income (loss)

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

Capital calls and (distributions), net

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

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

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

Foreign currency translation adjustments, net of tax

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

Stock-based compensation expense

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

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

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

Other-net

    —          —          —          —          844        99        —          943        —          943   
                                                                               

Balance at September 30, 2009

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

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

    —          —          626,375        1        15,209        —          —          15,210        —          15,210   

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

    —          —          —          —          2,891        —          —          2,891        —          2,891   

Net income

    —          —          —          —          —          77,464        —          77,464        25,371        102,835   

Capital calls and (distributions), net

    —          —          —          —          —          —          —          —          56,547        56,547   

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

    —          —          —          —          —          —          40,534        40,534        —          40,534   

Foreign currency translation adjustments, net of tax

    —          —          —          —          —          —          1,161        1,161        —          1,161   

Stock-based compensation expense

    —          —          —          —          9,865        —          —          9,865        —          9,865   

Repurchase of warrant under Capital Purchase Program

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

Other-net

    —          —          —          —          (45     8        —          (37     —          (37
                                                                               

Balance at September 30, 2010

    —        $ —          41,964,764      $ 42      $ 410,590      $ 810,379      $ 47,600      $ 1,268,611      $ 427,685      $ 1,696,296   
                                                                               

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

 

6


Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Nine months ended September 30,  

(Dollars in thousands)

   2010     2009  

Cash flows from operating activities:

    

Net income (loss) before noncontrolling interests

   $ 102,835      $ (13,442

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

    

Impairment of goodwill

     —          4,092   

Provision for loan losses

     29,124        72,889   

Provision for (reduction of) unfunded credit commitments

     2,561        (3,366

Changes in fair values of derivatives, net

     1,556        2,734   

(Gains) losses on investment securities, net

     (67,420     37,890   

Depreciation and amortization

     14,447        15,597   

Amortization of premiums (accretion of discounts) on investment securities, net

     18,700        10,199   

Tax benefit of original issue discount

     —          10,745   

Tax expense from stock exercises

     (306     (927

Amortization of share-based compensation

     9,904        11,177   

Amortization of deferred warrant-related loan fees

     (4,923     (6,125

Deferred income tax expense (benefit)

     1,794        (1,859

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

     24        117   

Changes in other assets and liabilities:

    

Accrued interest, net

     5,817        (2,235

Accounts receivable

     (10,768     3,378   

Income tax receivable, net

     23,933        (21,169

Accrued compensation

     22,567        (5,742

Foreign exchange spot contracts, net

     4,849        (9,282

Other, net

     21,897        (1,870
                

Net cash provided by operating activities

     176,591        102,801   
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (4,167,462     (2,115,015

Proceeds from sales of available-for-sale securities

     653,122        195   

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

     1,526,562        499,493   

Purchases of nonmarketable securities (cost and equity method accounting)

     (36,847     (33,882

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

     12,185        3,363   

Purchases of nonmarketable securities (investment fair value accounting)

     (78,667     (43,849

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

     25,866        11,760   

Net (increase) decrease in loans

     (354,452     729,876   

Proceeds from recoveries of charged-off loans

     13,397        16,892   

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

     (21,031     (11,545
                

Net cash used for investing activities

     (2,427,491     (942,019
                

Cash flows from financing activities:

    

Net increase in deposits

     2,083,008        2,582,160   

Principal payments of other long-term debt

     —          (101,272

Increase (decrease) in short-term borrowings

     20,980        (9,835

Proceeds from issuance of 5.375% Senior Notes, net of discount and issuance cost

     344,294        —     

Capital contributions from noncontrolling interests, net of distributions

     56,547        45,747   

Tax benefit from stock exercises

     3,197        337   

Dividends paid on preferred stock

     —          (7,932

Proceeds from issuance of common stock

     15,210        4,116   

Repurchase of warrant under Capital Purchase Program

     (6,820     —     
                

Net cash provided by financing activities

     2,516,416        2,513,321   
                

Net increase in cash and cash equivalents

     265,516        1,674,103   

Cash and cash equivalents at beginning of period

     3,512,853        2,436,725   
                

Cash and cash equivalents at end of period

   $ 3,778,369      $ 4,110,828   
                

Supplemental disclosures:

    

Cash paid during the period for:

    

Interest

   $ 22,903      $ 35,852   

Income taxes

     21,360        35,824   

Noncash items during the period:

    

Preferred stock dividends accrued, not yet paid

   $ —        $ 1,469   

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

     40,534        31,361   

Net change in fair value of interest rate swaps

     20,362        (37,914

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

 

7


Table of Contents

 

SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

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

The accompanying interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine months ended September 30, 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”) and as updated to reflect revised segment financial reporting in our Current Report on form 8-K filed on September 15, 2010.

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 nine months ended September 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.

 

8


Table of Contents

 

Current Accounting Developments

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

 

   

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 or third quarters 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 QSPEs. 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 stockholders’ 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 will enhance and increase the disclosure requirements for credit quality and the allowance for credit losses and will 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.

 

9


Table of Contents

 

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 prior participation in the U.S. Treasury’s Capital Purchase Program (“CPP”). The total cash repurchase price paid to the U.S. 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 nine months ended September 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 nine months ended September 30, 2010 and 2009, respectively:

 

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

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

   2010      2009     2010      2009  

Numerator:

          

Net income attributable to SVBFG

   $ 37,787       $ 24,163      $ 77,464       $ 27,266   

Preferred stock dividend and discount accretion

     —           (3,555     —           (10,636
                                  

Net income available to common stockholders

   $ 37,787       $ 20,608      $ 77,464       $ 16,630   
                                  

Denominator:

          

Weighted average common shares outstanding-basic

     41,930         33,177        41,679         33,033   

Weighted average effect of dilutive securities:

          

Stock options

     511         495        652         215   

Restricted stock units

     72         —          70         —     
                                  

Denominator for diluted calculation

     42,513         33,672        42,401         33,248   
                                  

Net income per common share:

          

Basic

   $ 0.90       $ 0.62      $ 1.86       $ 0.50   
                                  

Diluted

   $ 0.89       $ 0.61      $ 1.83       $ 0.50   
                                  

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 nine month periods. Our warrant associated with the 2008 Convertible Notes did not impact our weighted average diluted common shares total as the exercise price was higher than the average daily closing price for the three and nine 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 nine months ended September 30, 2010 and 2009, respectively:

 

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

(Shares in thousands)

   2010      2009      2010      2009  

Stock options

     6         1,718         8         2,485   

Restricted stock units

     5         90         4         499   

Warrant associated with Capital Purchase Program (1)

     —           275         —           597   
                                   

Total

     11         2,083         12         3,581   
                                   

 

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

In addition to the above, at September 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

 

10


Table of Contents

of our 2008 Convertible Notes, we entered into a convertible note hedge and warrant agreement. For information on our 2008 Convertible Notes and associated convertible note hedge and warrant agreement, see our Consolidated Financial Statements and Supplementary Data- Note 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 nine months ended September 30, 2010, we recorded share-based compensation expense of $3.6 million and $9.9 million, respectively, resulting in the recognition of $0.9 million and $2.4 million, respectively, in related tax benefits. For the three and nine months ended September 30, 2009, we recorded share-based compensation expense of $3.4 million and $11.2 million, respectively, resulting in the recognition of $0.8 million and $2.7 million, respectively, in related tax benefits.

Unrecognized Compensation Expense

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

 

(Dollars in thousands)

   Unrecognized
Expense
     Average Expected
Recognition
Period - in Years
 

Stock options

   $ 11,644         2.93   

Restricted stock units

     12,926         2.39   
           

Total unrecognized share-based compensation expense

   $ 24,570      
           

Share-Based Payment Award Activity

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

     452,324        47.85         

Exercised

     (470,876     28.63         

Forfeited

     (98,100     40.71         

Expired

     (57,925     50.01         
                

Outstanding at September 30, 2010

     3,326,146        37.53         3.27       $ 25,518,512   
                

Vested and expected to vest at September 30, 2010

     3,168,894        37.41         3.13         24,508,490   
                

Exercisable at September 30, 2010

     2,225,405        36.83         2.05         17,646,011   
                

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $42.32 as of September 30, 2010. The total intrinsic value of options exercised during the three and nine months ended September 30, 2010 was $1.3 million and $8.5 million, respectively, compared to $0.8 million and $1.0 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 nine months ended September 30, 2010:

 

     Shares     Weighted Average
Grant Date Fair
Value
 

Nonvested at December 31, 2009

     336,806      $ 39.55   

Granted

     219,750        46.99   

Vested

     (95,948     39.67   

Forfeited

     (35,685     33.91   
          

Nonvested at September 30, 2010

     424,923        43.90   
          

 

11


Table of Contents

 

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

 

(Dollars in thousands)

   September 30, 2010      December 31, 2009  

Securities purchased under agreements to resell

   $ 48,115       $ 58,242   

Short-term agency discount notes

     330,197         —     

Other short-term investment securities

     12,853         —     
                 

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

   $ 391,165       $ 58,242   
                 

In addition, as of September 30, 2010 and December 31, 2009, $2.9 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 $261.0 million and $171.6 million, respectively.

5. Investment Securities

Our investment securities portfolio consists of both an available-for-sale securities portfolio, which represents interest-earning investment securities, and a non-marketable securities portfolio, which primarily represents investments managed as part of our funds management business.

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

 

    September 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

  $ 25,452      $ 1,222      $ —        $ 26,674      $ 25,583      $ 464      $ —        $ 26,047   

U.S. agency debentures

    1,711,241        10,848        (369     1,721,720        887,008        5,188        (443     891,753   

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

    1,150,836        33,030        —          1,183,866        1,413,817        14,050        (17,237     1,410,630   

Agency-issued collateralized mortgage obligations - fixed rate

    966,492        25,500        (11     991,981        1,360,790        17,142        (5,557     1,372,375   

Agency-issued collateralized mortgage obligations - variable rate

    1,972,194        4,426        (923     1,975,697        —          —          —          —     

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

    96,980        5,792        (15     102,757        100,504        2,429        (56     102,877   

Equity securities

    444        92        (33     503        1,795        219        (5     2,009   
                                                               

Total available-for-sale securities

  $ 5,923,639      $ 80,910      $ (1,351   $ 6,003,198      $ 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)

          365,742              271,316   

Other private equity investments (3)

          84,535              96,577   

Other investments (4)

          962              1,143   

Non-marketable securities (equity method accounting):

               

Other investments (5)

          63,198              59,660   

Low income housing tax credit funds

          28,690              26,797   

Non-marketable securities (cost method accounting):

               

Private equity fund investments (6)

          100,110              86,019   

Other private equity investments

          12,830              12,019   
                           

Total non-marketable securities

          656,067              553,531   
                           

Total investment securities

        $ 6,659,265            $ 4,491,719   
                           

 

(1) During the second quarter of 2010, we sold all of our non-agency residential and commercial mortgage-backed securities totaling $123.3 million and agency-issued collateralized mortgage obligations totaling $34.6 million.

 

12


Table of Contents

 

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

 

     September 30, 2010     December 31, 2009  

(Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

SVB Strategic Investors Fund, LP

   $ 47,026         12.6    $ 50,508         12.6 

SVB Strategic Investors Fund II, LP

     94,922         8.6        85,820         8.6   

SVB Strategic Investors Fund III, LP

     135,631         5.9        102,568         5.9   

SVB Strategic Investors Fund IV, LP

     31,050         5.0        13,677         5.0   

SVB Capital Preferred Return Fund, LP

     19,730         19.5        8,330         20.0   

SVB Capital—NT Growth Partners, LP

     24,456         33.0        10,413         33.0   

SVB Capital Partners II, LP (i)

     4,631         5.1        —           N/A   

Other Private Equity Fund (ii)

     8,296         60.5        —           N/A   
                      

Total private equity fund investments

   $ 365,742         $ 271,316      
                      

 

  (i) At September 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.
  (ii) At September 30, 2010, we had a direct ownership interest of 44.5% and an indirect ownership interest of 12.6% and 3.4% in the fund through our ownership interests of SVB Capital—NT Growth Partners, LP and SVB Capital Preferred Return Fund, LP, respectively.

 

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

 

     September 30, 2010     December 31, 2009  

(Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

Silicon Valley BancVentures, LP

   $ 19,598         10.7    $ 24,023         10.7 

SVB Capital Partners II, LP

     38,052         5.1        36,847         5.1   

SVB India Capital Partners I, LP

     26,885         14.4        35,707         14.4   
                      

Total other private equity investments

   $ 84,535         $ 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 September 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 September 30, 2010 and December 31, 2009:

 

     September 30, 2010     December 31, 2009  

(Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

Gold Hill Venture Lending 03, LP (i)

   $ 12,096         9.3    $ 16,134         9.3 

Partners for Growth II, LP

     9,720         24.2        13,059         24.2   

Other investments

     41,382         N/A        30,467         N/A   
                      

Total other investments

   $ 63,198         $ 59,660      
                      

 

  (i) At September 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 344 and 349 venture capital/private equity funds at September 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 September 30, 2010, we recognized other- than- temporary impairment (“OTTI”) losses of $0.5 million resulting from other- than- temporary declines in value for 16 of the 344 investments. For the nine months ended September 30, 2010, we recognized OTTI losses of $1.5 million resulting from other- than- temporary declines in value for 54 of the 344 investments. The OTTI losses are included in net gains (losses) on investment securities, a component of noninterest income. For the remaining 290 investments at September 30, 2010, we concluded that declines in value, if any, were temporary and as such, no OTTI was required to be recognized. At September 30, 2010, the carrying value of these venture capital/private equity fund investments (cost method accounting) was $100.1 million, and the estimated fair value was $101.1 million.

 

13


Table of Contents

 

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

 

     September 30, 2010  
     Less than 12 months     12 months or longer      Total  

(Dollars in thousands)

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

U.S. agency debentures

   $ 249,672       $ (369   $ —         $ —         $ 249,672       $ (369

Residential mortgage-backed securities:

                

Agency-issued collateralized mortgage obligations—fixed rate

     6,260         (11     —           —           6,260         (11

Agency-issued collateralized mortgage obligations—variable rate

     559,152         (923     —           —           559,152         (923

Municipal bonds and notes

     3,509         (15     —           —           3,509         (15

Equity securities

     32         (33     —           —           32         (33
                                                    

Total temporarily impaired securities (1)

   $ 818,625       $ (1,351   $ —         $ —         $ 818,625       $ (1,351
                                                    

 

(1) As of September 30, 2010, we identified a total of 36 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 rates relative to rates at the time of purchase. Based on the underlying credit quality of the investments, we do not intend to sell any of our securities prior to recovery of our adjusted cost basis and as of September 30, 2010, it is more likely than not that we will not be required to sell any of our debt 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 September 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 securities portfolio into categories of less than 12 months, or 12 months or longer, as of December 31, 2009:

 

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

(Dollars in thousands)

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

U.S. agency debentures

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

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

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

Agency-issued collateralized mortgage obligations—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
                                                   

 

14


Table of Contents

 

The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on debt securities classified as available-for-sale as of September 30, 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. For U.S. treasury securities, the expected maturity is the actual contractual maturity of the notes. Expected remaining maturities for most U.S. agency debentures may occur earlier than their contractual maturities because the note issuers have the right to call outstanding amounts ahead of their contractual maturity. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities typically have original contractual maturities from 15 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure.

 

    September 30, 2010  
    Total     One Year or Less     After One
Year to
Five Years
    After Five
Years 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

  $ 26,674        2.39    $ —          —     $ 26,674        2.39    $ —          —     $ —          —  

U.S. agency debentures

    1,721,720        1.77        86,651        2.36        1,635,069        1.74        —          —          —          —     

Residential mortgage-backed securities:

                   

Agency-issued mortgage-backed securities

    1,183,866        3.68        —          —          —          —          1,038        7.50        1,182,828        3.68   

Agency-issued collateralized mortgage obligations—fixed rate

    991,981        3.38        —          —          —          —          —          —          991,981        3.38   

Agency-issued collateralized mortgage obligations—variable rate

    1,975,697        0.72        —          —          —          —          —          —          1,975,697        0.72   

Municipal bonds and notes

    102,756        6.02        1,143        6.50        7,171        5.38        42,397        5.90        52,045        6.20   
                                                 

Total

  $ 6,002,694        2.14      $ 87,794        2.41      $ 1,668,914        1.76      $ 43,435        5.94      $ 4,202,551        2.25   
                                                 

The cost of investment securities is determined on a specific identification basis. The following table presents the components of gains and losses on investment securities for the three and nine months ended September 30, 2010 and 2009:

 

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

(Dollars in thousands)

   2010     2009     2010     2009  

Gross gains on investment securities:

        

Available-for-sale securities, at fair value

   $ 23,605      $ 8      $ 26,737      $ 15   

Marketable securities (investment company fair value accounting)

     8,109        111        8,160        1,290   

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

        

Private equity fund investments

     19,014        7,101        47,659        8,370   

Other private equity investments

     2,321        4,531        7,258        4,724   

Other investments

     9        71        36        684   

Non-marketable securities (equity method accounting):

        

Other investments

     2,663        2,361        4,804        5,170   

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     222        15        780        316   

Other private equity investments

     —          —          —          22   

Other investments

     242        —          344        —     
                                

Total gross gains on investment securities

     56,185        14,198        95,778        20,591   
                                

Gross losses on investment securities:

        

Available-for-sale securities, at fair value

     —          —          (2,264     (41

Marketable securities (investment company fair value accounting)

     —          (16     (57     (409

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

        

Private equity fund investments

     (6,171     (4,321     (15,291     (41,081

Other private equity investments

     (2,877     (2,072     (8,589     (10,104

Other investments

     —          —          (79     —     

Non-marketable securities (equity method accounting):

        

Other investments

     (1     (1,690     (614     (2,973

Non-marketable securities (cost method accounting):

        

Private equity fund investments

     (516     (2,105     (1,455     (3,754

Other private equity investments

     (9     (89     (9     (119
                                

Total gross losses on investment securities

     (9,574     (10,293     (28,358     (58,481
                                

Gains (losses) on investment securities, net

   $ 46,611      $ 3,905      $ 67,420      $ (37,890
                                

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

   $ 16,817      $ 4,880      $ 33,159      $ (32,491
                                

 

15


Table of Contents

 

6. Loans and Allowance for Loan Losses

We serve a variety of commercial clients in the technology, life science, venture capital/private equity and premium wine industries. Our technology clients generally tend to be in the industries of hardware (semiconductors, communications and electronics), software and related services, and clean technology. Our life science clients are concentrated in the medical devices and biotechnology sectors. Loans made to venture capital/private equity firm clients typically enable them to fund investments prior to their receipt of funds from capital calls. Loans to the premium wine industry focus on vineyards and wineries that produce grapes and wines of high quality.

In addition to commercial loans, we make loans to targeted high- net- worth individuals through our Private Client Services (“PCS”) business. These products and services include real estate secured home equity lines of credit, which may be used to finance real estate investments and loans for personal residences used to purchase, renovate or refinance personal residences. These products and services also include restricted stock purchase loans and capital call lines of credit. We also provide real estate secured loans to eligible employees through our Employee Home Ownership Program (“EHOP”).

We also provide community development loans, which are low income housing loans made as part of our responsibilities under the Community Reinvestment Act. These loans are construction loans and are primarily secured by real estate.

The composition of loans, net of unearned income of $40.9 million and $34.9 million at September 30, 2010 and December 31, 2009, respectively, is presented in the following table:

 

(Dollars in thousands)

   September 30, 2010      December 31, 2009  

Commercial loans:

     

Software

   $ 1,601,950       $ 1,381,669   

Hardware

     540,423         551,545   

Clean Technology

     146,160         71,550   

Venture Capital/Private Equity

     746,822         925,330   

Life Science

     601,429         514,879   

Premium Wine

     145,696         143,062   

All other sectors

     225,623         158,666   
                 

Commercial loans (1)

     4,008,103         3,746,701   
                 

Real estate secured loans:

     

Premium Wine

     320,908         298,839   

Consumer loans (2)

     297,410         241,284   
                 

Real estate secured loans

     618,318         540,123   
                 

Construction loans

     49,976         59,926   

Consumer loans

     182,808         201,344   
                 

Total loans, net of unearned income

   $ 4,859,205       $ 4,548,094   
                 

 

(1) Included within our commercial loans portfolio are business credit card loans to commercial clients. At September 30, 2010 and December 31, 2009, our business credit card loans portfolio totaled $32.9 million and $24.6 million, respectively.
(2) Consumer loans secured by real estate at September 30, 2010, and December 31, 2009 were comprised of the following:

 

(Dollars in thousands)

   September 30, 2010      December 31, 2009  

Loans for personal residence

   $ 122,304       $ 64,678   

Home equity lines of credit

     88,325         90,459   

Loans to eligible employees

     86,781         86,147   
                 

Consumer loans secured by real estate

   $ 297,410       $ 241,284   
                 

 

16


Table of Contents

 

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

 

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

(Dollars in thousands)

   2010     2009     2010     2009  

Allowance for loan losses, beginning balance

   $ 71,789      $  110,473      $ 72,450      $ 107,396   

Gross charge-offs:

        

Commercial loans:

        

Software

     (4,401     (12,603     (10,897     (25,867

Hardware

     (835     (8,284     (9,782     (43,328

Clean Technology

     (59     —          (2,242     —     

Venture Capital/Private Equity

     —          (10,455     —          (10,455

Life Science

     (6,977     (6,807     (16,627     (15,424

Premium Wine

     (15     (17     (516     (2,333

All other sectors

     (1     (1,698     (49     (1,698
                                

Commercial loans

     (12,288     (39,864     (40,113     (99,105
                                

Real estate secured loans:

        

Premium Wine

     —          —          (1     —     

Consumer loans

     (1     (449     (487     (449
                                

Real estate secured loans

     (1     (449     (488     (449
                                

Construction loans

     —          —          —          (96

Consumer loans

     —          (6,240     (1     (10,814
                                

Total gross charge-offs

   $ (12,289   $ (46,553   $ (40,602   $ (110,464
                                

Recoveries:

        

Commercial loans:

        

Software

   $ 1,164      $ 836      $ 4,189      $ 1,820   

Hardware

     1,512        11,525        3,782        12,363   

Clean Technology

     32        —          903        —     

Life Science

     965        2,260        3,264        2,374   

Premium Wine

     60        43        158        48   

All other sectors

     91        61        626        95   
                                

Commercial loans

     3,824        14,725        12,922        16,700   
                                

Real estate secured loans:

        

Consumer loans

     6        —          6        2   
                                

Real estate secured loans

     6        —          6        2   
                                

Construction loans

     —          4        5        10   

Consumer loans

     68        34        464        180   
                                

Total recoveries

   $ 3,898      $ 14,763      $ 13,397      $ 16,892   
                                

Net charge-offs

     (8,391     (31,790     (27,205     (93,572

Provision for loan losses

     10,971        8,030        29,124        72,889   
                                

Allowance for loan losses, ending balance

   $ 74,369      $ 86,713      $ 74,369      $ 86,713   
                                

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 $45.0 million and $50.2 million at September 30, 2010 and December 31, 2009, respectively. The recorded investment in impaired loans for which there was a related allowance for loan losses was $34.5 million and $47.0 million at September 30, 2010 and December 31, 2009, respectively, with related allowance for loan losses of $6.5 million and $8.9 million, respectively. The recorded investment in impaired loans for which there was no related allowance for loan losses was $10.5 million and $3.2 million at September 30, 2010 and December 31, 2009, respectively. Average impaired loans for the three and nine months ended September 30, 2010 totaled $45.5 million and $48.9 million, respectively. Cash payments received related to these loans totaled $0.5 million and $1.4 million for the three and nine months ended September 30, 2010, respectively. Average impaired loans for the three and nine months ended September 30, 2009 totaled $95.1 million and $98.6 million, respectively. Cash payments received related to these loans totaled $0.5 million and $1.2 million for the three and nine months ended September 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 nine months ended September 30, 2010 or 2009 during the time period that the loans were impaired. There were no loans past due 90 days or more still accruing interest at September 30, 2010 compared to $2.5 million at December 31, 2009.

 

17


Table of Contents

 

Included in the $45.0 million of impaired loans at September 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 September 30, 2010, we had TDR’s of $24.0 million, which were comprised of $20.1 million in consumer loans secured by real estate, $1.8 million in software loans, $1.0 in construction loans and $1.1 million in other commercial loans. 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 September 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 September 30, 2010 or December 31, 2009 and has not been since the first quarter of 2009.

8. Short-Term Borrowings and Long-Term Debt

The following table represents outstanding short-term borrowings and long-term debt at September 30, 2010 and December 31, 2009:

 

(Dollars in thousands)   

Maturity

   September 30, 2010      December 31, 2009  

Short-term borrowings:

        

Other short-term borrowings

   (1)    $ 59,735       $ 38,755   
                    

Total short-term borrowings

      $ 59,735       $ 38,755   
                    

Long-term debt:

        

5.375% senior notes

   September 15, 2020    $ 347,555       $ —     

5.70% senior notes (2)

   June 1, 2012      268,503         269,793   

6.05% subordinated notes (3)

   June 1, 2017      298,263         276,541   

3.875% convertible senior notes

   April 15, 2011      248,715         246,991   

7.0% junior subordinated debentures

   October 15, 2033      55,592         55,986   

4.99% long-term notes payable

   (4)      7,182         7,339   
                    

Total long-term debt

      $ 1,225,810       $ 856,650   
                    

 

(1) Represents cash collateral received from counterparties for our interest rate swap agreements related to our senior and subordinated notes.
(2) At September 30, 2010 and December 31, 2009, included in the carrying value of our 5.70% senior notes are $18.6 million and $19.9 million, respectively, related to the fair value of the interest rate swap associated with the notes.
(3) At September 30, 2010 and December 31, 2009, included in the carrying value of our 6.05% subordinated notes are $48.7 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 $6.6 million and $18.1 million for the three and nine months ended September 30, 2010, respectively, and $6.4 million and $21.8 million for the three and nine months ended September 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 September 30, 2010 and December 31, 2009 were 0.15 percent and 0.05 percent, respectively.

5.375% Senior Notes

In September 2010, we issued $350 million of 5.375% senior notes due in September 2020 (“5.375% Senior Notes”). We received net proceeds of $344.3 million after deducting underwriting discounts and commissions and other estimated expenses. We intend to use approximately $250 million of the net proceeds from the sale of the notes to meet obligations due on the unconverted portion of our 2008 Convertible Notes due on April 15, 2011 (see “2008 Convertible Notes” section below for further details). The remaining net proceeds will be used for general corporate purposes, including working capital.

 

18


Table of Contents

 

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 nine months ended September 30, 2010, the effective interest rate for our 2008 Convertible Notes was 5.66 percent and 5.72 percent, respectively, and interest expense was $3.5 million and $10.6 million, respectively. For the three and nine months ended September 30, 2009, the effective interest rate for our 2008 Convertible Notes was 5.66 percent and 5.73 percent, respectively, and interest expense was $3.5 million and $10.5 million, respectively. At September 30, 2010, the unamortized debt discount totaled $1.3 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 institutions. As of September 30, 2010, we had not borrowed against any of our repurchase lines or 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 U.S. agency debentures) at September 30, 2010 totaled $1.0 billion, all of which was unused and available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank at September 30, 2010 totaled $88.7 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 receive-fixed for pay-floating interest rate swap agreements at the time of debt issuance. The interest rate swaps have matched-terms with the respective notes and effectively swap fixed rate coupons on the notes to variable rate coupons based upon London Interbank Offered Rates (“LIBOR”). 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 values of our interest rate swaps are calculated using discounted cash flow methods and are 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”. Although we do not expect any changes in the matched-terms on the notes and associated interest rate swaps, any differences associated with or arising from 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,

 

19


Table of Contents

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 per common share. 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 nine months ended September 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.

Other Derivative Instruments

Equity Warrant Assets

Our equity warrant assets are concentrated in private, venture-backed companies in the technology and life science industries. Most of 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 these warrant agreements, these 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.

 

20


Table of Contents

 

The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at September 30, 2010 and December 31, 2009, respectively, were as follows:

 

          September 30, 2010     December 31, 2009  
(Dollars in thousands)   Balance sheet
location
    Notional or
contractual
amount
    Fair value     Collateral
(1)
    Net
exposure
(2)
    Notional or
contractual
amount
    Fair value     Collateral
(1)
    Net
exposure
(2)
 

Derivatives designated as hedging instruments:

                 

Interest Rate Risks:

                 

Interest rate swaps

    Other assets      $ 500,000      $ 67,257      $ 59,735      $ 7,522      $ 500,000      $ 46,895      $ 38,755      $ 8,140   
                                                     

Derivatives not designated as hedging instruments:

                 

Currency Exchange Risks:

                 

Foreign exchange forwards

    Other assets        11,820        345        —          345        48,276        1,472        —          1,472   

Foreign exchange forwards

    Other liabilities        54,949        (1,099     —          (1,099     9,828        (85     —          (85
                                                     

Net exposure

        (754     —          (754       1,387        —          1,387   
                                                     

Other Derivative Instruments:

                 

Equity warrant assets

    Other assets        121,517        42,569        —          42,569        120,192        41,292        —          41,292   
                                                     

Other derivatives:

                 

Foreign exchange forwards

    Other assets        317,509        9,897        —          9,897        316,759        16,772        —          16,772   

Foreign exchange forwards

    Other liabilities        297,056        (9,782     —          (9,782     326,116        (15,593     —          (15,593

Foreign currency options

    Other assets        117,473        2,415        —          2,415        1,819        192        —          192   

Foreign currency options

    Other liabilities        117,473        (2,415     —          (2,415     1,819        (192     —          (192

Other derivatives (3)

    Other assets        634        274        —          274        —          —          —          —     
                                                     

Net exposure

        389        —          389          1,179        —          1,179   
                                                     

Net

      $ 109,461      $ 59,735      $ 49,726        $ 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 September 30, 2010 remain at “A” or higher and there were no material changes in their credit ratings during the nine months ended September 30, 2010.
(3) Represents the equity conversion option for a loan included in our life science client portfolio.

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

 

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

Statement of income location

  2010     2009     2010     2009  

Derivatives designated as hedging instruments:

         

Interest Rate Risks:

         

Net cash benefit associated with interest rate swaps

  Interest expense - borrowings   $ 5,943      $ 5,741      $ 18,531      $ 14,874   

Changes in fair value of interest rate swap

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

Net gains associated with interest rate risk derivatives

    $ 5,943      $ 5,741      $ 18,531      $ 14,704   
                                 

Derivatives not designated as hedging instruments:

         

Currency Exchange Risks:

         

Gains (losses) on foreign currency loan revaluations, net

  Other noninterest income   $ 2,871      $ (94   $ (75   $ 1,886   

(Losses) gains on foreign exchange forward contracts, net

  Net gains (losses) on derivative instruments     (2,698     (128     680        (2,664
                                 

Net gains (losses) associated with currency risk

    $ 173      $ (222   $ 605      $ (778
                                 

Other Derivative Instruments:

         

Gains (losses) on equity warrant assets

  Net gains (losses) on derivative instruments   $ 3,762      $ (1,322   $ 3,073      $ (593
                                 

Gains on client foreign exchange forward contracts, net

  Net gains (losses) on derivative instruments   $ 131      $ 360      $ 750      $ 1,304   
                                 

Changes in fair value of other derivatives

  Net gains (losses) on derivative instruments   $ 62      $ —        $ 62      $ —     
                                 

 

21


Table of Contents

 

10. Other Noninterest Income and Other Noninterest Expense

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

 

     Three months ended September 30,     Nine months ended September 30,  
(Dollars in thousands)    2010      2009     2010     2009  

Fund management fees

   $ 2,702       $ 2,437      $ 8,098      $ 7,625   

Service-based fee income (1)

     1,894         1,700        6,512        5,645   

Unused commitment fees

     1,352         906        3,959        2,465   

Currency revaluation gains

     661         275        987        383   

Gains (losses) on foreign currency loans revaluation, net

     2,871         (94     (75     1,886   

Other

     1,901         1,025        5,426        3,826   
                                 

Total other noninterest income

   $ 11,381       $ 6,249      $ 24,907      $ 21,830   
                                 

 

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

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

 

     Three months ended September 30,      Nine months ended September 30,  
(Dollars in thousands)    2010      2009      2010      2009  

Telephone

   $ 1,208       $ 325       $ 3,438       $ 3,042   

Tax credit fund amortization

     1,050         1,165         3,107         3,458   

Client services

     651         670         2,006         1,402   

Postage and supplies

     571         165         1,645         2,328   

Dues and publications

     444         325         1,093         1,266   

Other

     3,070         1,469         8,660         7,479   
                                   

Total other noninterest expense

   $ 6,994       $ 4,119       $ 19,949       $ 18,975   
                                   

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 purposes. Changes in an individual client’s primary relationship des